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In re Jersey City Medical Center

argued: January 23, 1987.


Appeal from the United States District Court for the District of New Jersey - Newark, D.C. Civil No. 85-5930.

Seitz, Becker, and Mansmann, Circuit Judges.

Author: Mansmann


MANSMANN, Circuit Judge.

This matter comes before us on appeal from an order of the district court, which affirmed a bankruptcy judge's order confirming the debtor's modified plan for the adjustment of its debts under Chapter 9 of the Bankruptcy Code. We possess jurisdiction pursuant to 28 U.S.C. § 158(d) (Supp. II 1984). Because the debtor proposed the plan lawfully and in good faith, and since the plan permissibly classified the claims of the debtor's various unsecured creditors, we will affirm the judgment of the district court.


The Jersey City Medical Center ("JCMC" or "the debtor") is a public municipal hospital which, since 1936, has provided health care for the Hudson County, New Jersey community, including a substantial number of indigent patients. The plaintiff, Finch Fuel Oil Co. ("Finch"), is a general unsecured creditor to which (according to Finch) JCMC became indebted in the amount of $408,339.40.

In January of 1982, after the State Commissioner of Health found JCMC "financially distressed," then-Governor Byrne appointed a reconstituted Board of Managers to replace JCMC's Board. On December 29, 1982, JCMC filed a petition under Chapter 11 of the Bankruptcy Code, which the bankruptcy judge dismissed on the ground that JCMC was a municipal corporation and was, therefore, ineligible for Chapter 11 reorganization.

On February 10, 1983, JCMC filed a petition for the adjustment of the debts of a municipality under Chapter 9 of the Bankruptcy Code. 11 U.S.C. §§ 901-946. The Official Unsecured Creditors' Committee objected to the petition because the City of Jersey City allegedly remained liable for the debtor's debts. The bankruptcy judge denied the committee's motion to dismiss the petition, and the district court affirmed that judgment.

Following extended negotiations, JCMC on March 29, 1985 filed a plan for the adjustment of its debts along with a disclosure statement. In May of 1985, Finch and the Unsecured Creditors' Committee filed objections to the disclosure statement, insisting that the debtor possessed funds sufficient to satisfy 100% of all creditors' claims by virtue of the reimbursement of JCMC's pre-petition costs from the State Department of Health, and contending that the City of Jersey City was responsible for JCMC's debts. The bankruptcy judge, however, approved the disclosure statement as amended.

It is instructive to note that, prior to the confirmation of JCMC's Chapter 9 petition, Finch filed suit in state court against the City of Jersey City seeking a declaration that the city was liable for JCMC's outstanding debts. Yet the trial court entered summary judgment in favor of the city and against Finch. The appellate division affirmed that judgment and the New Jersey Supreme Court denied Finch's petition for certification.

On June 4, 1985, the debtor submitted a modified plan. That plan provides that priority claims (designated "Class One" under the plan) will be paid on the plan's effective date. Claims of governmental units will be satisfied within six years from the date of their assessment, with interest at the prevailing rate established by Internal Revenue Service regulations. The court will disburse costs, expenses, and fees by order.

Furthermore, the plan divides the debtor's unsecured creditors into four additional classes. "Class Two" creditors -- physicians with claims arising out of agreements with the debtor for indemnity against medical malpractice awards -- will receive 100% of their claims as finally allowed. "Class Three" creditors -- holders of pre-petition medical malpractice claims against JCMC -- will get 30% of their claims. Both "Class Two" and "Class Three" payments will come directly from the Jersey City Insurance Fund Commission which, on July 30, 1985, entered into a contract with the debtor to that effect.

"Class Four" creditors -- employee benefit plan non-priority claims -- and "Class Five" claimants -- general creditors -- will obtain 30% of their claims on the effective date of the plan. Disputed claims from these classes will be paid upon the entry of non-appealable orders of the court. Classes Four and Five also will receive pro rata shares from a "surplus fund"*fn1 and from a pool consisting of 50% of the debtors' excess 1984 gross revenues.*fn2

Notably, the modified plan preserved the creditors' rights to recover the rest of their debts from third parties, including the City of Jersey City. The ballot for approval of the plan provided:

The acceptance and/or rejection by the undersigned creditor of the Debtor's Modified Plan of Reorganization does not constitute a waiver or release of any rights to seek recovery of the creditor's debt in excess of the dividend under the Modified Plan of Reorganization against third parties or other entities liable by contract or as a matter of law for said obligation.

On July 25, 1985, Finch -- the only dissenting member of the general unsecured creditors' committee -- filed objections to the modified plan.

The bankruptcy judge held a lengthy hearing on August 6, 1985. Following the hearing, the attorney for the debtor reported to the judge which classes of claimants had accepted the plan and which had rejected it, according to 11 U.S.C. § 1126.*fn3 The ballots indicated that Classes Three and Four rejected, and that "Class Five" accepted, the plan.*fn4 Members of "Class Two" did not vote, apparently since the plan left their claims unimpaired. See 11 U.S.C. § 1126(f). The bankruptcy judge found that the plan comported with the bankruptcy code and with the best interests of ...

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