BURIDI v. KMC REAL ESTATE INVESTORS, LLC

Filing 59

ORDER: For the reasons detailed in this order, the Bankruptcy Court's confirmation of the KMC and KMCREI Plans is AFFIRMED. Final judgment shall enter accordingly. Signed by Judge Sarah Evans Barker on 5/8/2015. SEE ORDER.(KR)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION
KMC REAL ESTATE INVESTORS, LLC
Debtor,
KENTUCKIANA MEDICAL CENTER, LLC
Debtor - Consolidated Party re 4:13-cv-181SEB-WGH,
______________________________________

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In Re: KMC REAL ESTATE INVESTORS,
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LLC Debtor,
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In Re: KENTUCKIANA MEDICAL
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CENTER, LLC Debtor - Consolidated Party re )
4:13-cv-181-SEB-WGH,
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ABDUL G. BURIDI,
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Appellant,
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vs.
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KMC REAL ESTATE INVESTORS, LLC,
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et al.
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Appellees.
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______________________________________ )
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NANCY J. GARGULA U.S. Trustee,
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Trustee.
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4:13-cv-00179-SEB-WGH

ORDER ON BANKRUPTCY APPEAL
Appellant Abdul G. Buridi appeals the Bankruptcy Court’s approval of the final
confirmation orders entered in the chapter 11 cases of debtors KMC Real Estate
Investors, LLC (“KMC”) and its affiliate Kentuckiana Medical Center, LLC

1

(“Kentuckiana”). For the following reasons, the Bankruptcy Court’s approval of the
confirmation orders is AFFIRMED.
Factual Background
General Background
Between 2005 and 2007, Cardiovascular Hospitals of America, LLC (“CHA”) and
Kentuckiana Investors, LLC (“KI”) formed KMC to develop and operate a new hospital
facility in Clarksville, Indiana. CHA and KI each owned 49% of KMC and the
membership interests of KI were held by approximately thirty (30) physicians who
practiced in the greater Louisville, Kentucky, area, including Dr. Buridi. In order to
obtain financing for the KMC project, CHA, KI, and the physician-members of KI
guaranteed various loans and other financial obligations of KMC to lenders and
equipment providers. Unfortunately, KMC immediately encountered financial
difficulties when its construction loan proceeds and working capital were exhausted
before the hospital was completed and stabilized.
Concurrently with the formation of KMC, many of the physician-members of KI
invested in and acquired membership interests in KMCREI, which purchased the real
estate and financed construction of the hospital facility through a $21 million loan from
Branch Banking & Trust Company (“BB&T”). There was no requirement that the
physician-members of KI acquire membership interests in KMCREI, however.
KMCREI’s membership interests were divided proportionately, not equally, among the
physicians who did choose to invest. Dr. Buridi owned a 1.03% membership interest in
KI and a 1.65% membership interest in KMCREI. As owner of the hospital building,
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KMCREI depended entirely on its sole tenant, KMC, for its revenues, and therefore when
KMC encountered financial issues, KMCREI also suffered.
Chapter 11 Filings
On September 19, 2010, KMC filed its voluntary petition for relief under chapter
11 of the Bankruptcy Code and KMCREI similarly filed under chapter 11 on April 1,
2011. Although both debtors continued to lose significant amounts of money after their
bankruptcy cases were filed, they managed to reach tenuous agreements with several key
creditors that enabled them to continue operating.
From the outset of KMC’s bankruptcy, it became clear that the only way in which
the hospital could become financially viable would be through a cash infusion of millions
of dollars to complete construction of the hospital and purchase required equipment. In
June 2012, KMC and KMCREI each obtained confirmation of their respective plans of
reorganization but were unable to consummate the plans when their investor refused to
fund the reorganization. Instead, both debtors remained in Bankruptcy Court and
continued to solicit new investments while continuing to accrue substantial post-petition
liabilities through normal business operations. By June 2013, KMC and KMCREI
carried a combined debt load of more than $31 million in secured claims, $6 million in
post-petition administrative claims, and $5 million in unsecured claims.
The Confirmed Plans of Reorganization

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Prior to commencement of KMCREI’s chapter 11 case, RL BB Financial, LLC
(“RLBB”)1 acquired the KMCREI construction loan originally advanced by BB&T.
After KMC’s and KMCREI’s failures to consummate their original plans of
reorganization, they engaged in extensive negotiations with RLBB in the months prior to
June 2013 to develop the framework for each debtor’s Third Amended Plan of
Reorganization. The KMC Plan called for RLBB or its affiliate, as “Exit Investor,” to
provide approximately $10 million to complete the hospital and pay claims against KMC.
The KMCREI Plan provided for the restructuring of RLBB’s $20 million secured loan
and cash payments to satisfy past due real estate taxes.
Under the KMC Plan, KMC’s secured liabilities were significantly restructured,
holders of administrative claims received 20% of their claims in cash and notes payable
over five years, and holders of unsecured claims received cash payments equal to their
pro rata share of a $500,000 pool of funds, in most cases equal to a fraction of their
overall indebtedness. All pre-confirmation equity membership interests in KMC were
cancelled on the effective date of the KMC Plan, and the Exit Investor acquired 100% of
the new membership interests in KMC.
Under the KMCREI Plan, only the secured claims owed to RLBB and the real
estate tax lienholder were to be satisfied through distribution of money or property. All
unsecured claims against KMCREI were to be discharged pursuant to 11 U.S.C. §
1141(d), and all membership interests in KMCREI were cancelled. The KMCREI Plan

1

RLBB is often referred to as “Rialto” in Bankruptcy Court pleadings and transcripts in the
record on appeal.

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originally provided that 80% of the new membership interests in reorganized KMCREI
would be issued to the Exit Investor while the remaining 20% of the new membership
interests were to be issued to Drs. Christodulos Stavens, Eli Hallal, Jeffrey Campbell, and
Renato LaRocca, four of the physician-owners of KI “in consideration of their ongoing
commitment to the hospital and importance to the feasibility of [the KMCREI Plan] and
the KMC Plan.” Dkt. No. 2 at 8. These four physicians comprised the KI contingent on
KMC’s board of managers (the remaining board members consisted of representatives of
CHA). Dr. Stavens served as KMC’s Chief Executive Officer as well as the manager of
KI. These four physicians were also responsible for admitting 70-80% of all patients to
the hospital during the time period relevant to this litigation.2
Drs. Stavens, Hallal, and Campbell asserted Allowed Administrative Claims
pursuant to 11 U.S.C. § 503(b)(1)(A) for salary and on-call services earned but not paid
during the KMC bankruptcy case. Dr. LaRocca acquired an Allowed Secured Claim
against KMC by assignment, which enabled KMC to retain operating room and
anesthesiology equipment for its continued operations during the bankruptcy case.
According to KMC, the 20% distribution of KMCREI’s equity interests was in

2

When KMC was formed, it was anticipated that the physician-owners of KI would increase
KMC’s value through regular admission of patients to the hospital for surgeries, exams, and
other necessary procedures. However, the physician-owners of KI admitted patients to varying
degrees. Dr. Buridi, for example, did not admit any patients to the hospital and, according to
Appellees, did not otherwise contribute any time or services throughout the pendency of the
Chapter 11 Cases. Dr. Buridi rejoins that while he may not have referred patients to the hospital,
he, along with other equity members of KI, contributed in other ways, namely through judgment
liens, wage garnishments, and other judgment enforcement actions, all arising from their
guaranty of the debt of KMC and KMCREI.

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consideration of the four physicians’ compromise of their respective Allowed
Administrative Claims against KMC.
As described below, however, the Bankruptcy Court ultimately ordered that the
20% that was to go to Drs. Stavens, Hallal, Campbell, and LaRocca could not be
transferred if that transfer would violate applicable federal healthcare laws. In that case,
RLBB would hold 100% of the new equity in the reorganized KMCREI following
confirmation of the plan.
Appellant’s Objections to Confirmation
On July 26, 2013, Dr. Buridi, among others, filed objections to confirmation of the
KMC and KMCREI Plans (“the Plan Objections”). The Plan Objections raised four
arguments in opposition to confirmation of the plans: (1) that the proposed distribution of
20% of the equity interests in KMCREI to Drs. Stavens, Hallal, Campbell, and LaRocca
violated 11 U.S.C. § 1129(b)(2)(B)(ii), the so-called “absolute priority rule”; (2) that the
plans unfairly discriminated against Dr. Buridi’s subrogation claim arising from amounts
collected pursuant to his personal guaranty; (3) that the KMC Plan was filed in bad faith
because a secured creditor of KMC with personal guaranties filed a collection suit against
Dr. Buridi and several other doctors; and (4) that the plan did not satisfy 11 U.S.C. §
1129(a)(11) because it was likely to be followed by liquidation or further financial
reorganization.
Amendment to KMC Plan
The proposed KMC Plan included an injunction intended to prevent creditors from
pursuing claims against KMC and its property or any guarantor or co-obligor of KMC
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and their property. As a personal guarantor, Dr. Buridi falls within the injunction’s
protection. At the hearing on the disclosure statement, Dr. Buridi had requested
clarification about the injunction and its effect on two state court cases he had filed
against third-party non-debtors, including Drs. Stavens and Hallal. At that hearing,
KMC’s counsel stated that the injunction was unrelated to Dr. Buridi’s state court claims
and would not prevent him from pursuing those lawsuits. With this assurance, Dr. Buridi
did not pursue his objection of the original injunction.
On July 29, 2013, the day before the Confirmation Hearing was scheduled to
occur, KMC filed an amendment to the KMC Plan that altered the injunction.
Specifically, the following language was added to the end of the injunction:
Notwithstanding anything in this Confirmation Order and in Article XI of
the Plan to the contrary, in the event that any guarantor or any co-obligor of
the Debtor either (a) becomes a debtor under title 11 of the U.S. code or (b)
commences or continues any action against the Debtor, KMCREI, or any
equity holder in the reorganized Debtor or KMCREI, then the injunctions
set forth in this Confirmation order shall automatically terminate and shall
not apply to such guarantor or such co-obligor and/or their property.
Dkt. 4-33 at 16.
Confirmation Hearing
On July 30, 2013, the confirmation hearing was held at which both the KMC Plan
and the KMCREI Plan were considered simultaneously. In addition to the Plan
Objections already detailed, Dr. Buridi raised two oral objections to confirmation. First,
he argued that the amended language of the injunction targeted him and was designed to
prevent his state court action against Drs. Stavens and Hallal. Specifically, Dr. Buridi
contended that in contradiction to KMC’s representations at the disclosure hearing, the
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amended language would render him vulnerable to creditor lawsuits if he chose to
continue pursuing his state court action against Drs. Stavens and Hallal, given that they
would be KMCREI equity holders following reorganization. The second oral objection
put forth by Dr. Buridi was based on his concern that the award of a 20% equity
distribution in KMCREI to Drs. Stavens, Hallal, Campbell, and LaRocca in order to
satisfy claims of KMC circumvented the federal “Stark Laws” set forth in 42 U.S.C. §
1395, a series of statutes governing physician self-referral for Medicare and Medicaid
patients.
The Bankruptcy Court expressed concern regarding Dr. Buridi’s objection based
on possible violations of healthcare law, but ultimately overruled the Plan Objections and
entered orders confirming both the KMC Plan and the KMCREI Plan on August 19,
2013.
Appellant’s Rule 9023 Motions
On September 2, 2013, Dr. Buridi and others filed a motion to alter, amend, or
vacate the confirmation orders, pursuant to Federal Rule of Bankruptcy Procedure 9023
and Federal Rule of Civil Procedure 59 (“the Rule 9023 Motions”). In the Rule 9023
Motions, Dr. Buridi again argued that the respective confirmed plans and confirmation
orders were potentially violative of federal healthcare laws. The Bankruptcy Court held a
hearing on the Rule 9023 Motions at which the court granted Dr. Buridi’s motions, and
adopted the following language suggested by counsel for RLBB in an attempt to address
Dr. Buridi’s concerns:

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Compliance with Applicable Non-Bankruptcy Health Care Laws.
Notwithstanding anything in the KMCREI Plan or KMC Plan to the
contrary, and for the purposes of clarification and to resolve the Rule 9023
Motion, the Plans shall be deemed construed and deemed amended, as
necessary, to provide as follows: (a) implementation of the Plans and all
transactions necessary to consummate the Plans including, without
limitation, distributions of equity or other property to doctors that provide
services and/or referrals to the KMC hospital, shall comply with all
applicable health care laws and regulations including, without limitation,
the anti-kickback and so-called “Stark Laws” found in Title 42 of the U.S.
Code (“the Applicable Healthcare Laws”); (b) Section 8.4 of the KMCREI
Plan and Section 9.04 of the KMC Plan are amended to add, as a condition
precedent to the Effective Date, that the Exit Investor is satisfied that
implementation of the Plans will comply with Applicable Health Care
Laws; and (c) in the event that the proposed distributions to Drs. Stevens,
Hallal, Campbell, and/or LaRocca, or the proposed treatment of the
administrative claims held by such doctors, is determined by the Exit
Investors to violate or risk violating the Applicable Health Care Laws, the
distribution and/or treatment of such claims shall be modified or eliminated
to the extent necessary to ensure full compliance with the Applicable
Health Care Laws.
Dkt. No. 2-29 at 6-7; Dkt. No. 4-29 at 17-18.
On September 11, 2013, the Bankruptcy Court entered amended confirmation
orders containing this language.
Consummation of the Plans
Although the Rule 9023 Motions were granted, Dr. Buridi subsequently appealed
entry of both the KMCREI and KMC Confirmation Orders. However, he did not seek a
stay of either Confirmation Order from the Bankruptcy Court or this Court, and did not
post a supersedeas bond. Despite Mr. Buridi’s appeals, KMC, KMCREI, and the Exit
Investor elected to waive conditions to the effective dates of each plan in accordance with
the Confirmation Orders, and began making plan distributions on November 7, 2013.

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The Exit Investor contributed more than $10 million in cash to enable KMC and
KMCREI to comply with the Confirmation Orders and to improve KMC’s ability to
generate revenue. In addition to the cash infusion required by the Confirmation Orders,
the Exit Investor contributed more funds to cover KMC operating shortfalls during its
transition out of bankruptcy. During this time period, KMC also entered into postconfirmation contracts with new venders, a management agreement with Galichia
Hospital Group, LLC, and retained a new chief operating officer. Also in accordance
with the Confirmation Orders, all of the pre-confirmation equity interests in KMC and
KMCREI were extinguished and the Exit Investor acquired, and presently owns, 100% of
the membership interests in both reorganized KMC and reorganized KMCREI.
The Instant Litigation
Dr. Buridi filed notices of appeal from the confirmation orders on September 25,
2013. KMC and KMCREI each filed motions to dismiss in their respective cases. On
February 14, 2014, the court consolidated Dr. Buridi’s appeals of the KMCREI and KMC
Plans. Both KMC’s and KMCREI’s motions to dismiss were denied by this Court on
September 29, 2014, based on the narrow relief Dr. Buridi was seeking. Dr. Buridi’s
bankruptcy appeal is now fully briefed and ripe for ruling.
Legal Analysis
I.

Standard of Review
This Court has power to review the final judgment of the United States

Bankruptcy Court for the Southern District of Indiana pursuant to 28 U.S.C. § 158(a)(1).
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We review the legal conclusions reached by the Bankruptcy Court de novo. Ojeda v.
Goldberg, 599 F.3d 712, 716 (7th Cir. 2010); In re Midway Airlines, Inc., 69 F.3d 792,
795 (7th Cir. 1995). The Bankruptcy Court’s findings of fact are reviewed for clear error.
In re Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998).
II.

Objections as to both the KMC and KMCREI
The majority of Dr. Buridi’s arguments on appeal are identical as to the KMC and

the KMCREI Plans, and thus, we address them together. Plan-specific objections are
addressed separately below.
A.

Improper Delegation of Judicial Authority

Dr. Buridi first argues that by amending the KMC and KMCREI Plans to address
his Rule 9023 motion by including the language set forth in Paragraph 4 of the Final
KMC Confirmation Order and Paragraph 5 of the Final KMCREI Confirmation Order,
the Bankruptcy Court ceded its authority to the Exit Investor to determine whether
distribution of equity to the four physicians would violate federal healthcare laws, which
he contends constitutes an unconstitutional delegation of judicial authority. In support of
his argument, Dr. Buridi relies primarily on the decision of the United States Supreme
Court in Whitman v. American Trucking Associations, 531 U.S. 457 (2001). Quoting
Whitman, Dr. Buridi argues that the Constitution’s text permits “no delegation” of powers
and that a government department may authorize an individual or body to act on its
behalf only by designating “‘an intelligible principle to which the person or body
authorized to act is directed to conform.’” Id. at 472 (citations and quotation marks
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omitted). However, the caselaw relied upon by Dr. Buridi addresses an unrelated body of
law, to wit, the constitutional principles underlying the nondelegation of legislative
authority only; he has failed to point us to (nor has our research revealed) relevant
caselaw that would support the application of such principles to the situation at hand.
Accordingly, we find that Dr. Buridi has failed to raise a cognizable constitutional claim
based on the Bankruptcy Court’s inclusion of Paragraph 4 in the KMCREI Plan and
Paragraph 5 in the KMC Plan.
Even if Dr. Buridi could establish that constitutional nondelegation principles are
applicable to the judiciary in the manner he contends, he has failed to present any
authority for the proposition that before confirming a plan, the bankruptcy court is
required to determine whether potential future actions of a reorganized debtor might
subject it to civil or criminal penalties for violations of non-bankruptcy law such that it
could be said to have improperly delegated its judicial authority through the inclusion of
Paragraph 4 in the KMCREI Plan and Paragraph 5 in the KMC Plan.
For example, in his Rule 9023 motion, Dr. Buridi did not make a constitutional
argument, but instead argued that the 20% equity distribution violated the Stark Laws and
thus was in violation of 11 U.S.C. § 1129(a)(3), which requires a bankruptcy court to
determine before confirming a plan of reorganization, that the plan was “proposed in
good faith and not by any means forbidden by law.” Id. But courts addressing the issue
have “uniformly held” that this provision “does not require that the contents of a plan
‘comply in all respects with the provisions of all nonbankruptcy laws and regulations.’”
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In re Gen. Dev. Corp., 135 B.R. 1002, 1007 (Bankr. S.D. Fla. 1991) (quoting In re
Buttonwood Partners, Ltd., 111 B.R. 57, 59 (Bankr. S.D.N.Y. 1990); In re Food City,
Inc., 110 B.R. 808, 812-13 (Bankr. W.D. Tex. 1990)).
Rather, “Section 1129(a)(3) requires only that the plan’s proposal, as opposed to
the contents of the plan, be in good faith and in compliance with all nonbankruptcy
laws.” 135 B.R. at 1007 (citing 111 B.R. at 59-60; 110 B.R. at 811) (emphasis in
original). Thus, “[b]ecause only the proposal of the plan must not be by a means
forbidden by law, plans proposing terms that arguably violate some statute or common
law doctrine have passed muster under Section 1129(a)(3).” Richard M. Cieri, Barbara J.
Oyer, and Dorothy J. Birnbryer, “The Long and Winding Road”: The Standards to
Confirm a Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (Part I), 3
J. BANKR. L. & PRAC. 3 Nov.–Dec. 1993, at 39-40 (citing Gen. Dev. Corp., 135 BR at
1007 (holding that plan proposing payment of a municipality’s claims in stock and notes
despite prohibition by the state constitution on ownership of a corporate stock by a
municipality satisfied Section 1129(a)(3)); Buttonwood Partners, 111 B.R. at 60 (holding
that possible violation of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 did not prevent confirmation of a plan under Section 1129(a)(3)).
This does not mean that the potential illegality of a substantive provision of a
reorganization plan is an irrelevant consideration in the confirmation process. Courts
have recognized, for example, that “the legal consequences which might flow from the
implementation of a substantive provision which is prohibited by law could affect the
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plan’s feasibility under section 1129(a)(11).” Food City, Inc., 110 B.R. at 812 n.10. We
take up this issue in detail below in addressing Dr. Buridi’s separate contention that the
Bankruptcy Court’s confirmation of the KMC and KMCREI Plans was in violation of §
1129(a)(11). But this is a statutory not a constitutional question. Simply put, if the
Bankruptcy Court erred, it was not an error of a constitutional magnitude.
B.

Automatic Post-Confirmation Amendment

Dr. Buridi’s next argument is that the language added by the Bankruptcy Court to
address his Rule 9023 motion violates 11 U.S.C. § 1127(b), which requires notice and a
hearing prior to any post-confirmation amendment to a plan of reorganization.
Specifically, Dr. Buridi argues that Paragraph 4 in the KMCREI Plan and Paragraph 5 in
the KMC Plan, in effect, provide that the KMC and KMCREI Plans are automatically
deemed amended and modified post-confirmation if the Exit Investor determines that the
equity distribution to the four named physicians risks violating the federal health care
laws, which Dr. Buridi contends “effectively circumvent[s] full disclosure under 11
U.S.C. section 1125 of the proposed amendment, as well as the notice and hearing due
process requirement that section 1127(b) requires.” Dkt. No. 16 at 27.
It is true that the Bankruptcy Court amended the Plans by including the language
challenged by Dr. Buridi. But that amendment was made in response to Dr. Buridi’s
Rule 9023 motion and following a hearing on that motion. Accordingly, we do not find
that the Bankruptcy Court’s amendment of the Plan through the addition of such
language was in contravention of § 1127(b). Under § 1127(b), a plan proponent or the
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reorganized debtor may modify the plan at any point after confirmation and before
substantial consummation “if circumstances warrant such modification and the court,
after notice and a hearing, confirms such plan as modified, under section 1129 of this
title.” Id. Here, Dr. Buridi was given both notice and a hearing before the Bankruptcy
Court amended the Plan. Contrary to Dr. Buridi’s characterization of the added language,
it does not allow the Plan to be freely amended post-confirmation without compliance
with 11 U.S.C. § 1127(b), but rather simply enables the KMCREI and KMC Plans to be
implemented without requiring further modifications in the event that the equitable
distributions at issue are deemed to risk violating federal health care laws. Therefore, in
our view, the challenged language itself does not even implicate, much less violate §
1127(b) in the manner Dr. Buridi contends.
C.

Substantive Consolidation

Dr. Buridi argues that the Bankruptcy Court also erred by treating KMCREI’s
Chapter 11 bankruptcy case as if it were substantively consolidated with KMC’s Chapter
11 case. Here, substantive consolidation was not sought by KMC or KMCREI; the
Bankruptcy Court did not order substantive consolidation, and neither reorganization plan
contained a “deemed consolidation” provision.3 Dr. Buridi contends that the Bankruptcy
Court nonetheless treated the two cases as substantially consolidated, pointing to the

3

The Bankruptcy Court did keep the KMC and KMCREI cases on a unified schedule for
purposes of hearings related to the disclosure statements and plans. But this procedure alone
does not show that the Bankruptcy Court treated the cases as substantively consolidated.
Moreover, Dr. Buridi never objected to such a procedure and thus has waived any claim related
to that conduct.

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provision in the Final Confirmation Orders describing the potential distribution of
KMCREI’s equity interests to Drs. Stevens, Hallal, Campbell, and LaRocca in
consideration of the doctors’ compromise of their respective Allowed Administrative
Claims against KMC as permitted (but not required).
We are not persuaded by Dr. Buridi’s argument. First, we note that, although Dr.
Buridi’s counsel expressed concern during the confirmation process regarding the fact
that the four physicians were being offered equity in KMCREI to settle administrative
claims against KMC, there is no indication that Dr. Buridi specifically objected to either
the KMC Plan or the KMCREI Plan on the basis of a purported consolidation at any point
throughout the pendency of the bankruptcy cases. Accordingly, this argument is waived.
Even if not waived, Dr. Buridi has pointed to no authority to support the position
that individual creditors’ consent to a compromise of particular administrative claims in
this manner constitutes a substantive consolidation. Rather, “[s]ubstantive consolidation
usually results in, inter alia, pooling the assets of, and claims against, the two entities;
satisfying liabilities from the resultant common fund; eliminating inter-company claims;
and combining the creditors of the two companies for purposes of voting on
reorganization plans.” In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d Cir. 1988)
(citation omitted). Here, however, KMC and KMCREI maintained separate assets, had
distinct creditor bodies, set forth distinct plans for satisfaction of claims and interests, and
solicited votes on separate plans of reorganization.

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Moreover, even if the Bankruptcy Court had effected substantive consolidation in
this case, Dr. Buridi has failed to establish the impropriety of the Bankruptcy Court’s
conduct under the facts before us. Substantive consolidation is not addressed in the
Bankruptcy Code. Rather, it is an equitable doctrine that “treats separate legal entities as
if they were merged into a single survivor left with all the cumulative assets and
liabilities….” In re Owens Corning, 419 F.3d 195, 205 (3d Cir. 2005) (internal citations
and quotations omitted). Courts generally hold that substantive consolidation is an
“extraordinary remedy” to be used sparingly because of the potential harm to creditors of
a more solvent debtor if forced to share equally with creditors of a less solvent debtor.
E.g., In re Doctors Hosp. of Hyde Park, Inc., 507 B.R. 558, 707 (Bankr. N.D. Ill. 2013);
In re Archdiocese of Milwaukee, 483 B.R. 693, 700 (Bankr. E.D. Wis. 2012).
Here, however, Dr. Buridi has failed to show any negative effect or harm he
suffered as a result of the purported consolidation. In fact, Dr. Buridi does not dispute
that but for the compromise of the administrative claims of the four named physicians,
KMC would have been required to disburse additional money or property to satisfy those
claims in advance of lower priority unsecured claims such as his. See 11 U.S.C. §§
503(b), 507(a)(2), and 1129(a)(9)(A). Accordingly, Dr. Buridi has failed to establish on
the facts before us that the Bankruptcy Court violated the Bankruptcy Code or abused its
broad equitable powers by purportedly effecting a substantive consolidation.
D.

Feasibility

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Dr. Buridi argues that the Bankruptcy Court confirmed the KMC and KMCREI
Plans in contravention of the feasibility requirement of 11 U.S.C. § 1129(a)(11), which
requires a determination that “[c]onfirmation of the plan is not likely to be followed by
the liquidation, or the need for further financial reorganization, of the debtor or any
successor to the debtor under the plan, unless such liquidation or reorganization is
proposed in the plan.” Id. Under Seventh Circuit law, to determine that a plan is
feasible, “the bankruptcy court need not find that it is guaranteed to succeed; only a
reasonable assurance of commercial viability is required.” Matter of 203 N. La Salle
Street Partnership, 126 F.3d 955, 961-62 (7th Cir. 1997) (internal quotation omitted),
rev’d on other grounds, 526 U.S. 434 (1999). The feasibility of a plan is a finding of fact
reviewed for clear error. See In re Lewis, 459 B.R. 281, 290 (N.D. Ill. 2011).
Dr. Buridi argues that the Plans are not feasible under 11 U.S.C. Section
1129(a)(11) because the 20% equity distribution to Drs. Stavens, Hallel, Campbell, and
LaRocca is “an apparent contravention scheme of federal healthcare law.” Dkt. No. 16 at
45. It is true that courts have recognized that “the legal consequences which might flow
from the implementation of a substantive provision which is prohibited by law could
affect the plan’s feasibility under section 1129(a)(11).” Food City, Inc., 110 B.R. at 812
n.10. However, Dr. Buridi has failed to provide a developed argument explaining how
the challenged provision impacts the feasibility, to wit, the ability to fund, the Plan
beyond merely citing the possible penalties for violations of the federal healthcare
statutes at issue.

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Here, at the time of confirmation, the Plans provided sufficient prospects of
success to satisfy § 1129(a)(11), particularly considering that the Confirmation Orders
provide that distributions should not be made under the Plans if they are deemed by the
Exit Investor to be potentially violative of applicable healthcare laws. The Bankruptcy
Court’s finding that the Plans were feasible at the time of confirmation is only supported
by hindsight, given the fact that, today, approximately 20 months into the Plan, the
hospital remains open and operational and there are no civil or criminal proceedings
pending against KMC or KMCREI based on any of the alleged violations of the
healthcare laws about which Dr. Buridi remains concerned. Accordingly, we cannot find
that the Bankruptcy Court clearly erred in determining that the Plans satisfied §
1129(a)(11) at the time of confirmation.
III.

Objection to KMC Plan Based on Modifications to Injunction
Dr. Buridi argues that the Bankruptcy Court erred in allowing what he contends

were “material” modifications of the injunction set forth in the KMC Plan. The
injunction provides, in relevant part, as follows:
…[A]ll parties that have held, currently hold or may hold any claims,
obligations, suits, judgments, damages, demands, debts, rights, causes of
action or liabilities against the Debtor or KMCREI that are compromised,
settled or otherwise provided for pursuant to the Plan shall be enjoined
from [pursuing collection actions] against the Debtor, its property or any
guarantor or co-obligor of the Debtor, and said guarantor’s or co-obligor’s
property, on account of such claims, obligations, suits, judgments,
damages, demands, debts, rights, causes of action or liabilities. …

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Dkt. 4-33 at 15. Dr. Buridi objects to the following language added to the injunction the
day before the confirmation hearing:
[I]n the event that any guarantor or co-obligor of the Debtor … commences
or continues any action against the Debtor, KMCREI, any equity holder in
the reorganized Debtor or KMCREI, or any enjoined Class of claimaint(s)
for claims arising prior to the Date of this Confirmation Order, then the
injunctions set forth in this Confirmation Order shall automatically
terminate and shall not apply to such guarantor or co-obligor and/or their
property.
Dkt. 4-33 at 16.
According to Dr. Buridi, the modification is discriminatory because its intent is to
prevent him from pursuing a state court lawsuit against Drs. Stavens and Hallel.
However, Dr. Buridi has failed to identify any actual cause of action or judgment in his
favor that has been enjoined nor has he established that he is under any threat of
defending against claims or liabilities that should have been enjoined. Although not
entirely clear, it appears he faults the Bankruptcy Court for failing to give him sufficient
time to review the modified language, given that the amended language was submitted
the day before the confirmation hearing. But Dr. Buridi has failed to point to a provision
of the Bankruptcy Code he contends the amended injunction violates or what remedy he
seeks. It is not the court’s duty to flesh out these arguments for him. For these reasons,
we cannot find clear error in the Bankruptcy Court’s treatment of the modification to the
injunction in the KMC Plan.
IV.

Objection to KMCREI Plan Under 11 U.S.C. § 1129(b)
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Section 1129(b) creates an exception to the general rule that a Chapter 11 plan
may only be approved if each class of creditors affected by the plan consents by
permitting confirmation of nonconsensual or “cramdown” plans if the following two
requirements are met: (1) all conditions of § 1129(a) are met (other than § 1129(a)(8),
which requires acceptance by each impaired class of claims or interests); and (2) “the
plan does not discriminate unfairly, and is fair and equitable, with respect to each class of
claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. §
1129(b)(1). A plan is “fair and equitable” to a dissenting class of impaired unsecured
claims if: (1) the allowed value of the claim is to be paid in full, 11 U.S.C. §
1129(b)(2)(B)(i); or (2) “the holder of any claim or interest that is junior to the claims of
such [impaired unsecured] class will not receive or retain under the plan on account of
any such junior claim or interest any property,” 11 U.S.C. § 1129(b)(2)(B)(ii), which is
known as the “absolute priority rule.”
Dr. Buridi contends that the equity distribution set forth in the KMCREI Plan
violates § 1129(b) because it both discriminates unfairly against him and contravenes the
absolute priority rule. We address these arguments in turn below.
1.

Absolute Priority Rule

Dr. Buridi contends that the Bankruptcy Court’s confirmation of the KMCREI
Plan was in contravention of the absolute priority rule. The underlying principle of the
absolute priority rule is that “[c]reditors in bankruptcy are entitled to full payment before
equity investors can receive anything.” In re Castleton Plaza, LP, 707 F.3d 821, 821 (7th
21

Cir. 2013) (citing 11 U.S.C. § 1129(b)(2)(B)(ii)). Dr. Buridi maintains that the equity
distribution to Drs. Stavens, Hallel, Campbell, and LaRocca violates the absolute priority
rule.
Dr. Buridi has failed, however, to identify any senior objecting class of claims in
the KMCREI case or any junior class that is retaining equity in KMCREI. The
confirmation order provides that, “[o]n the Effective Date, holders of Class 4 Interests
shall have their membership [i.e., equity] interests canceled.” Sec. Am. Conf. Order
(KMCREI Plan) at 11. Accordingly, there is no junior class of claims that will “receive
or retain under the plan on account of any such junior claim or interest any property.” 11
U.S.C. § 1129(b)(2)(B)(ii). Nor did Dr. Buridi show a senior class of creditors who
objected to this treatment. Accordingly, the Bankruptcy Court was correct in finding that
the absolute priority rule is not implicated in this case.
2.

Unfair Discrimination

Dr. Buridi also objects to the 20% equity distribution, arguing that it violates §
1129(b)(1), which requires that the plan “not discriminate unfairly” against a “class of
claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. §
1129(b)(1). Dr. Buridi argues that the KMCREI Plan unfairly discriminates against him
because Drs. Stavens, Hallel, Campbell, and LaRocca may receive distributions of equity
from the Exit Investor post-confirmation, while he will not. However, as noted above, all
Class 4 interests were canceled as of the Effective Date. Dr. Buridi has failed to rebut
KMCREI’s contention that nothing in the Bankruptcy Code limits the rights of creditors
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to transfer or receive non-estate property in this manner, given that the Exit Investor will
not be allocating to other parties distributions or dividends from the bankruptcy estate,
but new equity in a reorganized entity.
V.

Conclusion
For the reasons detailed above, the Bankruptcy Court’s confirmation of the KMC

and KMCREI Plans is AFFIRMED.4 Final judgment shall enter accordingly.
IT IS SO ORDERED.

Date: __________________________
05/08/2015

4

We note that confirmation of the Plans does not mean that the Debtors are insulated from
subsequent enforcement actions for illegal conduct. As Dr. Buridi points out, enforcement
actions of federal healthcare law violations may be brought by the Department of Health and
Human Services or under the False Claims Act. However, “a rule which requires a court to seek
out possible future violations from which confirmation will not shelter the debtor anyway invites
advisory rulings and wastes valuable judicial resources.” Food City, 110 B.R. at 813. If the
offer of equity or the 20% distribution indeed does violate healthcare laws as Dr. Buridi
contends, enforcement mechanisms exist to address such a violation. But Dr. Buridi has failed to
show that the Bankruptcy Court erred in its treatment of this issue in the bankruptcy context,
which is the basis of the appeal before us.

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Distribution:
Laura A. DuVall
OFFICE OF THE U.S. TRUSTEE
101 West Ohio Street
Suite 1000
Indianapolis, IN 46204
Miles S. Apple
PITT & FRANK PSC
[e-mail]
David Marcus Cantor
SEILLER WALTERMAN LLC
[e-mail]
Neil C. Bordy
SEILLER WALTERMAN LLC
[e-mail]
Tyler R. Yeager
SEILLER WATERMAN LLC
[e-mail]
David Ralph Krebs
TUCKER HESTER BAKER & KREBS, LLC
[e-mail]
Bradley J. Buchheit
TUCKER, HESTER, BAKER & KREBS
[e-mail]
Courtney E. Chilcote
TUCKER, HESTER, BAKER & KREBS
[e-mail]

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