A federal bankruptcy judge has denied requests from two banks to halt parts of a hospital financing order, citing concerns that disruptions to funding could jeopardize patient safety and healthcare access in central Alabama.
Judge Christopher L. Hawkins of the U.S. Bankruptcy Court for the Middle District of Alabama ruled on April 8 that UMB Bank and ServisFirst Bank failed to establish the elements necessary for a stay pending appeal of financing provisions in the Jackson Hospital bankruptcy case. The decision preserves a controversial arrangement that reserves funds for hospital operations ahead of the banks' secured claims.
"No party has disputed that the funding and use of cash collateral authorized under the Final DIP Order is essential to the Debtors' continued operations and the prevention of a shutdown that would jeopardize patient safety," Judge Hawkins wrote in his 12-page opinion.
Jackson Hospital & Clinic and its pharmacy subsidiary filed for Chapter 11 bankruptcy protection on February 3, 2025, immediately seeking approval for $24.5 million in debtor-in-possession (DIP) financing. The court approved the financing on an interim basis on February 5, and then on a final basis on March 4 after resolving most objections from creditors.
The disputed provisions, which Judge Hawkins called the "Challenged Carve Outs," reserve funds for post-petition expenses including vendor payments, salaries, wages, and payroll taxes incurred before a triggering event such as a default. UMB Bank and ServisFirst Bank, both pre-petition secured lenders, objected to these provisions because they subordinate their liens to these operational expenses.
On March 19, both banks appealed the financing order but sought to stay only the carve-out provisions pending appeal. They argued that the carve-outs constitute "an unprecedented expansion of Section 364(d) of the Bankruptcy Code" that benefits post-petition vendors and employees without proper evidentiary support.
The judge noted that the banks failed to cite any legal precedent supporting their central argument that the challenged carve-outs should be treated as post-petition financing under Section 364(d). Instead, Judge Hawkins suggested the provisions might better be understood as preserving the estate's ability to recover necessary operational costs under Section 506(c).
In evaluating the request for a stay, the court gave particular weight to the potential harm to patients and the public interest. Judge Hawkins expressed "grave concerns" that even a limited stay could trigger a default under the DIP Credit Agreement's terms, potentially causing the lender to terminate essential funding.
"The Court is unwilling to take the chance that an order staying the Final DIP Order would cause termination of the DIP Credit Agreement," the judge wrote. "The Court places the most weight on the substantial harm to essentially all parties involved and the disservice of the public interest that would result from a termination of funding."
At the April 1 hearing, the judge questioned representatives from all parties about whether a stay would constitute an event of default under the financing agreement. While the DIP lender's counsel did not threaten to terminate funding, they also declined to provide assurance that default rights would not be exercised.
The case highlights the complex balancing act bankruptcy courts face when dealing with healthcare providers, where financial restructuring decisions must account for patient welfare alongside creditor rights.
The jointly administered bankruptcy cases (No. 25-30256-CLH) continue in the Middle District of Alabama, with the Debtors represented by attorneys Derek F. Meek, Marc P. Solomon, and Stuart H. Memory.
This article was prepared using Stretto Conductor, our new AI-powered assistant that's here to help. Stretto Conductor was able to create this summary of a 12 page court filing in less than a minute. Always review the underlying docket filings for accurate information. The information and responses generated by Stretto Conductor may contain errors or inaccuracies and should not be relied upon as a substitute for professional or legal advice.