UNITED STATES BANKRUPTCY COURT

1

EASTERN DISTRICT OF CALIFORNIA

2 FRESNO DIVISION 3 4 In re ) Case No. 17-13797-B-9 ) 5 TULARE LOCAL HEALTHCARE ) DC No. GL-1 ) 6 DISTRICT, ) ) 7 Debtor. ) ) 8 ) ) 9 10

11 MEMORANDUM DECISION ON CREDITOR DEPARTMENT OF HEALTH CARE

SERVICES’ MOTION FOR LEAVE TO FILE AMENDED CLAIM 197

12 13 Before: René Lastreto II, Bankruptcy Judge __________________ 14 15 Grant Lien, Deputy Attorney General of California, Sacramento, 16 CA, for the Department of Health Care Services, Creditor. 17 Riley C. Walter, WANGER JONES HELSLEY, PC, Fresno, CA, for Tulare Local Health Care District, dba Tulare Regional Medical 18 Center, Debtor. 19 _____________________ 20 21 RENÉ LASTRETO II, Bankruptcy Judge: 22 23 INTRODUCTION 24 To receive payments on allowed claims provided by a Chapter 25 9 Plan of Adjustment under the Bankruptcy Code, the creditor 26 must file a proof of claim on the approved form.1 Filed claims 27 can be amended. The question here is “when?” 28 1 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and the Federal Rules of 1 In the Ninth Circuit, amendments to claims are “liberally” 2 allowed unless leave to amend would prejudice an opposing party. 3 “Prejudice,” though, means more than having to litigate about or 4 pay the claim. 5 The California Department of Health Care Services (“DHCS”) 6 timely filed a proof of claim on the approved form in the Tulare 7 Local Health Care District’s (“District”) Chapter 9 case. But 8 the claim stated the amount was “[u]ndetermined at this time.” 9 After District objected to allowance of the claim, filed a 10 Disclosure Statement and Plan of Adjustment, obtained court 11 approval of the Disclosure Statement, served the Disclosure 12 Statement and Plan, District’s creditors voted to overwhelmingly 13 support the Plan, and the court confirmed the Plan, DHCS filed a 14 motion to amend the claim from “undetermined” to $5,520,423.33. 15 DHCS had many reasons for the delay in specifying the claim 16 amount. The court considered those and the prejudice District, 17 its creditors, and other constituencies would experience if 18 leave to amend was granted. Based on the evidence and status of 19 the Chapter 9 case, the court DENIES the motion for leave to 20 amend. 21 22 FACTS 23 Background 24 Since 2002, District was a participant in a program 25 administered by DHCS providing supplemental reimbursement to 26 qualified health providers for outpatient services rendered to 27 Medi-Cal patients. Doc. 2260. Annually, District provided cost 28 Bankruptcy Procedure, Rules 100 1-9037. The Federal Rules of Civil Procedure are referred to as “Civ. Rule.” 1 reports to DHCS for eligible outpatient services. Doc. 1513. 2 Under California’s reimbursement plan, DHCS should annually 3 reconcile District’s cost reports with settled/audited cost 4 reports. After reconciliation, any underpayment or overpayment 5 is to be reflected annually in DHCS’s supplemental payment to 6 the participating provider under the program. Doc. 2260. 7 Though District submitted its reports annually, no 8 reconciliation followed. Docs. 1513, 2397. That is until after 9 this case was filed, a claim deadline imposed, and District 10 objected to DHCS’s claim – over sixteen years after the 11 reimbursement program began. 12 Why? Because, DHCS says, as of April 2018 (when it filed 13 its proof of claim 197 in an “undetermined” amount) “final 14 reconciliations [were] still pending.”2 Also, DHCS says “the 15 reconciliation process is inherently complicated and necessarily 16 time consuming.” Doc. 2259. Time is consumed because interim 17 payments to District (and other providers) are calculated using 18 “cost-to-charge ratios” from provider cost reports and Medi-Cal 19 Fee-for-Service (“FFS”) charges. Id. But final reconciliations 20 require audited cost reports and FFS charges and payments 21 reconciled from the State’s “internal Medicaid Management 22 Information System (“MMIS”).” Id. 23 DHCS “experienced difficulties” during this sixteen-year 24 period due to: “difficulties in extracting [outpatient fee-for- 25 service] charges and revenues from MMIS;” “workforce 26 27 28 Mendiol2 aD e wc al s. “S Sh ei ce tl ia o nM e Cn hd ii eo fl a o, f a Mt et da ic -h C. a lt o S up pr po lo ef m eo nf t ac ll a Pi am y m1 e9 n7 t. S eT ch te in o, n ,M s S. t aff Services Manager II, for the Safety New Financing Division of . . . [DHCS].” 1 reductions;” and “inefficiencies with workflow logistics, some 2 of which lasted for years.” Id. 3 Once DHCS “developed the necessary framework for extracting 4 the data, additional nuances needed to be addressed.” DHCS had 5 to determine the amount of provider cost associated with 6 professional services by using all providers’ MMIS data so it 7 could be excluded. This proved to be “difficult” and led to 8 further delays. Id. 9 Meanwhile, beset with many financial and other problems 10 complicated by its former management arrangement, District filed 11 this Chapter 9 case September 30, 2017. Less than three months 12 later, DHCS was added to the creditor list. After entering an 13 order for relief, the court issued an order setting the claims 14 bar date for April 10, 2018. Doc. 377. 15 Thirteen months later, District filed its Plan of 16 Adjustment and Disclosure Statement. Docs. 1440, 1441. The 17 Disclosure Statement said allowed unsecured claims would be 18 between $16.5 million and $26 million held by about 250 19 claimants. Doc. 1441. In a footnote, District explained the 20 wide range of estimated claim amounts was due to disputed 21 government reimbursement claims. District said it “believed” 22 that after the audits are completed within two to three years, 23 the overpayment claims will be eliminated. “Other reductions 24 may be achieved through objections to claims and pending or to 25 be filed.” Id. 26 In August 2019, the Plan of Adjustment was confirmed.3 27 Doc. 1618. The success of District’s reorganization hinged on 28 3 DHCS was served all the ballot solicitation materials on July 9, 2019. Doc. 1545 at 11. DHCS did not return a ballot or participate in the 1 two major conditions. First, District needed to lease most of 2 its facilities. They did. Adventist Health is the lessee and 3 is operating the hospital and accompanied facilities. Second, 4 certain loans needed to be repaid which facilitated 5 restructuring of some of District’s bond debt. District managed 6 that as well. 7 Cash flow from the lease payments and other sources under 8 the plan permit District to attend to certain deferred 9 maintenance projects and other needs. Under the Plan, the 10 unsecured creditor class (class 8) is to receive between 19.2% 11 and 30.3% distributions on allowed claims over five years. But 12 payments do not begin until 2025. 13 14 Chapter 9 15 A word about Chapter 9. This chapter of the Bankruptcy 16 Code is available only to “municipalities” as defined in 11 17 U.S.C. § 101 (40). District is a municipality. This chapter 18 permits reorganization of municipalities and represents a 19 careful application of reorganization policies under bankruptcy 20 law. Care is necessary because of the constitutional limitation 21 on Federal “interference” with state governments. 22 Very similar to Chapter 11, Chapter 9 incorporates many 23 provisions of the Bankruptcy Code. A list of applicable 24 sections is found in 11 U.S.C. § 901 (a). Among those 25 incorporated are the provisions dealing with filing and 26 27 28 solicitation process. Docs. 159 3-97. Further, DHCS did not object to plan confirmation. 1 allowance of claims. Both §§ 501 and 502 are incorporated 2 entirely.4 3 For our purposes, existing jurisprudence about claims and 4 amendments involving other chapters of the Bankruptcy Code is 5 largely applicable. This will become evident throughout the 6 analysis. 7 8 DHCS’s Claim 9 DHCS filed a claim in April 2018 before the bar date.5 The 10 claim is in an “undetermined amount.” Claim 197 states it is 11 for “overpayment of supplemental reimbursement under Medi-Cal.” 12 It is accompanied by the declaration of Shiela Mendiola, the 13 Branch Chief of Provider Payments and Policy, which states, in 14 part, that final reconciliations are still pending for “all 15 program years beginning in State Fiscal Year 2002-2003 until the 16 bankruptcy filing in September 2017.” 17 A month and one half before the Plan confirmation, District 18 filed an objection to the claim.6 Reserving any other grounds 19 for objection, District contended first the claim should be 20 disallowed because it did not specify an amount, and second, 21 District promptly provided all information for DHCS to liquidate 22 the claim. After agreed continuances, DHCS opposed the claim 23

24 4 That said, there are provisions of both sections that are inapplicable such as those dealing with filing and allowance of “interests” – no 25 “interests” are involved in Chapter 9 – and claims arising during “the involuntary gap” – municipalities cannot be involuntary debtors. See Richard 26 Levin and Henry J. Sommer, eds. 6 Collier on Bankruptcy ¶ 901.04 [11], [12] (16th ed. Matthew, Bender, 2021). 27 5 DHCS filed other claims as well. All of them have been withdrawn or 28 disallo 6 w We Jd H. - 4 .T h e D io sn tl ry i cr te m da ii dn i nn og t c fl ia li em ai s n ot th ie c es u ob fj e hc et a ro if n gt h oi ns im to st i oo bn j. e ction until several months later. Doc. 1948. 1 objection and filed its first motion to amend the claim to 2 assert a liquidated amount: over $5.5 million. This first 3 motion, filed two years after the claim filing deadline, was 4 denied for procedural reasons. 5 Finally, in late August 2020 this motion was filed. 6 Following agreed upon continuances to accommodate discovery, the 7 matter was argued and submitted to the court on March 30, 2021.7 8 9 Summary of Contentions 10 DHCS contends it is merely adding “greater particularity” 11 to its already timely filed proof of claim. Under the Ninth 12 Circuit’s “liberal standard” for claim and pleading amendments, 13 the liquidation of the claim from “undetermined” to $5.5 million 14 is allowed. Under its legal framework, DHCS argues, it has 15 three years to complete its audit and did not delay in 16 finalizing the reconciliations. Further, DHCS has established 17 reasons for the delay in reconciliations. 18 District urges the court adopt the standard in the Seventh 19 and Eleventh Circuits that claim amendments at this stage should 20 only be allowed for “compelling reasons” or under “compelling 21 circumstances.” DHCS has not met this standard, District 22 concludes, so the amendment should be disallowed. Also, 23 District claims DHCS had all the information necessary to 24 provide a liquidated amount long before Plan confirmation. At 25 any rate, the District urges, permitting this amendment will 26 hamper any reorganization effort and is harmful to the integrity

27 7 Neither party elected to nor reserved the right to present live 28 pt ae rs tt yim o in sy deu en md ee dr tL oo c ha al v eR u fl ae c to uf a lPr a ic st si uc ee s 9 r0 e1 s4 o- lv1 e d( f) u n( d1 e) r ( CB i) v, . R( uC l) e. 4 3S o (, c )e .a c h R ule 9017. 1 of the reorganization process. Allowing the amendment now, 2 District adds, will significantly prejudice unsecured creditors 3 because they will receive over 20% less than they would have 4 otherwise received. 5 6 JURISDICTION 7 The United States District Court for the Eastern District 8 of California has jurisdiction over this proceeding since it 9 arises in a case under Title 11 of the United States Code under 10 28 U.S.C. § 1334 (b). This court has jurisdiction to hear and 11 determine this matter by reference from the District Court under 12 28 U.S.C. § 157 (a). This is a “core” proceeding under 28 13 U.S.C. §§ 157 (b) (2) (A) and (B). 14 15 DISCUSSION 16 I. 17 Whether to allow an amendment to a timely filed proof of 18 claim is within the discretion of the bankruptcy court. In re 19 Roberts Farms, Inc., 980 F.2d 1248, 1251 (9th Cir. 1992); 20 Venhaus v. Wilson (In re Wilson), 96 B.R. 257, 262 (B.A.P. 9th 21 Cir. 1988). A bankruptcy court abuses its discretion if it 22 applies an incorrect legal standard or its factual findings are 23 illogical, implausible, or without support in the record. 24 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th 25 Cir. 2011). 26 The Ninth Circuit’s standard for allowing claim amendments 27 is often characterized as “liberal.” That is an overstatement. 28 Even under that “liberal” standard, Ninth Circuit courts look to 1 whether the opposing party would be “unduly prejudiced” by the 2 amendment. Roberts Farms, 980 F.2d at 1251. “[I]n determining 3 prejudicial effect [we] look to such elements as bad faith or 4 unreasonable delay in filing the amendment, impact on other 5 claimants, reliance by the debtor or other creditors, and change 6 of the debtor’s position.” Id. at 1251-52 quoting Wilson, 96 7 B.R. at 262. 8 9 A. 10 The court declines District’s invitation to adopt the 11 “compelling reason” or “compelling circumstance” standard of the 12 Seventh and Eleventh Circuits in considering claim amendments. 13 First, neither the Seventh Circuit’s Holstein v. Brill, 987 14 F.2d 1268 (7th Cir. 1993) nor the Eleventh Circuit’s IRT Partners v. Winn-Dixie Stores, Inc. (In re Winn-Dixie Stores, 15 16 Inc.), 639 F.3d 1053 (11th Cir. 2011) are controlling in this 17 circuit. Neither decision cites nor distinguishes Roberts 18 Farms. The dissent in Holstein does cite Roberts Farms and 19 Wilson to urge remand of the case to bankruptcy court for 20 explanation of the reasons for allowing the amendment. 21 Holstein, 987 F.2d at 1271 (Ripple, J., dissenting). 22 Second, neither Winn-Dixie nor Holstein have been cited in 23 the Ninth Circuit as stating a more workable test for 24 considering post-confirmation claim amendments than Roberts 25 Farms. Winn-Dixie, as far as the court can tell, has never been 26 cited in the Ninth Circuit. Holstein has been cited twice – in 27 a published and unpublished decision.8 Neither case examined 28 8 Fed. Tax Id. Nos. 33-08 11062 v. Office of State Assessed Props. (In re Leap Wireless Int’l Inc.), 2005 Bankr. LEXIS 3300 (Bankr. S.D. Cal. Aug. 19, 1 Roberts Farms and each referenced Holstein as considering 2 various “benchmarks” (including the claims bar date and plan 3 confirmation in Chapter 11) when proposed claim amendments 4 should be more carefully scrutinized. Konop, 386 B.R. at 258; 5 Leap Wireless, 2005 Bankr. LEXIS 3300 at *7. 6 Roberts Farms is not “on all fours” with the facts here. 7 In Roberts Farms, the debtor did not object to the proof of 8 claim - which was in a liquidated amount – for almost two years 9 so the passage of time was not prejudicial. Roberts Farms, 980 10 F.2d at 1252. The proposed amendment to the claim did not 11 change the amount of the claim, but only the legal theory of the 12 claim. Ibid. There was also no persuasive showing of any 13 prejudice in allowing the amendment. 14 Still, the post-confirmation amendment here attempts to 15 change the amount. The Ninth Circuit’s considerations of 16 numerous factors will inform our analysis. 17 18 B. 19 Nor will the court apply the “liberal” standard of pleading 20 amendments under Civ. Rule 15 urged by DHCS. 21 First, Civ. Rule 15 does not apply to contested matters 22 without a court order. Rule 9014 (c). This motion is a 23 contested matter and there is no order applying Civ. Rule 15. 24 Second, even if Civ. Rule 15 applied, that does not change 25 the analysis of facts surrounding the proposed amendment. Nor 26 should the court ignore the effects of allowing the amendment. 27 28 2005); Konop v. Hawaiian Airlin es, Inc. (In re Hawaiian Airlines, Inc.), 386 B.R. 251 (D. Haw., 2008). 1 Pleading amendments are not automatic. Learjet, Inc. v. Oneok, Inc. (In re W. States Wholesale Nat. Gas Antitrust 2 3 Litig.), 715 F.3d 716, 738 (9th Cir. 2013). The Ninth Circuit 4 considers if any of five factors deter granting leave to amend: 5 1. Bad faith. 6 2. Undue delay. 7 3. Prejudice to the opposing party. 8 4. Futility of the amendment. 9 5. Previous opportunities to amend the complaint. 10 See also, Foman v. Davis, 371 U.S. 178, 182 (1962). So, even 11 though pleading amendments are to be freely given “when justice 12 requires,” (Civ. Rule 15 (a) (2)) the court should engage in an 13 analysis of the surrounding circumstances before deciding 14 whether the amendment should be allowed. 15 16 II. 17 Considering the pertinent facts and circumstances, the 18 court finds and concludes DHCS unreasonably delayed in seeking 19 to amend its proof of claim. 20 21 A. 22 DHCS reported no final reconciliations to District for at 23 least thirteen fiscal years. This delay occurred though it is 24 undisputed District timely provided cost reports for all those 25 fiscal years. This tenacious reticence continued after the 26 Chapter 9 case was filed. DHCS did not file their first motion 27 to amend the claim until two years after the claim deadline. 28 1 1. 2 This brings the next question into focus. Was the delay 3 reasonable? The answer: no. 4 At bottom, “reasonable” means “[f]air proper or moderate 5 under the circumstances; sensible.” Black’s Law Dictionary 6 (11th ed. 2019). This determination relies on an objective 7 analysis of facts. This is consistent with other evaluations of 8 “reasonable delay.” See Dye v. Rivera (In re Marino), 193 B.R. 9 907, 915 (B.A.P. 9th Cir. 1996) (consider “facts and 10 circumstances of the case and determine whether delay in [lien] 11 perfection was reasonable”); Wechsler v. Macke Int’l Trade, Inc. 12 (In re Macke Int’l Trade, Inc.), 370 B.R. 236, 256 (B.A.P. 9th 13 Cir. 2007) (affirming bankruptcy court’s application of 14 “objective, reasonable person standard” in finding an 15 involuntary petition was not filed in bad faith); Jackson v. 16 Bank of Haw., 902 F.2d 1385, 1387-89 (9th Cir. 1990) (relevant 17 to determining undue delay is “whether the moving party knew or 18 should have known the facts and theories raised by the amendment 19 in the original pleading.”). 20 It is not “sensible” or “moderate” to delay filing a claim 21 in a liquidated amount when the information needed from the 22 District was timely provided. Nor is it “fair or proper” to 23 delay two years after the claim deadline before seeking to amend 24 a claim from “undetermined” to $5.5 million. DHCS admits here 25 that the District’s fiscal year 2015-16 cost reports were 26 audited by April 2018 (before the claim deadline).9 Yet no 27 amended claim nor motion to amend was filed or prosecuted for 28 9 Mendiola Decl., Doc. 22 60, Ex. B. She also testified that the 2016-17 fiscal year cost reports did not have to be audited until November 2020. Id. 1 two years. No estimated claim was filed based on the 2 information provided by District. 3 4 B. 5 DHCS’s explanations for the delay distill into two themes: 6 internal issues and legal protections. 7 8 1. 9 DHCS claims there were 60-70 providers that participated in 10 the Supplemental Reimbursement Program. There were also delays 11 in establishing the “framework” for evaluating cost reports, 12 reconciling data from DHCS’s MMIS system, personnel challenges, 13 other hindrances in finally reconciling the audited cost 14 reports, and “nuances” that added to their problems. But our 15 inquiry must be an objective one. These issues ultimately are 16 not District’s nor its creditors’ responsibility. 17 The program is undoubtedly complex to administer. But it 18 is DHCS’s duty to annually reconcile cost information from filed 19 hospital cost reports to the audited reports.10 Payments under 20 the program are adjusted based on the reconciliation. 21 District’s duty is to provide the reports. District did. 22 The subjective explanations for DHCS’s delays are logical. 23 But they do not make the delay reasonable here. 24 25 2. 26 DHCS also argues that statutes authorizing recoupment of 27 overpayments provide three years from acceptance of a cost 28

10 Id. 1 report to complete an audit. Cal. Welf. & Inst. Code §§ 14710 2 (a) (1), 14115.5, 14172 and 14177. True enough, but DHCS 3 provides no authority that these statutes excuse DHCS from claim 4 filing deadlines or other deadlines critical to a reorganization 5 process. See In re Bajac Constr. Co., 100 B.R. 524, 525 (Bankr. 6 E.D. Cal. 1989) (acknowledging “[in] Chapter 11, Chapter 12, or 7 Chapter 13 proceedings there may well be equities present which 8 make it proper to reject the attempted amendment of a claim. 9 The process of reorganization or rehabilitation may be too far 10 along and various parties who have labored on the plan may be 11 prejudiced” by the amendment). The cited statutes authorize 12 recoupment the amounts overpaid from future payments. 13 Krolikowski v. San Diego City Employees’ Ret. Sys., 24 Cal. App. 14 5th 537, 560; 24 Cal. Rptr. 3d 499 (2018). The statutes do not 15 go as far as DHCS advocates. 16 Further, recoupment is not what DHCS is seeking here. 17 Rather, it wants to assert a $5.5 million claim. Recoupment in 18 the bankruptcy context is “the setting up of a demand arising 19 from the same transaction as the plaintiff’s claim or cause of 20 action strictly for the purpose of abatement or reduction of 21 such claim.” Gardens Reg’l Hosp. & Med. Ctr. Liquidating Tr. v. 22 Cal. (In re Gardens Reg’l Hosp. & Med. Ctr., Inc.), 975 F.3d 23 926, 934 (9th Cir. 2020) (emphasis in original) quoting Newbery 24 Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 25 1996). DHCS is not seeking to recoup its alleged claim from 26 future reimbursements. District is not operating the hospital 27 now. So, prosecuting the claim is not recoupment subject to the 28 statutes cited. 1 3. 2 The Ninth Circuit’s frequent application of the “informal 3 proof of claim” doctrine is unhelpful to DHCS, here. This 4 “judge made” doctrine permits late “amendments” to claims that 5 may not have been filed timely under certain circumstances. 6 Usually, the claimant seeking relief under the doctrine has 7 otherwise participated in the case and the claim is well known 8 from the case record. See Pac. Res. Credit Union v. Fish (In re 9 Fish), 456 B.R. 413, 419 (B.A.P. 9th Cir. 2011) (holding stay 10 relief motion and plan objection which stated the amount and 11 basis of the claim met the requirements); In re Sambo’s Rests., 12 Inc., 754 F.2d 811, 816-17 (9th Cir. 1985) (holding wrongful 13 death lawsuit, correspondence between counsel, and claimant’s 14 joinder in a motion to transfer was sufficient). 15 A bankruptcy court’s determination of whether a document is 16 an informal proof of claim is an issue of law. In re Fish, 456 17 B.R. at 417 citing Pizza of Hawaii, Inc. v. Shakey’s, Inc. (In 18 re Pizza of Hawaii), 761 F.2d 1374, 1377 (9th Cir. 1985). 19 To constitute an informal proof of claim, the document must 20 state an explicit demand showing the nature and amount of the 21 claim against the estate, and evidence an intent to hold the 22 estate liable. In re Holm, 931 F.2d 620, 622 (9th Cir. 1991) 23 (quoting In re Anderson-Walker Indus., Inc., 798 F.2d 1285, 1287 24 (9th Cir. 1986); In re Franciscan Vineyards, Inc., 597 F.2d 181, 25 182 (9th Cir. 1979) cert. den. 445 U.S. 915 (1980)). DHCS’s 26 claim here suffers from three infirmities preventing application 27 of the “informal proof of claim” doctrine. 28 1 First, DHCS filed the proof of claim on the requisite form 2 before the claim filing deadline. Beneficiaries of the doctrine 3 have not filed a timely claim. 4 Second, DHCS’s claim does not state an explicit demand. 5 The claim states the amount as: “Undetermined at this time.”11 6 In fact, the attachment to the claim does not establish an 7 intent to hold the estate liable. The declaration attached 8 states in part: “A final reconciliation may result in a 9 determination of overpayment or additional reimbursement 10 (underpayment) for a particular year.”12 11 Third, DHCS ignores the existence of prejudice in the 12 analysis. Under the “informal proof of claim” doctrine, 13 amending the claim will only be allowed “in the absence of 14 prejudice to opposing parties.” Sambo’s, 754 F.2d at 816-17. 15 Evident so far is unreasonable delay. District and other 16 creditors have also been prejudiced for other reasons. 17 18 III. 19 On these facts, the court finds and concludes District and 20 other creditors relied upon and changed their positions based on 21 the unliquidated claim filed by DHCS. 22 23 A. 24 District’s interim CEO, Daniel R. Heckathorne, testified by 25 declaration that District ordinarily provided cost reports on an 26 annual basis to DHCS through September 30, 2017 when District 27 28 11 Claim 197.

12 Id., Ex. A, ¶ 4. 1 filed Chapter 9.13 This testimony is unchallenged. Further, no 2 information was available in the books and records showing any 3 demand from DHCS between 2002 and 2017.14 4 What is more, District’s next CEO, Sandra L. Ormonde, 5 confirmed in her declaration the District’s books and records 6 did not reflect any money was due. So, the DHCS claims were 7 valued at $0 when financial projections were prepared for the 8 Disclosure Statement and Plan.15 This assumption underpinned 9 District’s calculation of the range of percentages allowed 10 unsecured claims would receive, ensure plan feasibility, and 11 District’s ability to otherwise perform.16 No District records 12 reflected any sums due DHCS for the outpatient reimbursement 13 program.17 So, it was more than plausible that District’s 14 reliance was reasonable. 15 The Disclosure Statement stated a range of potential 16 recoveries for the unsecured class (Class 8). The Plan was 17 overwhelmingly accepted by the impaired classes, including 18 Class 8.18 Logically, those creditors relied upon the estimates 19 of distribution in deciding how to vote. That is reliance and 20 change of position based on the “undetermined” amount of the 21 proof of claim filed by DHCS. 22 /// 23 /// 24 ///

25 13 Heckathorne Decl., Doc. 1513. 14 Id. 26 15 Ormonde Decl., Doc. 2397. 16 Id. 27 17 Id. DHCS objected to admission of portions of the Ormonde 28 d he ec al ra ir na gt . ion and rulings on the objections were placed on the record at the 18 Ballot Summ., Doc. 1593. 1 B. 2 District should not have relied upon the proof of claim, 3 contends DHCS, because participation was voluntary, and District 4 could have determined a relatively accurate amount due by 5 examining the actual interim payments it received and 6 recalculated the payments once it received the audited cost 7 reports from DHCS for each fiscal year. 8 Two problems abate that contention. First, DHCS admits 9 that due to its operational problems, audited cost reports could 10 not be generated on a timely basis until at least April 2018.19 11 This is further bolstered by Mr. Heckathorne’s and Ms. Ormonde’s 12 declarations which state the District’s records showed nothing 13 was due.20 14 Second, DHCS’s argument proves too much. If District could 15 have hypothetically made an internal reconciliation, so should 16 DHCS. Plus, DHCS had superior access to the necessary 17 information including the internal processes to “put a fine 18 point” on the reconciliation calculation. Yet, no attempt was 19 made to estimate a claim amount in DHCS’s proof of claim until 20 well after the Plan of Adjustment was confirmed. 21 22 C. 23 DHCS disputes reliance or change of position by creditors 24 because the Disclosure Statement revealed a range of allowed 25 unsecured claims between $16.5 and $26 million. The Disclosure 26 Statement also included a footnote explaining the reason for the 27 range was in part due to “large disputed proofs of claim filed 28 19 Mendiola Decl., Doc. 2 260, Ex. B. 20 Heckathorne Decl., Doc. 1513; Ormonde Decl., Doc. 2397. 1 by governmental entities” for overpayment claims.21 So, DHCS 2 contends its $5.5 million amount due, if allowed, is within the 3 range the creditor’s expected. 4 The contention is unsupported by the facts. District 5 disputed many claims in the case for various reasons. Those 6 included DHCS’s withdrawn claims which were disallowed after 7 objection.22 The claim at issue here, claim 197, differs from 8 the others because it was not in any amount and the attachment 9 to the claim was ambiguous whether any claim existed at all. 10 11 IV. 12 This court also finds and concludes that based on the 13 above, District and other creditors would be legally prejudiced 14 if DHCS’s claim amendment was allowed. 15 16 A. 17 We begin by acknowledging DHCS is correct that in the 18 context of claim amendments “prejudice requires more than simply 19 having to litigate the merits of, or to pay, a claim – there 20 must be some legal detriment to the party opposing.” Wall St. 21 Plaza, LLC v. JSJF Corp. (In re JSJF Corp.), 344 B.R. 94, 102 22 (B.A.P. 9th Cir. 2006). Also, the burden of identifying actual 23 prejudice that would result from allowing an amendment is on the 24 party objecting to the amendment. Sambo’s, 754 F.2d at 817 25 (applying the rule to find a sufficient informal proof of 26 claim). This is consistent with burdens placed on parties 27 28 2 21 2 D Ci ls ac il mo ss u 1r 8e 6 ,S t 1a 8t 7e ,m e 2n 4t 3, wD ho ic c. h 1 t4 o4 t1 a la et d a3 b7 o. u t $5.35 million. Docs. 2120- 22. 1 opposing pleading amendments under Civ. Rule 15. See DCD 2 Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987). 3 That said, the factors used to determine potential 4 prejudice are the factors listed in Roberts Farms. JSJF, 344 5 B.R. at 102. The court has found unreasonable delay, reliance, 6 and change of position of both District and creditors. So, 7 there is already more prejudice shown than simply having to 8 litigate or pay the amended claim. But we examine prejudice 9 further. 10 11 B. 12 Ms. Ormonde testified that based on District’s books and 13 records and other data the aggregate percentage distribution 14 under the Plan of Adjustment will be 19.2% to 30.3%. She also 15 calculated that based on District’s current liability for 16 allowed Class 8 claims, if DHCS’s proposed amended claim of over 17 $5.520 million were allowed, the amount paid to Class 8 claims 18 would drop to 18.56%. That is below the “low end” of the 19 estimated payment to Class 8 claims. 20.49% lower.23 A 20 significant reduction of potential payment to creditors. 21 Also, District indisputably submitted timely cost reports. 22 No evidence was presented that at any time before this motion to 23 amend was District made aware of a claim that would be made by 24 DHCS under the outpatient reimbursement program. District filed 25 this Chapter 9, obtained an order for relief, the court ordered 26 a claims bar date, District prepared a Plan and Disclosure 27 Statement, creditors voted, the Plan was confirmed. All these 28

23 Ormonde Decl., Doc. 2397 at 3-4. 1 benchmarks occurred under the scenario presented by DHCS that 2 the claim amount was “undetermined.” That is legal detriment to 3 District and creditors. 4 5 C. 6 DHCS disagrees. They claim neither District nor creditors 7 were prejudiced because claim 197 was “undetermined” since the 8 proposed amendment simply adds more particularity to the claim. 9 Even so, DHCS adds, the confirmed Plan does not start 10 distributions to Class 8 for approximately four more years. The 11 court is unconvinced. 12 13 1. 14 “More particularity” assumes some “particularity” in the 15 first place. We have already discussed the issues with the 16 vagueness of the claim and its effects on District and its 17 creditors. 18 Also, DHCS improperly minimizes the magnitude of the 19 proposed amendment. The effects on District and distributions 20 to the unsecured class have been discussed. 21 22 2. 23 Nor does the delay in the start of payments to Class 8 24 creditors assist DHCS. 25 First, the voting creditors overwhelmingly supported the 26 confirmation of the Plan. It is more than probable the 27 creditors read and understood the Disclosure Statement revealing 28 the proposed delay in beginning the payment stream. 1 Second, the delay in starting payments does not equate to 2 creditor nonchalance about the amount they were to receive. If 3 anything, the delay in payment would heighten creditor 4 enthusiasm for accurate estimates of their proposed dividend. 5 Those distribution estimates were calculated based on District’s 6 evaluation of DHCS’s claim discussed previously. 7 8 3. 9 DHCS has provided no authority supporting such a 10 significant “amendment” after plan confirmation even under the 11 often misunderstood “liberal standard” for claim amendments in 12 the Ninth Circuit. Most authorities referenced examine 13 application of the “informal proof of claim” doctrine discussed 14 before: Sambo’s, 754 F.2d at 816; JSJF, 344 B.R. at 101-04 15 (reversing order denying claim amendment since Plan and 16 Disclosure Statement set forth claim); Green v. Brotman Med. 17 Ctr., Inc. (In re Brotman Med. Ctr., Inc.), No. CC-11-1131 18 PaMkLa, 2012 Bankr. LEXIS 665, *23 (B.A.P. 9th Cir. Jan. 31, 19 2012) (holding stay relief motion accompanied by attachments 20 including pending lawsuit with inexact claim amount 21 sufficient);24 In re Parrott Broad. Ltd. P’ship., 518 B.R. 602, 22 609 (Bankr. D. Idaho 2014) (finding declaration submitted to 23 United States Trustee establishing qualification to serve on 24 creditor’s committee while case pending as Chapter 11 was 25 sufficient after conversion of the case to Chapter 7). 26

27 24 The unpublished Brotman memorandum cites In re Pizza of Haw., 761 28 cF i. v2 id l a at c t1 i3 o8 n1 w( ah so l sd ui fn fg i ct ih ea nt t a tn o e sf hf oo wr t a nt o i nj to ei nn t ia o nd e tb ot o hr o la ds ta h ed e ef se tn ad ta en t l ii an b la e ). No similar facts are present here. 1 In contrast, claim amendments after plan confirmation have 2 been denied on grounds of prejudice. See Bevan v. Socal 3 Communs. Sites, LLC, 327 F.3d 994, 998 at n.2 (9th Cir. 2003) 4 (dicta) (secured creditor’s attempted amendment to increase 5 claim to amount paid to IRS to redeem collateral prejudicial, 6 citing Roberts Farms); In re Clickaway Corp., No. 18-51662 MEH, 7 2020 Bankr. LEXIS 1436, *23 (Bankr. N.D. Cal. May 28, 2020) 8 (amendment found prejudicial when attempted over a year after it 9 should have been asserted under the parties’ agreement and 10 allowance would have a significant impact on other claimants, 11 citing Roberts Farms). 12 In sum, even applying the “liberal” standard of allowing 13 claim amendments under Roberts Farms, the proposed amendment 14 urged by DHCS, if allowed, would result in prejudice to 15 District, creditors, and other beneficiaries of the confirmed 16 Plan of Adjustment. The court does not make this decision 17 lightly – especially considering the potential fiscal impact. 18 But, weighing the facts present here, this is the warranted 19 resolution. 20 /// 21 /// 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 1 CONCLUSION 2 For the foregoing reasons, DHCS’s Motion for Leave to Amend 3 |}Claim 197 is DENTED.2° 4 An appropriate order will issue. 5 6 4 8 Dated: Apr 27, 2021 By the Court 9 10 Crd 11 ené Lastreto II, Judge United States Bankruptcy Court 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 25 The above are the court’s findings of fact and conclusions of law 27 under Civ. Rule 52 made applicable to bankruptcy proceedings under Rule 7052 and in contested matters under Rule 9014 (c). If any finding of fact is 28 deemed a conclusion of law, or conclusion of law deemed a finding of fact, the court adopts them as findings or conclusions, respectively.

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