Judge OKs Using State Grants to Defease Brooklyn Hospital Bonds

A bankruptcy judge last week approved the use of state grant money to defease $21.6 million of outstanding bonds issued by the Dormitory Authority of the State of New York on behalf of bankrupt Victory Memorial Hospital in Brooklyn. The authority expects to defease the bonds on Aug. 1.

In 1999, DASNY sold $37.3 million of bonds on behalf of the nonprofit hospital, which filed for Chapter 11 bankruptcy in November 2006.

On Thursday, Judge Carla Craig, of the U.S. Bankruptcy Court for the Eastern District of New York in Brooklyn granted a motion filed by attorneys from Sidley Austin LLP representing DASNY that will allow the transfer of the grant money to defease and redeem the bonds, and to satisfy a mortgage, a mortgage note, and other obligations to the authority.

DASNY expects to call the bonds for optional redemption at par plus any premium required. According to the official statement, bonds redeemed between Aug. 1, 2009, and July 31, 2010, are subject to a premium redemption price of 101% of par. With included interest, the bonds will be defeased at an estimated $22.4 million, according to the court order and stipulation. The bonds were issued with various maturities out to 2038.

The bonds are insured by MBIA Insurance Corp. and secured by payments made under a mortgage note insured by the Federal Housing Administration under its Hospital Mortgage Insurance Program as well as certain reserve accounts.

A mortgage note is an obligation for a borrower to pay a loan that is secured by a mortgage. Unlike a mortgage, the note has no lien on real property.

Victory Memorial has defaulted on its monthly note payments since September, according to a material event notice. The default required DASNY to either commence procedures to apply for FHA insurance benefits and to assign the note and mortgage to the FHA or to apply for an extension, according to the notice.

DASNY applied for and was granted an extension from the FHA so that the HEAL-NY grant funds could be used to prepay the mortgage note and defease the bonds.

On Jan. 30, 2009, the trustee, Bank of Tokyo-Mitsubishi Trust Co., made an unscheduled draw on the reserve account of the debt service reserve fund to make a portion of the payment of principal and interest on the bonds, according to the notice.

The state Health Department awarded the hospital a grant of up to $25 million in 2007 to facilitate the hospital's closure under the state's Healthcare Efficiency and Affordability Law for New Yorkers, known as HEAL-NY.

The $1 billion HEAL-NY program is financed primarily through state-backed DASNY-issued bonds and provides funds that can be used for medical facilities' expansions, upgrades, or the cost associated with closures including defeasance of debt.

On Jan. 27, 2009, $19.5 million of HEAL-NY grant money was deposited into an escrow account on behalf of Victory Memorial to be used to defease the bonds.

A few weeks after the hospital filed for bankruptcy in 2006, the state Commission on Health Care Facilities in the 21st Century, better known at the Berger Commission after its chairman, Stephen Berger, recommended the closure, merger, downsizing, or reconfiguration of operations at 80 hospitals and nursing homes across the state, including Victory Memorial.

In 2005, the Health Department and Maimonides Medical Center - which was to partner with the hospital - worked out a bailout for the hospital using $3 million of grants and a $5 million loan but it failed to stem a steady decline in patients, the Berger Commission said in a report.

Patients and physicians defected to neighboring hospitals and cash flow became a major problem, the report said.

The 234-bed hospital closed its acute-care facilities in July but continues to operate its nursing home facilities, which it intends to sell to another party, Health Department spokeswoman Claudia Hutton said.

According to the bankruptcy filing, in the summer of 2006 the hospital had assets worth $49.5 million and outstanding liabilities of $86.6 million.

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