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LISA HILL FENNING (SBN 89238) HARRY GARNER (SBN 254942) ARNOLD & PORTER LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Lisa.Fenning@aporter.com Harry.Garner@aporter.com Proposed Counsel to the Debtor and Debtor-in-Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION In re DOWNEY REGIONAL MEDICAL CENTERHOSPITAL, INC., a California non-profit, public benefit corporation, Debtor. Case No.: 2:09-bk-34714 Chapter 11 EMERGENCY MOTION OF DEBTOR FOR ORDER PURSUANT TO BANKRUPTCY CODE SECTIONS 105(a), 363(b), AND 507(a) (I) AUTHORIZING DEBTORS TO PAY PREPETITION WAGES, COMPENSATION, AND EMPLOYEE BENEFITS AND (II) AUTHORIZING AND DIRECTING FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED THERETO; MEMORANDUM IN SUPPORT THEREOF HEARING Date: September __, 2009 Time: Place: Courtroom 1475 United States Bankruptcy Court 255 E. Temple Street Los Angeles, CA 90012

Tax I.D. 95-1903935

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1 2 3 4 5 6 7 8 9 10 A. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VII. D. VI. C. D. (3) (4) B. IV. V. I. II. III.

TABLE OF CONTENTS Page JURISDICTION AND VENUE .............................................................................................. 1 PROCEDURAL STATUS ....................................................................................................... 1 BACKGROUND ..................................................................................................................... 2 A. B. The Business of the Hospital ....................................................................................... 2 The Causes of the Bankruptcy Filing........................................................................... 2

RELIEF REQUESTED............................................................................................................ 5 EMPLOYEE OBLIGATIONS................................................................................................. 5 Employee Compensation Obligations.......................................................................... 6 Employee Benefit Obligations ..................................................................................... 7 (1) (2) Paid Time Off Benefits .................................................................................... 7 Health And Welfare Plans................................................................................ 8 a. Medical And Other Health Plans, and Other Welfare Plans................ 8

Workers Compensation Plans......................................................................... 8 Retirement Plans .............................................................................................. 8

Employee Expense Obligations ................................................................................... 9 Payroll Taxes And Other Withholding ........................................................................ 9

BASIS FOR RELIEF ............................................................................................................. 10 A. B. C. The Proposed Payments Should Be Authorized Under Bankruptcy Code 507 ...... 11 The Proposed Payments Are Appropriate Under Bankruptcy Code 363................ 12 Payment Of Certain of The Prepetition Employee Obligations Is Appropriate Under Bankruptcy Code 541................................................................................... 12 Payment Of The Prepetition Employee Obligations Should Be Authorized Under Bankruptcy Code 105 And The Doctrine of Necessity........................................... 12

APPLICABLE BANKS SHOULD BE AUTHORIZED AND DIRECTED TO HONOR AND PAY CHECKS ISSUED AND MAKE OTHER TRANSFERS TO PAY THE EMPLOYEE OBLIGATIONS............................................................................................... 14

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VIII. IX. X.

REQUEST FOR WAIVER OF BANKRUPTCY RULE 6004 ............................................. 14 NOTICE ................................................................................................................................. 15 CONCLUSION ...................................................................................................................... 15

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TABLE OF AUTHORITIES Page(s) Begier v. IRS, 496 U.S. 53 (1990) .................................................................................................................. 12 In re Eagle-Picher Indus., Inc., 124 B.R. 1021 (Bankr. S.D. Ohio 1991)................................................................................. 13 In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1985) ................................................................................ 12, 13 In re Just for Feet, Inc., 242 B.R. 821 (D. Del. 1999) ................................................................................................... 13 In re Lehigh & New Eng. Ry., 657 F.2d 570 (3d Cir. 1981).................................................................................................... 13 Mich. Bureau of Workers Disability Comp. v. Chateaugay Corp. (In re Chateaugay Corp.), 80 B.R. 279 (S.D.N.Y. 1989) ....................................................... 13 Miltenberger v. Logansport, C & S.W. R. Co., 106 U.S. 286 (1882) ................................................................................................................ 13 In re NVR L.P., 147 B.R. 126 (Bankr. E.D. Va. 1992) ..................................................................................... 13 STATUTES AND RULES 11 U.S.C. 101 et seq. ................................................................................................................. 1 11 U.S.C. 105 ............................................................................................................................. 12

19 11 U.S.C. 105(a) ................................................................................................................ 1, 4, 13 20 21 22 23 24 25 26 27 28 11 U.S.C. 363 ............................................................................................................................. 12 11 U.S.C. 363(b) ...................................................................................................................... 1, 4 11 U.S.C. 365 ............................................................................................................................. 14 11 U.S.C. 507 ............................................................................................................................. 11 11 U.S.C. 507(a) ................................................................................................................ 1, 4, 11 11 U.S.C. 507(a)(4).................................................................................................................... 11 11 U.S.C. 507(a)(5).................................................................................................................... 11 11 U.S.C. 541 ............................................................................................................................. 12 -iiiLA566796

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11 U.S.C. 1107(a) ........................................................................................................................ 1 11 U.S.C. 1108 ............................................................................................................................. 1 28 U.S.C. 157 ............................................................................................................................... 1 28 U.S.C. 157(b) .......................................................................................................................... 1 28 U.S.C. 1334 ............................................................................................................................. 1 28 U.S.C. 1408 ............................................................................................................................ 1 28 U.S.C. 1409 ............................................................................................................................. 1 Bankruptcy Code Chapter 11 ................................................................................................. passim

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Fed. R. Bankr. P. 2002 .................................................................................................................. 15 Fed. R. Bankr. P. 2014-1(a) ........................................................................................................ 6, 7 Fed. R. Bankr. P. 2081-1(6) ............................................................................................................ 1 Fed. R. Bankr. P. 6004(a).............................................................................................................. 14 Fed. R. Bankr. P. 6004(h) ............................................................................................................. 14

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TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE, CREDITORS HOLDING THE TWENTY LARGEST UNSECURED CLAIMS, ANY ALLEGED SECURED CREDITORS, THE OFFICE OF THE UNITED STATES TRUSTEE, AND OTHER PARTIES IN INTEREST: Downey Regional Medical Center-Hospital, Inc., the debtor and debtor-in-possession in the above captioned case (the Debtor), hereby moves the Court for the entry of an order, pursuant to sections 105(a), 363(b), and 507(a) of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code), (a) authorizing, but not directing, Debtor to pay prepetition wages, salaries, and employee benefits; (b) authorizing, but not directing, Debtor to continue the maintenance of all employee benefit programs in the ordinary course; and (c) authorizing and directing all banks to honor prepetition checks for payment of prepetition employee obligations. Debtor requests pursuant to Local Bankruptcy Rule (LBR) 2081-1(a)(6) and LBR 90751(a) that the Court schedule a hearing on this Motion on less than 48 hours notice, upon timely notice to the Office of the United States Trustee (UST), creditors holding the twenty largest unsecured claims, Debtors alleged secured creditors, and other parties in interest (collectively, the Interested Parties). A copy of this Motion was served, concurrent with the filing hereof with the Court, on the Interested Parties by courier or overnight delivery. SUMMARY OF RELIEF REQUESTED1 By this Motion, Debtor seeks to pay to, or for the benefit of, its Employees the Prepetition Employee Obligations and to continue Debtors Employee Benefit Plans in effect immediately prior to the commencement of this Chapter 11 Case. If Debtor fails to pay or honor the Employees prepetition compensation, reimbursement procedures, and employee benefits, the Employees will suffer extreme personal hardship and in many cases will be unable to pay their basic living expenses. This clearly would destroy Employee morale and result in unmanageable Employee turnover during the critical stages of Debtors Chapter 11 Case. Debtor submits that any significant deterioration in morale at this time will substantially and adversely impact Debtor and its ability to
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Capitalized terms used but not defined in this Motion shall have the meaning given to them in the accompanying Memorandum.

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reorganize, thereby resulting in immediate and irreparable harm to Debtor and its estate. In general, the market for nurses and other qualified medical personnel remains strong, and Debtor needs to remain competitive in the marketplace to retain the staff it needs to reorganize successfully. This Motion is based on the Memorandum of Points and Authorities below (the Memorandum); the Declaration of Robert E. Fuller in Support of the Debtors Chapter 11 Petition and First Day Motions (the Fuller Declaration), filed with the Court concurrently herewith; and the arguments, evidence, and representations that may be presented at or prior to the hearing on this Motion. Pursuant to LBR 9075-1(a)(7), if you wish to oppose this Motion you may present a written or oral response to the Motion at the time of the hearing on the Motion. WHEREFORE, Debtor respectfully requests that the Court enter an Order, substantially in the form annexed hereto, granting the relief requested in the Motion and such other and further relief as may be just and proper. Dated: Los Angeles, California September 14, 2009 Respectfully Submitted, /s/ Lisa Hill Fenning Lisa Hill Fenning (SBN 89238) Harry Garner (SBN 254942) Arnold & Porter LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Proposed Counsel to the Debtor and Debtor-inPossession

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MEMORANDUM OF POINTS AND AUTHORITIES Downey Regional Medical Center-Hospital, Inc., the debtor and debtor-in-possession in the above captioned case (the Debtor or Hospital), hereby moves this Court (the Motion) for entry of an order, pursuant to sections 105(a), 363(b), and 507(a) of the Bankruptcy Code, (a) authorizing, but not directing, Debtor to pay prepetition wages, salaries, and employee benefits; (b) authorizing, but not directing, Debtor to continue the maintenance of all employee benefit programs in the ordinary course; and (c) authorizing and directing all banks to honor prepetition checks for payment of prepetition employee obligations. In support of the Motion, Debtor relies upon and incorporates by reference the Declaration of Robert E. Fuller in Support of the Debtors Chapter 11 Petition and First Day Motions (the Fuller Declaration), filed with the Court concurrently herewith. In further support of the Motion, Debtor, by and through its undersigned counsel, respectfully states as follows: I. JURISDICTION AND VENUE 1. This Court has jurisdiction to consider this Motion under 28 U.S.C. 157 and 1334.

This is a core proceeding under 28 U.S.C. 157(b). Venue of these cases and this Motion in this District is proper under 28 U.S.C. 1408 and 1409. The statutory predicates for the relief requested herein are Bankruptcy Code sections 105(a), 363(b) and 507(a), and Local Bankruptcy Rule 2081-1(6). II. PROCEDURAL STATUS 2. On September 14, 2009 (the Petition Date), Debtor commenced a case by filing a

petition for relief under chapter 11 of the Bankruptcy Code (the Chapter 11 Case). 3. Debtor continues to operate its business and to manage its property as a debtor and

debtor-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in Debtors Chapter 11 Case. 4. States Trustee. No creditors committee has been appointed in this Chapter 11 Case by the United

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III.

BACKGROUND A. 5. The Business of the Hospital The Hospital is a nonprofit general acute care and teaching hospital licensed for 199

beds located in Downey, California. The Hospital currently operates 181 staffed inpatient beds, including an intensive care unit, a neo-natal intensive care unit for newborns with special health issues, a birth center, and definitive observation units, besides general medical-surgical beds. It services approximately 14,000 inpatients per year in all services. The Hospitals average length of stay is less than 4 days on a very acute population, making it one of the most efficient in the state. 6. The Hospital offers a wide variety of clinical services and provides virtually all

clinical services of a major tertiary university hospital except for organ transplants. The Hospital has 11 operating rooms, and a very busy surgical practice. It offers same day surgeries, and specializes in open heart surgery, general surgery, orthopedic surgery, and neurosurgery. It operates on over 7,000 patients annually. The Hospital also has numerous specialty outpatient services, seeing over 80,000 outpatients annually, including non-invasive cardiology, radiology, endoscopy, and physical therapy. 7. The Hospital also has an emergency room of 22 beds. The emergency room is not

designated as a trauma unit, but it is equipped for and services trauma patients who are regularly brought to the Hospital in extremis or who come in via transportation other than ambulance. The emergency room services over 50,000 patients annually. Therefore, at about 2,500 patients per bed annually, it is one of the busiest in the area. The emergency room is burdened because since 2001 there have been four major emergency rooms closed on the I-105 corridor, including Martin Luther King Hospital, leaving only three remaining general emergency rooms in the area including the Hospital.1 B. 8. The Causes of the Bankruptcy Filing Although nominally profitable on an accrual basis, the Hospital has been forced to

commence the Chapter 11 Case as a result of a liquidity crisis. This crisis has two primary causes.
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There is also a Kaiser Permanente Facility in the area, and although its emergency room is technically open to everyone, paramedic operators tend to take only Kaiser patients to this facility.

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First, the Hospital has incurred substantial losses as a result of severe problems on the finance side of its business (now largely corrected) due to defective charge capture practices and software billing practices (the Charge Capture System Problems) that resulted in the Hospital not collecting all the revenues to which it would be entitled. Second, the Hospital was incurring significant losses due problems with respect to its capitation arrangements (the Capitation Program) with certain physician groups and health plans (the Capitation Program Problems). These losses were so severe that the Hospital concluded it had to terminate the Capitation Program to staunch the long-term hemorrhaging of cash, despite the short term cash flow interruption and claims that would result. The Hospital has taken steps to exit the Capitation Program and adopt a fee-for-service model, but the exit costs are substantial. The combination of the Charge Capture System and Capitation Program Problems has left the Hospital with no cash reserves since March 2008. 9. In essence, due to software and process failings, the Hospitals financial, billing and

collections systems had failed to capture charges which led to incomplete bills for a significant portion of its services for nearly a decade, causing unrecoverable losses. A cost-accounting problem caused the misallocation of costs to the capitation contracts, resulting in the Hospitals books showing a profit in capitation where none really existed. These problems have been investigated, diagnosed, and continue to be remedied under the direction of a new chief executive officer, Kenneth Strople, who took the reins in 2007, Robert Fuller, the chief operating officer, and consultant Richard Yardley, the acting chief financial officer. Given sufficient time to operate under a regime in which charges are properly captured, bills are complete when invoiced, and financial reports provide reliable real-time information, the Hospital should be able to repay its debts in full. 10. However, demands by certain creditors for immediate paymentand for payment of

more than the Hospital believes it owes in some casesprevented an orderly restructuring outside of bankruptcy and forced this filing. Much of the pressure has come from the physician groups who have asserted claims in excess of $9 million against the Hospital related to the termination of the capitation contracts.

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11.

The exit from the Capitation Program created three distinct cash drains: (1) the tail of

claims for services provided out-of-network by other hospitals and health care providers, (2) the claims by the physician groups participating in the Capitation Program for risk-sharing profit splits, much of which is disputed by the Hospital (the Risk Share Claims), and (3) the transitional loss of cash occasioned by the change in business model out of capitation (where under the Hospital was paid up front, before services were rendered) to fee-for service (where under the Hospital is paid in arrears, typically up to 150 days following the rendering of services), some of which was eased by the $8.8 million in advances by the insurers who participated in the program. However, the Hospital does not have the financial capacity to bridge the costs of exiting capitation within the time frame being demanded by impacted parties. In short, this reorganization filing has resulted from demands made by parties who greatly benefitted from the Capitation Program while it was operational (the physicians), but who are now not patient enough to allow the Hospital to implement its new business model and return to financial stability before demanding payment. 12. The immediate problem that forced the Hospital to file this Case arose from an

arbitration brought by one of the physician groups and the potential for the other two groups to follow suit. The physician groups are expected to assert claims for over $9 million. 13. Alliance Physicians Medical Group (Alliance), one of the physician groups,

recently filed an arbitration in an attempt to collect their alleged risk share profits from 2006 to 2008. In its arbitration, Alliance claimed it was owed up to $4.7 million or more. It sought to attach the Hospitals bank accounts in the fall of 2008. The arbitrators award is imminent, and the Hospital believes that Alliance will seek immediate enforcement by attaching the Hospitals bank accounts. 14. The threat of attachments relating to the estimated $9 million of Risk Share Claims

has scared off prospective lenders who would not want the loan proceeds intended for critically needed working capital to be diverted to paying historical disputed debts. Such a diversion of funds would shut down the Hospital. The automatic bankruptcy stay will protect the Hospital from the catastrophic interruption of its operations that would result from such an attachment.

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IV.

RELIEF REQUESTED 15. By this Motion, Debtor requests that this Court enter an order pursuant to

sections 105(a), 363(b), and 507(a) of the Bankruptcy Code (a) authorizing, but not directing, Debtor to: (i) pay or otherwise honor, as applicable, unpaid prepetition obligations to or for the benefit of current employees (collectively, the Employees), including accrued prepetition wages, salaries, and other cash and non-cash compensation claims, except as otherwise set forth herein (collectively, the Employee Compensation Obligations); (ii) continue Debtors various nonworking day policies, employee benefit plans, and programs (and to pay all fees and costs in connection therewith), except as otherwise set forth herein (collectively, the Employee Benefit Obligations), the most significant of which are described below; (iii) reimburse Employees for prepetition expenses Employees incurred on behalf of Debtor in the ordinary course of business (the Employee Expense Obligations); and (iv) pay all related prepetition withholdings and payrollrelated taxes (the Payroll Taxes and Other Withholding and, with the Employee Compensation Obligations, the Employee Benefit Obligations and the Employee Expense Obligations, collectively, the Prepetition Employee Obligations) associated with the Employee Compensation Obligations and the Employee Benefit Obligations; (b) authorizing and directing Debtors banks to receive, process, honor and pay all of Debtors prepetition checks and fund transfers on account of any of the Prepetition Employee Obligations; (c) prohibiting Debtors banks from placing any holds on, or attempting to reverse, any automatic transfers to any account of an Employee or other party for Prepetition Employee Obligations; and (d) authorizing the Debtor to issue new postpetition checks or effect new postpetition fund transfers on account of the Prepetition Employee Obligations to replace any prepetition checks or fund transfer requests that may be dishonored or rejected. V. EMPLOYEE OBLIGATIONS 16. In the ordinary course of business, Debtor incurs certain obligations to its employees

as compensation for their performance of services. As of the Petition Date, Debtor employed approximately 1,300 individuals, of which approximately 900 are full time employees (the FullTime Employees) and 400 are part-time employees (the Part-Time Employees). These

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employees include almost 500 registered nurses. Approximately 94% of the Employees are hourly wage earners (the Hourly Employees) and the remaining 6% are salaried personnel (the Salaried Employees). There are no unionized employees at Debtor. 17. As discussed in more detail below, Debtor has incurred costs and obligations with

respect to the Employees that arose prior to the Petition Date. Certain of these costs and obligations are currently outstanding and due and payable, while others will become due and payable in the ordinary course of Debtors business after the Petition Date. A. 18. Employee Compensation Obligations Prior to the Petition Date and in the ordinary course of business, Debtor typically

paid wages, salary, and compensation to the Employees on a biweekly basis, every other Thursday. All payroll disbursements, except for deductions on account of benefits, are pre-funded to Automatic Data Processing, Inc. (ADP) on the Tuesday before each payroll, based upon the biweekly time reported through the prior weekend. 19. The current estimated biweekly gross payroll for Debtors Employees is

approximately $2.82 million, including payroll taxes. Debtors most recent payroll for the period ending September 6, 2009 was pre-funded to ADP on Wednesday, September 9, and paid to Employees on Friday, September 11, a one day delay given the Monday holiday. 20. As of the Petition Date, Debtor estimates that it owes approximately $1.611 million

to its Employees, or approximately $1,239 per Employee, on account of accrued, unpaid wages and salaries, including payroll taxes, that have accrued from September 7 through September 14. No individual Employee is owed in excess of $10,950 for amounts due for biweekly prepetition wages or salary. 21. Pursuant to this Motion, Debtor seeks to pay the outstanding amounts owed as of the

Petition Date for accrued and unpaid wages and salaries, including amounts that Debtor is required by law to withhold from Employee payroll checks in respect of federal, state, and local income taxes, garnishment contributions, social security, and Medicare taxes. 22. Pursuant to Rule 2014-1(a) of the Local Bankruptcy Rules, Debtor intends to serve

Notices of Setting/Increasing Insider Compensation with respect to Chief Executive Officer

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Kenneth Strople or Chief Operating Officer Robert Fuller (the Senior Officers). As part of this Motion, Debtor seeks authority to pay the Senior Officers the unpaid wage or salary obligations that have accrued on their behalf prior to the Petition Date (the Insider Compensation Obligations), provided that that no objections to the Notices are received within the 15-day time period provided by Local Bankruptcy Rule 2014-1(a). B. 23. Employee Benefit Obligations In the ordinary course of business, Debtor has established the following categories of

benefit plans and policies for its Employees: (i) a paid time off plan that covers vacation days, sick days, and holidays (the PTO Plan); (ii) medical insurance, dental insurance, vision insurance, life insurance, and disability insurance (collectively, the Health and Welfare Plans); (iii) a selffunded workers compensation plan (the Workers Compensation Plan); and (iv) 401(k) and 402(b) plan (the Retirement Plans, and, together with the PTO Plans, Health and Welfare Plans, and the Workers Compensation Plans, the Employee Benefit Plans). Debtor deducts specified amounts from eligible Employees wages to fund certain of the Employee Benefit Plans, such as insurance and retirement contributions. (1) 24. Paid Time Off Benefits

If certain conditions are met, Employees are eligible to receive full wages for, among

other things, vacation and holidays pursuant to the PTO Plan. Debtor does not typically cash out any of the PTO benefits, except under its policy where Debtor allows 50% of the hours in each Employees PTO account to be cashed out once a year (or at other times and amounts in emergency situation as approved by the CEO or his delegate). Debtor does not expect any unusual demands for PTO to be cashed out, but it seeks authority to honor such cash-out provisions in its sole discretion. 25. Under the PTO Plan, Debtors Employees accrue vacation time, sick leave, and

holiday time (collectively, PTO). Generally, Employees accrue vacation and holiday time based on their duration of employment. By this Motion, Debtor seeks authority to honor, in its sole discretion, the existing PTO Plan as of the Petition Date in order to allow Employees to take PTO in the ordinary course of Debtors business.

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(2)

Health And Welfare Plans

Debtor offers a number of Health and Welfare Plans to provide benefits to its

Employees, including, without limitation, (i) medical, dental, vision, and other health plans; (ii) life insurance, and (iii) disability benefits. a. Medical And Other Health Plans, and Other Welfare Plans.

Debtor offers to its Employees various health benefits, including, among others,

medical, dental, prescription drug, and rehabilitation services coverage. Debtor offers these plans to all its Full-Time and Part-Time Employees. Debtor offers its Employees CIGNA PPO and HMO medical coverage, CIGNA Life, Employee Assistance, Accidental Death and Disability coverage (with voluntary contributions for extending base coverage), CIGNA long-term disability and business travel accident coverage, Superior Vision coverage, and CIGNA dental coverage. Debtor pays 77% of the costs of those health and welfare plans, with Employees bearing 23% of the global benefits budget through payroll deductions. The total cost of these health and welfare benefits for Debtors current fiscal year (July 1, 2009 - June 30, 2010) is estimated to amount to $9,430,900. Debtor estimates that pre-petition, unpaid accruals for this coverage amounts to $206,705, although coverage is pre-paid and remains paid in full at the time of filing. (3) Workers Compensation Plans

California law requires the Debtor to maintain workers compensation policies and

programs to provide Employees with coverage for claims arising from or related to their employment with the Debtor (the Workers Compensation Program). 29. Debtor is self-insured under the Workers Compensation Program, its premiums for

excess insurance are paid, its deposits with the State are paid, and its claims payments are current, but out of an abundance of caution, by this Motion, Debtor seeks authority to continue its Workers Compensation Program and honor as necessary in the ordinary course of business any amounts arising under the Debtors Workers Compensation Program existing prior to the Petition Date. (4) Retirement Plans

Debtor mains a 401(k) plan administered through Merrill Lynch, to which it

contributes 3% of wages to plan participants, as well as a 403(2)(b) annuity plan with Mutual of

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America, but into which no further contributions are made. Debtor requests permission to continue to make contributions in the ordinary course to the 401(k) plan. C. 31. Employee Expense Obligations Debtor routinely reimburses Employees for certain expenses incurred within the

scope of their employment, including expenses for travel, lodging, professional seminars and conventions, ground transportation, meals, supplies, and miscellaneous business expenses (collectively, the Reimbursable Expenses). Debtor processes expense reports on a rolling basis, with a time lag of approximately 20 days between the submission of a request for reimbursement and payment. It is difficult to determine the amount of outstanding Reimbursable Expenses that have been accrued prior to the Petition Date because of the lag time in the submission of reimbursement requests. However, it is likely that as of the Petition Date, certain Employees may not yet have been reimbursed for Reimbursable Expenses incurred prior to the Petition Date. Approximately $5,000 in the aggregate is paid to Employees with respect to Reimbursable Expenses each month. Debtor seeks authority to reimburse all such expenses as and when reports are submitted by Employees. D. 32. Payroll Taxes And Other Withholding Debtor is required by law to withhold from its Employees wages amounts related to

federal, state, and local income taxes as well as social security and Medicare taxes, and to remit these taxes to the appropriate taxing authorities. In addition, Debtor routinely withholds from Employee paychecks other amounts that Debtor is required to transmit to third parties. Examples of such withholding include garnishments, charitable donations, and certain insurance payments (collectively, Withheld Funds). Debtor believes that such Withheld Funds, to the extent they remain in Debtors possession, constitute moneys held in trust and therefore are not property of Debtors bankruptcy estate. Thus, Debtor believes that it has the authority to direct such funds to the appropriate parties in the ordinary course of business. 33. Debtor also is required to make matching payments from its own funds for social

security and Medicare taxes, and to pay, based on a percentage of gross payroll and subject to stateimposed limits, additional amounts to the appropriate taxing authorities for, among other things,

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state and federal unemployment insurance (collectively, the Employer Payroll Taxes). As of the Petition Date, Debtor believes that approximately $127,600 in accrued and unpaid Payroll Taxes is outstanding for the period prior to the Petition Date.2 34. By this Motion, Debtor seeks the authority to pay, in its sole discretion, all its

accrued and outstanding prepetition Employer Payroll Taxes, and, though Debtor believes that it has the authority to do so in the ordinary course of business, out of an abundance of caution, Debtor also seeks the authority to direct the Withheld Funds to the appropriate parties, as described above. VI. BASIS FOR RELIEF 35. Pursuant to this Motion, Debtor seeks to pay to, or for the benefit of, its Employees

the Prepetition Employee Obligations and to continue Debtors Employee Benefit Plans in effect immediately prior to the commencement of this Chapter 11 Case. If Debtor fails to pay or honor the Employees prepetition compensation, reimbursement procedures, and employee benefits, the Employees will suffer extreme personal hardship and in many cases will be unable to pay their basic living expenses. This clearly would destroy Employee morale and result in unmanageable Employee turnover during the critical stages of Debtors Chapter 11 Case. Debtor submits that any significant deterioration in morale at this time will substantially and adversely impact Debtor and its ability to reorganize, thereby resulting in immediate and irreparable harm to Debtor and its estate. In general, the market for nurses and other qualified medical personnel remains strong, and Debtor needs to remain competitive in the marketplace to retain the staff it needs to reorganize successfully. 36. To retain Employees and maintain their morale during and after these chapter 11

cases, Debtor seeks authority to satisfy any Prepetition Employee Obligations and continue to provide the employee benefit plans subsequent to the Petition Date and maintain accruals of those benefits in the ordinary course of business. Debtor submits that the amounts to be paid to Employees pursuant to this Motion are reasonable when compared with the importance and

Nothing contained herein shall be deemed to be an admission regarding the existence or amount of liability for any obligations described herein.

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necessity of preserving Employee loyalty and morale and with the difficulties and losses Debtor will likely suffer if those amounts are not paid. 37. Debtor does not seek to alter its compensation, vacation, or other benefit policies at

this time. This Motion is intended only to permit Debtor, in its sole discretion, to make payments consistent with Debtors existing policies and practices to the extent that, without the benefit of an order approving this Motion, such payments may be inconsistent with the applicable provisions of the Bankruptcy Code. Payment of the Prepetition Employee Obligations in accordance with Debtors prepetition business practices is in the best interests of its estate, its creditors, and all parties in interest, and will enable Debtor to continue to operate its business in an economic and efficient manner without disruption. 38. Accordingly, Debtor seeks authorization to pay the Prepetition Employee

Obligations (or to maintain accrued levels of benefits and continue such accruals where payment is not yet due) all in accordance with the policies, plans and programs in place prior to the commencement of these cases. A. 39. The Proposed Payments Should Be Authorized Under Bankruptcy Code 507 Bankruptcy Code sections 507(a)(4) and 507(a)(5) require that certain claims for

prepetition wages, salaries, commissions, vacation, sick leave, and employee benefit contributions be accorded priority in payment in an amount not to exceed $10,950 for each employee. Because of the number of Employees working for Debtor, and because some amounts are unknown pending submission of claims, Debtor does not know the exact amount due each Employee for the prepetition period. However, Debtor believes that, excluding obligations under the PTO Plan, which are not current cash pay obligations of Debtor as of the Petition Date, none of the Debtors Employees is owed more than the $10,950 cap on priority status under Sections 507(a)(4) and 507(a)(5). Accordingly, granting the relief requested will not adversely affect Debtors other unsecured creditors since payment of the priority claims will not affect distributions to other general unsecured creditors that hold non-priority claims.

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B. 40.

The Proposed Payments Are Appropriate Under Bankruptcy Code 363 Under Bankruptcy Code 363, a bankruptcy court is empowered to authorize a

chapter 11 debtor to expend funds in the bankruptcy courts discretion outside the ordinary course of business. To obtain approval for the use of estate assets outside the ordinary course of business, the debtor must articulate a valid business justification for the requested use. See In re Ionosphere Clubs, Inc., 98 B.R. 174, 176 (Bankr. S.D.N.Y. 1985). Payment of prepetition wage and salary claims in order to preserve and protect a debtors business, retain its currently working employees, and maintain positive employee morale, even if such payment were deemed to be outside the ordinary course of business, is a sufficient business justification for such an authorization. See id. at 175. Accordingly, this Court should grant the requested relief under 363. C. Payment Of Certain of The Prepetition Employee Obligations Is Appropriate Under Bankruptcy Code 541 The payment of Withheld Funds to the appropriate third parties will not prejudice the

41.

estate because such Withheld Funds are held in trust for the benefit of the respective payees and, thus, do not constitute estate property within the scope of 541. See Begier v. IRS, 496 U.S. 53, 59 (1990) (withholding taxes are property held by a debtor in trust for another and, as such, are not property of the debtors estate). Moreover, payments that are critical to the retention and morale of Debtors workforce actually add value to the estate because an unplanned reduction in Employee retention or productivity could have disastrous effects on recoveries to unsecured creditors. D. Payment Of The Prepetition Employee Obligations Should Be Authorized Under Bankruptcy Code 105 And The Doctrine of Necessity The proposed payments of the Prepetition Employee Obligations should be

42.

authorized pursuant to 105 and under the doctrine of necessity. Section 105 authorizes this Court to issue any order . . . necessary or appropriate to carry out the provisions of the Bankruptcy Code. For the reasons set forth herein, and in light of the critical need for Debtor to preserve the going concern value of its business to effect a successful reorganization through, among other things, preservation of its workforce and its Employees morale, payment of the wages and benefits as requested herein is proper in accordance with 105.

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43.

The doctrine of necessity is a well-settled doctrine that permits a bankruptcy court to

authorize payment of certain prepetition claims prior to the completion of the reorganization process where the payment of such claims is necessary to the reorganization. The Courts power to utilize the doctrine of necessity in Chapter 11 cases derives from the Courts inherent equity powers and its statutory authority to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. 11 U.S.C. 105(a). The United States Supreme Court first articulated the doctrine of necessity over a century ago, in Miltenberger v. Logansport, C & S.W. R. Co., 106 U.S. 286 (1882), in affirming the authorization by the lower court of the use of receivership funds to pay pre-receivership debts owed to employees, vendors and suppliers, among others, when such payments were necessary to preserve the receivership property and the integrity of the business in receivership. See id. at 309-14. 44. The modern application of the doctrine of necessity is largely unchanged from the

Courts reasoning in Miltenberger. See In re Lehigh & New Eng. Ry., 657 F.2d 570, 581-82 (3d Cir. 1981) ([I]n order to justify payment under the necessity of payment rule, a real and immediate threat must exist that failure to pay will place the [debtors] continued operation . . . in serious jeopardy.). See In re Just for Feet, Inc., 242 B.R. 821, 826 (D. Del. 1999) (stating that where the debtor cannot survive absent payment of certain prepetition claims, the doctrine of necessity should be invoked to permit payment); see also In re NVR L.P., 147 B.R. 126, 127 (Bankr. E.D. Va. 1992) ([T]he court can permit pre-plan payment of a pre-petition obligation when essential to the continued operation of the debtor.); In re Eagle-Picher Indus., Inc., 124 B.R. 1021, 1023 (Bankr. S.D. Ohio 1991) ([T]o justify payment of a pre-petition unsecured creditor, a debtor must show that the payment is necessary to avert a serious threat to the Chapter 11 process.). 45. Courts frequently apply 105(a) to authorize substantially similar relief to that

requested here. See Mich. Bureau of Workers Disability Comp. v. Chateaugay Corp. (In re Chateaugay Corp.), 80 B.R. 279, 287 (S.D.N.Y. 1989) (affirming a bankruptcy court order authorizing the debtor to pay pre-bankruptcy wages, salaries, employee benefits and reimbursements, and workers compensation claims and premiums); In re Ionosphere Clubs, 98

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B.R. at 177 (authorizing the debtor to pay current employees pre-bankruptcy wages, salaries, medical benefits, and business expense claims). VII. APPLICABLE BANKS SHOULD BE AUTHORIZED AND DIRECTED TO HONOR AND PAY CHECKS ISSUED AND MAKE OTHER TRANSFERS TO PAY THE EMPLOYEE OBLIGATIONS 46. Because Debtor funds its payroll through aggregate wire transfers to ADP, no payroll

checks are issued directly by Debtor to Employees. However, expense reimbursement and other checks on account of the Health and Welfare Plans may be outstanding. Therefore, Debtor further requests that the Court enter an order authorizing and directing Debtors banks to receive, process, honor, and pay all of Debtors prepetition checks and fund transfers on account of any of the Prepetition Employee Obligations, and prohibiting Debtors banks from placing any holds on, or attempting to reverse, any automatic transfers to any account of an Employee or other party for Prepetition Employee Obligations. Debtor also seeks an order authorizing Debtor to issue new postpetition checks or effect new postpetition fund transfers on account of the Prepetition Employee Obligations to replace any prepetition checks or fund transfer requests that may be dishonored or rejected. 47. Authorization to pay all amounts on account of Prepetition Employee Obligations

shall not be deemed to constitute postpetition assumption or adoption of any contract, program, or policy pursuant to 365 of the Bankruptcy Code. Debtor is in the process of reviewing these matters and reserves all of its rights with respect thereto. Moreover, the authorization to pay all amounts on account of Prepetition Employee Obligations shall not affect Debtors right to contest the amount or validity of any Prepetition Employee Obligations, including, without limitation, the Employer Payroll Taxes that may be due to any taxing authority. VIII. REQUEST FOR WAIVER OF BANKRUPTCY RULE 6004 48. Any delay in paying the obligations relating to the Prepetition Employee Obligations

could negatively impact Debtor, its creditors, and its estate. Accordingly, Debtor seeks a waiver of the notice requirements set forth in Rule 6004(a) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules) and the stay requirement set forth in Bankruptcy Rule 6004(h).

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IX.

NOTICE 49. Notice of this Motion and the entry of the interim order will be given to: (a) the

Office of the United States Trustee for the Central District of California; (b) all required government entities; (c) the parties included on Debtors list of twenty (20) largest unsecured creditors; and (d) those parties entitled to notice pursuant to Bankruptcy Rule 2002 (collectively, the Notice Parties). Debtor submits that, under the circumstances, no other or further notice is required. X. CONCLUSION WHEREFORE, Debtor respectfully requests that the Court enter an Order, substantially in the form annexed hereto, granting the relief requested in the Motion and such other and further relief as may be just and proper.

Dated: Los Angeles, California September 14, 2009

Respectfully Submitted, By: /s/ Lisa Hill Fenning Lisa Hill Fenning (SBN 89238) Harry Garner (SBN 254942) Arnold & Porter LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Proposed Counsel to the Debtor and Debtor-inPossession

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