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Judge: Melrose Park can keep trying to punish Pipeline for filing Westlake Hospital bankruptcy

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By Jonathan Bilyk | Nov 8, 2019

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A federal bankruptcy judge has cleared the way for the village of Melrose Park to resume its effort to punish the owners of Westlake Hospital for using bankruptcy to close the hospital.

The judge, however, reiterated the village cannot ever hope to win a court order forcing Westlake’s corporate parent, Pipeline Health Systems, to reopen the hospital.

On Nov. 5, U.S. Bankruptcy Judge Deborah L. Thorne agreed to modify an earlier order she had issued, in which she had asserted the same bankruptcy protection that applies to the holding company for the shuttered Westlake Hospital should also apply to the affiliated corporations that sent the hospital into bankruptcy.

In her new order, Judge Thorne modified the automatic stay to allow the village to continue suing Pipeline in Cook County court. Melrose Park is seeking potentially steep financial sanctions against the hospital for using the federal bankruptcy process to close the hospital, after a Cook County judge had ordered the hospital to remain open.

Any money the village reaps from a judgment in their favor could be used to pay their lawyers, from the prominent Chicago class action firm, Edelson P.C.

In late September, Judge Thorne had initially ruled against Melrose Park, finding the so-called automatic stay, which puts on hold any pending legal actions against the debtors seeking bankruptcy protection, should apply not only to the hospital, but also to Westlake’s owners. Those owners, a group of corporate entities under the umbrella of Pipeline Health, had been hit with two lawsuits from Melrose Park.

In these cases, the corporate entity targeted by Melrose Park is known as SRC Hospital Investments II LLC.

Pipeline, through SRC, had purchased Westlake Hospital in January, as part of its acquisition of a group of Chicago area hospitals and health care facilities.

In the months following, Pipeline sought to close Westlake, asserting the hospital’s finances were much worse than they had believed at the time of purchase. Pipeline claimed the hospital was losing millions of dollars each month.

However, Pipeline’s efforts to close Westlake were frustrated for months by legal challenges launched by the village of Melrose Park and their Edelson attorneys. The village asserted Pipeline had reneged on its pledge to Illinois hospital regulators to continue operating the hospital. The village claimed the hospital was essential to promote public health in the region, as Westlake served a largely low-income population. The village alleged Pipeline’s decision to purchase and then close the hospital violated its state permit and state law.

In bringing the suit, the village hired attorney Ari Scharg and others from the Edelson firm. The village agreed to pay the Edelson lawyers from any money they secured in a judgment against Pipeline, or from any tax revenue the for-profit Westlake Hospital may generate, should it remain open.

The legal actions eventually resulted in a court order requiring Pipeline to keep Westlake open and operating at full service levels, regardless of financial losses.

After three months under that court order, Westlake, through SRC, filed for bankruptcy and the bankruptcy trustee allowed the company to close the hospital to stem its financial losses.

Melrose Park responded to the bankruptcy with motions in bankruptcy court, asserting the filing was in bad faith and should be dismissed. In Cook County court, Melrose Park filed motions, asking the judge to hold SRC and Pipeline in contempt of court, and ordering them to pay potentially hundreds of thousands of dollars in sanctions.

In federal bankruptcy court, Judge Thorne rejected Melrose Park’s requests to dismiss the filing, and initially also resisted their attempts to continue suing SRC. In that Sept. 24 order, the judge said she believed the Cook County courts had no power to forbid SRC from taking Westlake into bankruptcy.

“To the extent the state court injunction prohibited SRC from filing a petition on behalf of Westlake, and it is not clear that it did, the injunction as to SRC would also violate the Bankruptcy Code.”

Melrose Park, however, refused to drop the matter, and asserted the bankruptcy trustee had agreed on Sept. 10 to allow the village to continue suing SRC, so long as the village did not attempt to reopen the hospital under court order.

After another round of arguments on that question, Judge Thorne granted Melrose Park permission, as agreed to by Westlake’s trustee.

Pipeline has been represented in Cook County court by the firm of Riley, Safer, Holmes & Cancila, of Chicago, and in the bankruptcy by the firm of Morris James LLP, of Wilmington, Del.


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Organizations in this Story

Edelson, PCU.S. Bankruptcy Court for the Northern District of IllinoisCircuit Court of Cook CountyWestlake Community HospitalPipeline Health SystemsVillage of Melrose Park

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