The opinion
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
QUORUM HEALTH CORP., Case No. 20-10766 (BLS)
Reorganized Debtor
DANIEL H. GOLDEN, as Litigation Trustee
of the QHC LITIGATION TRUST and Adv. Pro. No. 21-51190 (BLS)
WILMINGTON SAVINGS FUND SOCIETY,
FSB, solely in its capacity as Indenture Re: Adv. D.I. 54, 59, 60, 61, 62,
Trustee, 78, 79, 90
Plaintiffs.
v.
COMMUNITY HEALTH SYSTEMS, INC.;
CHS/COMMUNITY HEALTH SYSTEMS,
INC.; REVENUE CYCLE SERVICE
CENTER, LLC; CHSPSC, LLC;
PROFESSIONAL ACCOUNT SERVICES,
INC.; PHYSICIAN PRACTICE SUPPORT,
LLC; ELIGIBILITY SCREENING
SERVICES, LLC; W. LARRY CASH;
RACHEL SEIFERT; ADAM FEINSTEIN;
AND CREDIT SUISSE SECURITIES (USA)
LLC,
Defendants.
OPINION
Before the Court are two motions. The first is a Motion to Intervene1 in this Adversary
Proceeding (the “Motion to Intervene”) filed by Quorum Health Corporation (“Quorum” or
“QHC”). Quorum filed its Motion with a proposed intervenor complaint seeking a declaratory
judgment (the “Intervenor Complaint”) on the issue of indemnification stemming from a
1 Adv. Doc. No. 54.
separation and distribution agreement (the “Separation Agreement”) between Quorum and
Community Health Systems (“CHS”). By its motion and subsequent briefing, Quorum asserts
that it has a statutory right to intervene in this Adversary Proceeding2 as a party in interest under
Section § 1109(b). Quorum further asserts through the Intervenor Complaint that defendants
CHS, Rachel Seifert, and Larry Cash (collectively, the “CHS Parties”)3 are not entitled to
advancement or indemnification for fees & costs associated with litigating the Adversary
Proceeding. In opposition to the Motion to Intervene, the CHS Parties assert that intervention
should be denied because this Court lacks subject matter jurisdiction over the dispute alleged in
the Complaint.
The second matter is a Motion to Stay Litigation Pending Arbitration (the “Motion to
Stay”)4 filed by the CHS Parties, which contends that the proposed Intervenor Complaint must
be stayed pending arbitration as provided for in the Separation Agreement. Quorum opposes the
Motion to Stay on two bases: (1) that a declaratory judgment action is not a claim primarily
seeking monetary relief (which is an express condition for arbitration under the Separation
Agreement); and (2) that the Bankruptcy Court’s jurisdiction over the indemnification issue
should override the Federal Arbitration Act’s general mandate of enforcing arbitration
2 The Plaintiff in the underlying action, Daniel H. Golden (the “Litigation Trustee”) seeks similar relief in his
complaint (the “AP Complaint”), specifically asserting that the indemnification provisions under the Separation
Agreement are avoidable as fraudulent transfers under 11 U.S.C. §§ 544, 548 and applicable state law.
3 Cash was the Chief Financial Officer of CHS who also became Quorum’s President and a member of Quorum’s
board of directors on July 27, 2015. Seifert was CHS’ Chief Executive Vice President, Secretary and General
Counsel, who also became Quorum’s Executive Vice president and a member of its board of directors on July 27,
2015. Immediately after voting for the alleged “dividend”, both parties resigned their positions as officers and
board-members of Quorum. In addition to CHS, Seifert, and Cash, the other defendants opposing this motion are
Community Health Systems, Inc. (“CHSI”), Revenue Cycle Service Center, LLC, CHSPSC, LLC, Professional
Account Services, Inc., Physician Practice Support, LLC, Eligibility Screening Services, LLC and Adam Feinstein.
4 Adv. Doc. No. 60, 61.
agreements. For the following reasons, this Court will deny the Motion to Intervene, and will
grant the Motion to Stay.
JURISDICTION
This Court has jurisdiction over this matter, pursuant to 28 U.S.C. §§ 157 and 1334.
Venue is proper in this district, pursuant to 28 U.S.C. §§ 1408 and 1409.5
BACKGROUND
I. The Spin-off
On April 29, 2016, roughly four years before the commencement of its Chapter 11 case,
Quorum was formed through a spin-off from CHS. The spin-off resulted in the creation of an
independent company consisting of 38 hospitals, affiliated outpatient service facilities, and an
affiliated advisory and consulting services firm.6 To facilitate the transaction, 100% of Quorum’s
common stock was distributed to CHS stockholders of record on April 22, 2016.7 The
distribution resulted in each CHS shareholder receiving one share of Quorum common stock for
every four shares of CHS common stock.8
Following the spin-off, Quorum borrowed approximately $400 million through the
issuance of unsecured senior notes (the “Senior Notes”), and entered into a credit agreement
5 See Welded Constr., L.P. v. Prime NDT Services, Inc. (In re Welded Constr., L.P.), 605 B.R. 35, 37 (Bankr. D. Del.
2019) (affirming the Bankruptcy Court's ability to entertain all pretrial proceedings regardless of a core/noncore
designation and Stern issues). CHS has devoted much of its opposition to the proposition that this Court lacks
subject matter jurisdiction over the Motion to Intervene. Specifically, CHS argues that the declaratory judgment,
sought by Quorum and pertaining to the indemnification agreement, is neither core, nor a non-core proceeding and is
thus outside of this Court’s purview. This Court disagrees. The Trustee seeks to avoid the indemnification
provisions in the underlying Adversary Proceeding — a matter which the Court has already concluded it has subject
matter jurisdiction to preside over. The Motion to Intervene and the related Intervenor Complaint requesting
declaratory judgment seeks an answer to that very same issue.
6 See Disclosure Statement, at 8.
7 See QHC 10-K (Dec. 31, 2017), at 3.
8 See id.
consisting of an $880 million senior secured loan facility (the “Term Loan Facility”), a $100
million senior secured revolving credit facility, and a $125 million senior secured asset-based
revolving credit facility.9 The proceeds of the Senior Notes and Term Loan Facility loans were
used to make a $1.2 billion payment from Quorum to CHS, and to pay Quorum’s related
transaction and financing fees and expenses.10
II. The Separation Agreement
Quorum entered into certain agreements with CHS that governed or continue to govern
matters related to the spin-off, including the Separation Agreement dated as of April 29, 2016.
Of particular relevance to this dispute, Section 4.02 of the Separation Agreement provides that
Quorum has certain indemnification obligations. That section states:
Except as otherwise specifically set forth in any provision of this Agreement or of
any Ancillary Agreement, QHC and each of the QHC Subsidiaries shall, to the fullest
extent permitted by Law, indemnify, defend and hold harmless each of the CHS
Indemnitees from and against all QHC Indemnity Obligations, including, to the
fullest extent permitted by Law, the advancement and reimbursement of expenses,
including attorneys' fees and costs, incurred with respect to a QHC Indemnity
Obligation . . ..11
The scope of the indemnification obligations stemming from Section 4.02 is broad,
covering a wide array of people and conduct. Section 4.02 defines “CHS Indemnitees” as:
(i) CHS and each CHS Subsidiary; (ii) each of the respective past, present and future
directors, officers, employees or agents of the entities described in (i) above, in each
case in their respective capacities as such; and (iii) each of the heirs, executors,
administrators, successors and assigns of any of the foregoing.12
It further defines “QHC Indemnity Obligations” as:
9 See Disclosure Statement at 12–13.
10 See Disclosure Statement at 8.
11 Orseck Decl., Ex. 1 at 31.
12 Orseck Decl., Ex. 1 at 11.
[A]ll Losses incurred by a CHS Indemnitee to the extent such Losses relate to, arise
out of or result from, directly or indirectly, any of the following items: (i) any CHS
Liability; (ii) any failure of CHS or a CHS Subsidiary or any other Person to pay,
perform or otherwise promptly discharge any CHS Liabilities in accordance with
their terms, whether prior to, at or after the Effective Time; (iii) any Third Party
Claim relating to the conduct of any business, operation or activity by CHS or a CHS
Subsidiary from and after the Effective Time · ( other than the conduct of business,
operations, or activities for the benefit of QHC pursuant to an Ancillary Agreement);
and (iv) any breach by CHS or a CHS Subsidiary of this Agreement or any Ancillary
Agreement.13
The term “QHC Liabilities” is defined as liabilities incurred by either CHS or QHC that are
included or reflected on the QHC pro forma balance sheet. The Separation Agreement also
contains provisions dealing with dispute resolution. Section 8.02(a) of the Separation Agreement
provides generally for arbitration of disputes under the Separation Agreement:
In the event that a Dispute has not been resolved within thirty (30) days after receipt
by a party of an initial notice provided in Section 8.01, or within such longer period
of good faith negotiation as the parties may agree to in writing, then, unless the
Dispute involves primarily non-monetary relief (in which case such disputes shall be
addressed in accordance with Section 8.02(e), such Dispute shall, upon the written
request of a party, be submitted to be finally resolved by binding arbitration pursuant
to the then current CPR arbitration commercial arbitration rules of the American
Arbitration Association.14
There is a narrow exception to the arbitration requirement which is limited to matters where
money damages are not sought. Section 8.02(e) of the Separation Agreement states:
If the Dispute involves primarily non-monetary relief, then such Dispute shall not be
submitted to arbitration, and either party may commence litigation in the Tennessee
Court of Chancery located in Williamson County, Tennessee (or, if such court does
not have subject matter jurisdiction thereof, any other federal or state court located in
the Middle District of the State of Tennessee with subject matter jurisdiction).15
13 Orseck Decl., Ex. 1 at 12.
14 Orseck Decl., Ex. 1 at 53.
15 Orseck Decl., Ex. 1 at 54.
III. The Chapter 11 Cases & Reorganization
Following the spin-off, Quorum struggled with its capital structure and engaged in a
series of divestitures, closing or selling 15 of the 38 hospitals.16 The company continued to
struggle due to factors such as a deterioration of its revenue cycle, declining performance, and
liquidity constraints, all of which eventually culminated into Quorum’s Chapter 11 filing.17 On
April 7, 2020 (the “Petition Date”), Quorum and 134 affiliates (collectively, the “Reorganized
Debtors”) filed petitions for relief under Chapter 11 in this Court.18 The Office of the United
States Trustee for the District of Delaware declined to appoint an official committee in the
prepackaged Chapter 11 cases. The Reorganized Debtors filed their prepackaged plan of
reorganization on the Petition Date,
and this Court entered the Findings of Fact, Conclusions of Law, and Order Approving
the Disclosure Statement for, and Confirming, the Debtors’ Joint Prepackaged Chapter 11 Plan
of Reorganization19 (the “Confirmation Order”) on June 30, 2020, approving the Disclosure
Statement and confirming the Plan. The record indicates that the Plan became effective on July
7, 2020 (the “Effective Date”).20
IV. The QHC Litigation Trust
Pursuant to the terms of the Plan, the Reorganized Debtor created the QHC Litigation
Trust on the Effective Date through an agreement between Senior Note Holders and the
16 See Disclosure Statement, at 16.
17 Id. at 16–20.
18 A complete list of the 135 jointly administered Chapter 11 debtors (the “Debtors”) can be found in Doc. No. 58. A
majority of the cases have now been closed.
19 See Doc. No. 556.
20 See Doc. No. 568.
Reorganized Debtor (the “QHC Litigation Trust Agreement”).21 Its purpose was twofold: to (i)
prosecute and/or settle certain causes of action and (ii) distribute any proceeds obtained from any
such litigation, arbitration or settlement (the “QHC Litigation Trust Interests”) to the holders of
Senior Notes Claims (the “QHC Litigation Trust Beneficiaries”).22 The QHC Litigation Trust
was funded using certain trust assets (the “QHC Litigation Trust Causes of Action”):
(a) any Cause of Action arising under or based on sections 542, 543, 544 through 548,
550, or 553 of the Bankruptcy Code, any state law fraudulent transfer, fraudulent
conveyance, or voidable transaction law, or any statute limiting or prohibiting
transfers to shareholders;
(b) any Cause of Action relating to fraudulent transfer, fraudulent conveyance,
voidable transaction, illegal dividend, breach of fiduciary duty, aiding and abetting
breach of fiduciary duty, alter ego, or unjust enrichment, and
(c) the Contributed Claims, which include any prepetition Cause of Action relating to
the Senior Notes held by any of the holders of Senior Notes Claims that elected to
contribute such claims to the QHC Litigation Trust arising under or based on state,
federal, or common law, including but not limited to fraudulent transfer, fraudulent
conveyance, voidable transaction law, any statute limiting or prohibiting transfers
to shareholders, and alter ego.23
All claims arising under Chapter 5 of the Bankruptcy Code and analogous state law state law
causes of action were assigned to the QHC Litigation Trust on the Effective Date, and the Plan
empowered the QHC Litigation Trustee to prosecute or settle any of the QHC Litigation Trust
Causes of Action.
V. The QHC Litigation
On October 25, 2021, the Litigation Trustee commenced this Adversary Proceeding and
filed the AP Complaint24 asserting claims against multiple defendants, including CHS, Cash and
Seifert. The Complaint alleges, amongst other things, claims for fraudulent transfers under
21 See Plan Art. IV.C.3; see also Doc. No. 483, Ex. J, at 2.
22 Id.
23 See Plan Arts. I.A.30, 124.
24 Adv. Doc. No. 1.
Sections 544 and 548 of the Bankruptcy Code and applicable state law and seeks to avoid (i) the
“dividend” and transaction fees paid by Quorum to CHS, (ii) releases granted by Quorum to
CHS officers, and (iii) Quorum’s indemnification obligations to CHS and CHS officers.
VI. The Indemnification Provision
As a result of the ongoing litigation, the CHS Movants sent an indemnification request to
Quorum on December 15, 2021, pursuant to Section 4.02 of the Separation Agreement.25 In
doing so, they asserted that Quorum was required to make an “advancement of the CHS
[Parties]’ fees and expenses incurred in defending” against the claims in this Adversary
Proceeding, as well as indemnification for all losses incurred in connection with the Adversary
Proceeding, including payments that CHS must make pursuant to its own indemnification
obligations to other Defendants.26 The CHS Movants also asserted that Cash and Seifert are
entitled to indemnification under Quorum’s bylaws and Certificate of Incorporation.
Quorum disputes that the three defendants are entitled to any indemnification in
connection with this Adversary Proceeding and rejected the indemnification request in its
entirety. Thereafter, it filed the Motion to Intervene and Complaint with this Court. The CHS
Movants have filed their Motion to Stay in response to Quorum’s attempt to litigate its
indemnification obligations in this Court rather than through arbitration.
25 Adv. Doc. No. 54.
26 See Adv. Doc. No. 79.
DISCUSSION
The Court will address the two motions individually, beginning with the Motion to Stay
and continuing to the Motion to Intervene.
As noted above, Quorum’s Intervenor Complaint seeks a declaratory judgment on the
issue of its obligation to indemnify the CHS Parties. The parties disagree as to whether the action
should be stayed pursuant to Section 3 of the Federal Arbitration Act. Central to this issue is the
meaning and scope of the term “monetary relief” as it appears in the Separation Agreement. The
Separation Agreement requires any and all disputes to be arbitrated except those concerning non-
monetary relief. Quorum asserts that its Intervenor Complaint is ripe for adjudication by this
Court, rather than through arbitration, because a declaratory judgment action does not seek
monetary damages. By contrast, the CHS Parties urge this Court to consider the substance of the
relief requested — namely a decision by this Court regarding whether Quorum is obliged to pay
for legal fees associated with the underlying Adversary Proceeding.
The Court agrees with the interpretation set forth by the CHS Parties. The relief sought
by Quorum through its Complaint is inherently monetary, irrespective of the procedural
mechanisms utilized to achieve the result. By its very nature, indemnification involves the
potential transfer of money from one party to another. A ruling by this Court on that specific
issue in response to a pending request for payment directly affects whether and to what extent the
parties are entitled to payment. Therefore, per the Separation Agreement, this Court finds that the
matter falls squarely within the scope of the arbitration clause, and the parties have contracted to
resolve the dispute in arbitration. The Motion to Stay will be granted.
Turning now to the issue of intervention, the Court will deny without prejudice Quorum’s
Motion to Intervene. Quorum moves to intervene for the express purpose of obtaining a
declaratory judgment via the Intervenor Complaint that is not properly before this Court.
Because the indemnification dispute set forth in the Intervenor Complaint must be decided in
arbitration, the Court finds no reason to allow Quorum to intervene for the purpose of
prosecuting its Intervenor Complaint.
However, the Court observes that Quorum has identified a cognizable interest in the
disposition of certain counts’’ of the underlying Adversary Proceeding dealing with the validity
of the indemnification clauses. This Court also notes Quorum’s statutory right to intervene as a
party in interest pursuant to Section 1109(b).”8 The Court would consider permitting Quorum to
intervene in this adversary proceeding upon the filing of a motion requesting that relief.
CONCLUSION
For the reasons stated above, this Court will DENY Quorum’s Motion to Intervene
without prejudice and GRANT the CHS Parties’ Motion to Stay Litigation Pending Arbitration.
An appropriate order will issue.
Dated: August 30, 2023.
. () “4 ~f A
iC S AL enn Lb
NN / ;
BRENDAN LINEHAN SHANNON
UNITED STATES BANKRUPTCY JUDGE
27 See Adv. Pro. Doc. No. 1. at counts
Section 1109(b) states, “a party in interest, including the debtor . .. may raise and may appear and be heard on any
issue in a case under this chapter.” 11 U.S.C. §1109(b).
10