Verity Health System of California – Creditors Object to Sale Motion, Citing Incomplete Record and Bid Chilling Break Fee

October 17, 2018 – Creditors UMB Bank, N.A., as master indenture trustee, and Wells Fargo Bank, National Association, as indenture trustee (together, the “Secured Parties) filed an objection [Docket No. 557] to Verity Health System of California’s sale motion. The Secured Parties state, “The Debtors are seeking relief on an incomplete record. The Debtors have benchmarked significant sale-related relief, including bid deadlines, break up fees and bid increments, off the presumed economic terms of this proposed sale. Critical information that bears directly on that baseline value remains unknown. The Debtors have similarly not provided any formal summary of bid procedures or a form of order on the Sale Motion. The Debtors should only proceed after that information is provided. The Debtors are also proposing onerous terms and bidding protections that may chill competitive bidding, deprive key stakeholders of their appropriate role in sale matters, may fail to maximize the value of the associated assets, and expose creditors and other stakeholders to risks that are not otherwise reasonable or in the best interest of those parties….The Debtors seek approval for a $9.4 million break up fee plus the Debtors’ commitment to also separately cover the Stalking Horse Bidder’s expenses if it is not named the Successful Bidder at the end of the Auction. See Sale Motion…This will amount to well more than 4.0 percent of the net asserted value of the Stalking Horse Bid….Tthe prevailing market for a break-up fee in this case is not more than 3.0 percent, i.e. $7.05 million. It is respectfully submitted that any payment in excess of that amount is not supportable and would impair, rather than foster, competitive bidding in these cases. The Debtors’ proposed break up fee and expense reimbursement cannot withstand the careful scrutiny the law requires. The Debtors’ own pleadings cite numerous cases where approved break up fees and similar bidder payments have ranged between 1.0 and 3.0 percent. ”