Not a Lexis Advance subscriber? Try it out for free.

In re Corporacion de Servicios Medicos Hospitalarios de Fajardo

United States Court of Appeals for the First Circuit

November 10, 1986, Decided

No. 86-1451

Opinion

 [*441]  COFFIN, Circuit Judge:

This case raises important issues of first impression regarding the scope of the police power exception to the Bankruptcy Code's automatic stay and the ability of debtors to assume contracts for the provision of governmental services. 11 U.S.C. §§ 362(b)(4), 365. The Department of Health for the Commonwealth of Puerto Rico ("Department"), represented by Secretary of Health Luis Izquierdo Mora ("Secretary"), appeals the district court's affirmance of two orders issued by the bankruptcy court in the course of Chapter 11 proceedings initiated by appellee, Corporacion de Servicios Medicos Hospitalarios de Fajardo ("Corporacion").  [**2]  One order permitted Corporacion to assume a lucrative hospital administration contract that it entered with the Department in 1982. The other order enjoined the Department of Health from continuing license revocation proceedings against Corporacion. We affirm the first order and hold that the issues raised by the second order are moot.

I. Factual Setting.

The events giving rise to this appeal commenced on December 1, 1982 when Corporacion, a private corporation, entered into a ten-year contract with the Department to operate the Fajardo Subregional Hospital. The contract grew out of a Puerto Rican legislative effort during the mid-1970s to reduce the Department's role as health care provider and install private administrators to operate the formerly public hospitals. See P.R. Laws Ann. tit. 24, §§ 337, 337d. The terms of the contract obligated the Department to pay Corporacion a fixed annual fee, totalling several million dollars each year, for the care of indigent patients. Corporacion was also entitled to receive sums from paying patients and third-party sources such as Medicare and Blue Cross/Blue Shield. Operation of the Fajardo Subregional Hospital was Corporacion's [**3]  only business and the contract with the Department was its principal asset.

During March 1985, following the issuance of reports by an auditing firm and an advisory team appointed to evaluate Corporacion's performance under the contract, newly installed Secretary of Health Izquierdo Mora sought to terminate the Department's contract with Corporacion. On April 30, 1985, he filed suit seeking to have the Commonwealth Superior Court declare Corporacion in default and rescind the contract. Corporacion, however, filed a petition for reorganization under Chapter 11  [*442]  of the Bankruptcy Code on May 10, 1985. It continued to perform the contract and receive payments from the Department even after filing for bankruptcy.

Read The Full CaseNot a Lexis Advance subscriber? Try it out for free.

Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.

805 F.2d 440 *; 1986 U.S. App. LEXIS 33333 **; 15 Collier Bankr. Cas. 2d (MB) 1375; Bankr. L. Rep. (CCH) P71,511

IN RE CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, Debtor; CORPORACION DE SERVICIOS MEDICOS HOSPITALARIOS DE FAJARDO, Plaintiff, Appellee v. HON. LUIS IZQUIERDO MORA, ETC., ET AL., Defendants, Appellants

Prior History:  [**1]   APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO, Hon. Jose Antonio Fuste, U.S. District Judge.

Disposition:  Affirmed.

CORE TERMS

bankruptcy court, district court, abstention, license, automatic stay, termination, assurance, default, contractual, abstain, cure, power to regulate, inspection, future performance, contract action, proceedings, revoke, governmental unit, provisions, executory, contends, enjoined, rights

Bankruptcy Law, Bankruptcy, Case Administration, Bankruptcy Court Powers, Procedural Matters, Contested Matters, Jurisdiction, Core Proceedings, Commencement of Case, Abstention, Civil Procedure, Preliminary Considerations, Federal & State Interrelationships, Judicial Review, General Overview, Jurisdictional Sources, Administrative Powers, Automatic Stay, Scope of Stay, Exceptions to Stay, Police & Regulatory Actions, Business & Corporate Compliance, Contracts Law, Standards of Performance, Creditors & Debtors, Contracts Law, Types of Contracts, Lease Agreements, Executory Contracts & Unexpired Leases, Powers to Assume & Reject, Time Limitations, Pleading & Practice, Motion Practice, Executory Contracts, Real Property Law, Leases, Existing Defaults, Standards of Review, Clear Error Review, Appeals, Clearly Erroneous Review