1 2 3 4 5 6 7 8 9 10 11 12 13 14

LISA HILL FENNING (SBN 89238) HARRY GARNER (SBN 254942) ARNOLD & PORTER LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Lisa.Fenning@aporter.com Harry.Garner@aporter.com Proposed Counsel to the Debtor and Debtor-in-Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION In re DOWNEY REGIONAL MEDICAL CENTERHOSPITAL, INC., a California non-profit, public benefit corporation, Debtor. Case No.: 2:09-bk-34714 Chapter 11 EMERGENCY APPLICATION OF DEBTOR FOR ORDER AUTHORIZING EMPLOYMENT OF HNB CAPITAL LLC AS INVESTMENT BANKER EFFECTIVE AS OF THE PETITION DATE; DECLARATION OF HOWARD BRAND HEARING Date: September __, 2009 Time: Place: Courtroom: 1475 United States Bankruptcy Court 255 E. Temple Street Los Angeles, CA 90012

15 16 17 18 19 20 21 22 23 24 25 26 27 28 Tax I.D. 95-1903935

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. V. VI. VII. VIII. IX. X. XI. XII. I. II. III.

TABLE OF CONTENTS

Page JURISDICTION AND VENUE ..............................................................................................2 PROCEDURAL STATUS .......................................................................................................2 BACKGROUND .....................................................................................................................2 A. B. The Business of the Hospital .......................................................................................2 The Causes of the Bankruptcy Filing...........................................................................3

RELIEF REQUESTED............................................................................................................5 HNB CAPITALS BACKGROUND AND QUALIFICATIONS...........................................5 SCOPE OF SERVICES ...........................................................................................................8 COMPENSATION ..................................................................................................................9 LIMITATION OF LIABILITY AND INDEMNIFICATION...............................................11 HNBS DISINTERESTEDNESS ..........................................................................................12 BASIS FOR RELIEF .............................................................................................................12 REQUEST FOR EMERGENCY RELIEF.............................................................................13 CONCLUSION ......................................................................................................................14

-i-

1 2 3 CASES 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 STATUTES AND RULES

TABLE OF AUTHORITIES

Page(s) Linquist & Craig Hotels and Resorts Inc., Case No. 04-12603 (Bankr. C.D. Cal. Oct. 19, 2004) ........................................................... 13 In re Phoenix MC, Inc., Case No. 09-18372 (Bankr. C.D. Cal. April 27, 2009)........................................................... 13 In re Z Gallerie, Case No. 09- 18400 (Bankr. C.D. Cal. April 10, 2009).......................................................... 13

11 U.S.C. 327 ............................................................................................................................. 12 11 U.S.C. 327(a) ................................................................................................................ 1, 2, 12 11 U.S.C. 328(a) ............................................................................................................ 10, 12, 13 11 U.S.C. 330 ............................................................................................................................. 10 11 U.S.C. 504 ............................................................................................................................. 11 11 U.S.C. 101(14) ...................................................................................................................... 12 11 U.S.C. 1107(a) ........................................................................................................................ 2 11 U.S.C. 1108 ............................................................................................................................. 2 28 U.S.C. 157 ............................................................................................................................... 2 28 U.S.C. 157(b) .......................................................................................................................... 2 28 U.S.C. 1334 ............................................................................................................................. 2 28 U.S.C. 1408 ............................................................................................................................. 2

23 28 U.S.C. 1409 ............................................................................................................................. 2 24 25 26 27 28 Fed. R. Bankr. P. 2014 ................................................................................................................ 1, 2 Fed. R. Bankr. P. 6003 .................................................................................................................. 13 Fed. R. Bankr. P. 6003(a).......................................................................................................... 1, 13 LBR 2014-1(b) ............................................................................................................................ 1, 2

LA566938

-ii-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

LBR 2016-2................................................................................................................................... 10 LBR 2081-1(a)(12).......................................................................................................................... 1 LBR 9075-1(a) ................................................................................................................................ 1

LA566938

-iii-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Downey Regional Medical Center-Hospital, Inc., the debtor and debtor-in-possession in the above captioned case (the Debtor or Hospital), hereby files this application (the Application) for entry of an order pursuant to 327(a) of title 11 of the United States Code (the Bankruptcy Code), Rule 2014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), and Rule 2014-1(b) of the Local Bankruptcy Rules for the United States Bankruptcy Court for the Central District of California (the Local Bankruptcy Rules), authorizing the employment and retention of HNB Capital LLC, whose business offices are located at 1732 Aviation Boulevard, Suite 223, Redondo Beach, California 90278 (HNB), as Debtors investment banker in this chapter 11 case. Debtor seeks to employ HNB nunc pro tunc to September 14, 2009, with compensation to be paid on a fixed fee and percentage basis without a fee application being required. In support of this Application, Debtor relies upon and incorporates by reference the Declaration of Howard Brand (the Brand Declaration), a true and correct copy of which is attached hereto as Exhibit A. Debtor requests, pursuant to Local Bankruptcy Rules 2081-1(a)(12) and 9075-1(a), that the Court enter an order approving this Application on less than 48 hours notice, upon timely notice to the Office of the United States Trustee (UST), creditors holding the twenty largest unsecured claims, Debtors alleged secured creditors, and other parties in interest (collectively, the Interested Parties). Debtors chapter 11 reorganization strategy is dependent upon immediate interim approval of certain postpetition financing, from which HNB is entitled to a success fee payable in part upon interim funding, in addition to a monthly retainer of $35,000 payable until closing of the final DIP Loan (as defined below). As described in more detail below, HNBs services are critical to the completion of the financing and ultimately its final approval. Debtor must retain HNB and obtain authority to pay the first installment of its success fee immediately in order to ensure that HNB will continue to provide necessary services, and that the proposed lender will close the anticipated financing. HNB is not willing to incur the significant costs and expenses of the continued negotiation and documentation of the financing without the Courts prior approval of its success fee. Debtor, therefore, requests that the Court waive the requirement of Federal Bankruptcy Rule 6003(a)

LA566938

-1-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

and enter an order granting this Application. A copy of this Application was served, concurrent with the filing hereof with the Court, on the Interested Parties by courier or overnight delivery. In further support of this Application, Debtor, by and through its undersigned counsel, respectfully states as follows: I. JURISDICTION AND VENUE 1. This Court has jurisdiction to consider this Application under 28 U.S.C. 157 and

1334. This is a core proceeding under 28 U.S.C. 157(b). Venue of these cases and this Application in this District is proper under 28 U.S.C. 1408 and 1409. The statutory predicates for the relief requested herein are Bankruptcy Code 327(a), Bankruptcy Rule 2014, and Local Bankruptcy Rule 2014-1(b). II. PROCEDURAL STATUS 2. On September 14, 2009 (the Petition Date), Debtor commenced a case (the

Chapter 11 Case) by filing a petition for relief under chapter 11 of the Bankruptcy Code. 3. Debtor continues to operate its business and to manage its property as a debtor and

debtor-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in Debtors Chapter 11 Case. 4. States Trustee. III. BACKGROUND A. 5. The Business of the Hospital The Hospital is a nonprofit general acute care and teaching hospital licensed for 199 No creditors committee has been appointed in this Chapter 11 Case by the United

beds located in Downey, California. The Hospital currently operates 181 staffed inpatient beds, including an intensive care unit, a neo-natal intensive care unit for newborns with special health issues, a birth center, and definitive observation units, besides general medical-surgical beds. It services approximately 14,000 inpatients per year in all services. The Hospitals average length of stay is less than 4 days on a very acute population, making it one of the most efficient in the state. 6. The Hospital offers a wide variety of clinical services and provides virtually all

clinical services of a major tertiary university hospital except for organ transplants. The Hospital

LA566938

-2-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

has 11 operating rooms, and a very busy surgical practice. It offers same day surgeries, and specializes in open heart surgery, general surgery, orthopedic surgery, and neurosurgery. It operates on over 7,000 patients annually. The Hospital also has numerous specialty outpatient services, seeing over 80,000 outpatients annually, including non-invasive cardiology, radiology, endoscopy, and physical therapy. 7. The Hospital also has an emergency room of 22 beds. The emergency room is not

designated as a trauma unit, but it is equipped for and services trauma patients who are regularly brought to the Hospital in extremis or who come in via transportation other than ambulance. The emergency room services over 50,000 patients annually. Therefore, at about 2,500 patients per bed annually, it is one of the busiest in the area. The emergency room is burdened because since 2001 there have been four major emergency rooms closed on the I-105 corridor, including Martin Luther King Hospital, leaving only three remaining general emergency rooms in the area including the Hospital.1 B. 8. The Causes of the Bankruptcy Filing Although nominally profitable on an accrual basis, the Hospital has been forced to

commence the Chapter 11 Case as a result of a liquidity crisis. This crisis has two primary causes. First, the Hospital has incurred substantial losses as a result of severe problems on the finance side of its business (now largely corrected) due to defective charge capture practices and software billing practices (the Charge Capture System Problems) that resulted in the Hospital not collecting all the revenues to which it would be entitled. Second, the Hospital was incurring significant losses due problems with respect to its capitation arrangements (the Capitation Program) with certain physician groups and health plans (the Capitation Program Problems). These losses were so severe that the Hospital concluded it had to terminate the Capitation Program to staunch the long-term hemorrhaging of cash, despite the short term cash flow interruption and claims that would result. The Hospital has taken steps to exit the Capitation Program and adopt a fee-for-service

28

There is also a Kaiser Permanente Facility in the area, and although its emergency room is technically open to everyone, paramedic operators tend to take only Kaiser patients to this facility.

LA566938

-3-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

model, but the exit costs are substantial. The combination of the Charge Capture System and Capitation Program Problems has left the Hospital with no cash reserves since March 2008. 9. In essence, due to software and process failings, the Hospitals financial, billing and

collections systems had failed to capture charges which led to incomplete bills for a significant portion of its services for nearly a decade, causing unrecoverable losses. A cost-accounting problem caused the misallocation of costs to the capitation contracts, resulting in the Hospitals books showing a profit in capitation where none really existed. These problems have been investigated, diagnosed, and continue to be remedied under the direction of a new chief executive officer, Kenneth Strople, who took the reins in 2007, Robert Fuller, the chief operating officer, and consultant Richard Yardley, the acting chief financial officer. Given sufficient time to operate under a regime in which charges are properly captured, bills are complete when invoiced, and financial reports provide reliable real-time information, the Hospital should be able to repay its debts in full. 10. However, demands by certain creditors for immediate paymentand for payment of

more than the Hospital believes it owes in some casesprevented an orderly restructuring outside of bankruptcy and forced this filing. Much of the pressure has come from the physician groups who have asserted claims in excess of $9 million against the Hospital related to the termination of the capitation contracts. 11. The exit from the Capitation Program created three distinct cash drains: (1) the tail of

claims for services provided out-of-network by other hospitals and health care providers, (2) the claims by the physician groups participating in the Capitation Program for risk-sharing profit splits, much of which is disputed by the Hospital (the Risk Share Claims), and (3) the transitional loss of cash occasioned by the change in business model out of capitation (where under the Hospital was paid up front, before services were rendered) to fee-for service (where under the Hospital is paid in arrears, typically up to 150 days following the rendering of services), some of which was eased by the $8.8 million in advances by the insurers who participated in the program. However, the Hospital does not have the financial capacity to bridge the costs of exiting capitation within the time frame being demanded by impacted parties. In short, this reorganization filing has resulted from

LA566938

-4-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

demands made by parties who greatly benefitted from the Capitation Program while it was operational (the physicians), but who are now not patient enough to allow the Hospital to implement its new business model and return to financial stability before demanding payment. 12. The immediate problem that forced the Hospital to file this Case arose from an

arbitration brought by one of the physician groups and the potential for the other two groups to follow suit. The physician groups are expected to assert claims for over $9 million. 13. Alliance Physicians Medical Group (Alliance), one of the physician groups,

recently filed an arbitration in an attempt to collect their alleged risk share profits from 2006 to 2008. In its arbitration, Alliance claimed it was owed up to $4.7 million or more. It sought to attach the Hospitals bank accounts in the fall of 2008. The arbitrators award is imminent, and the Hospital believes that Alliance will seek immediate enforcement by attaching the Hospitals bank accounts. 14. The threat of attachments relating to the estimated $9 million of Risk Share Claims

has scared off prospective lenders who would not want the loan proceeds intended for critically needed working capital to be diverted to paying historical disputed debts. Such a diversion of funds would shut down the Hospital. The automatic bankruptcy stay will protect the Hospital from the catastrophic interruption of its operations that would result from such an attachment. IV. RELIEF REQUESTED 15. By this Application, Debtor seeks entry of an order authorizing the employment and

retention of HNB as Debtors investment banker, nunc pro tunc as of the Petition Date, in accordance with the provisions of this Application, the Engagement Letter (as defined below), and the proposed order submitted herewith. V. HNB CAPITALS BACKGROUND AND QUALIFICATIONS 16. HNB is a financial advisory and investment banking firm with expertise in, among

other things, obtaining financing for hospitals and other healthcare businesses, hospital turnarounds, and restructuring, both out-of-court and in chapter 11 proceedings. Since 2004, HNB and its principal and managing partner Howard Brand (Brand) have focused almost exclusively on the field of healthcare finance. Since that time, HNB has been engaged as the financial consultant and

LA566938

-5-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

helped to provide the debt capital for Olympia Medical Center in Los Angeles, formerly known as Midway Hospital, when it acquired Midway from Tenet Healthcare in 2004. HNB and Brand continue to provide financial advisory services to Olympia. HNB also provided health care finance consulting services to Karykeion, Inc. d/b/a Community and Mission Hospital of Huntington Park in its Chapter 11 case pending in this district. HNB has also provided health care financing services to Sleepwell Laboratories LLC, a chain of medical sleep diagnostic centers. 17. In July 2009, HNB undertook to assist the Hospital in its efforts to obtain post-

petition financing. The Hospital signed a consulting agreement with HNB on July 7, 2009 (the Engagement Letter). A true and correct copy of the Engagement Letter is attached hereto as Exhibit B. 18. For the Hospital, Brand has generally provided financial structuring plans and

suggestions. Brand has also reviewed and analyzed various company business operations, plans and documents in order to determine what was possible for achieving a workable capital structure. The Hospital and Brand determined that the best course of action would be to obtain accounts receivables financing after the Hospital entered into bankruptcy. 19. Brand has business relationships with over twenty-five healthcare finance

companies. Within this universe of healthcare lenders there is an even more limited universe of healthcare lenders who will consider lending to a company of the Hospitals size, and almost none that will consider lending in the shadow of a potential or actual bankruptcy filing. As part of HNBs efforts to obtain senior secured DIP financing for the Hospital on the basis of its accounts receivable, Brand contacted the following lenders that, in his experience, are the only lenders that are in the market offering receivables financing to medium-sized hospitals like Debtor: A. B. C. D. E. F. CapitalSource, Inc. (CapitalSource); Healthcare Finance Group (HFG); Gemino Healthcare Financing; Sun Healthcare; GE Healthcare Finance; and Presidential Healthcare.

LA566938

-6-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

(collectively, the Lenders). Of those Lenders, the following had previously participated in or provided proposals for some of HNBs other healthcare financing consulting engagements: Capital Source, HFG, GE Healthcare Finance, Sun Healthcare and Presidential Healthcare. 20. With respect to the Hospital, Brand provided each of the Lenders with business

information that he had prepared and gathered from the Hospital, and then had multiple telephone conferences with them. When HFG expressed a potential interest in financing Debtor, Brand conducted numerous follow-up conversations and personal meetings with HFG to explain the Hospitals situation and assist in both diligence efforts and negotiations between HFG and Debtor. Brands intensive efforts over a two-month period have resulted in the HFG proposal for DIP financing that has become the basis of the DIP Loan (as defined below). 21. Except for HFG and CapitalSource, none of the Lenders was willing to make a

proposal for the Hospital. Before Brands retention, CapitalSource had expressed an interest and had entered into a January 2009 term sheet with the Hospital. However, it had failed to commit to any financing, despite diligence efforts from January to July. By the time Brand was retained, the Hospital had reached the conclusion that CapitalSource would never commit. In addition, by July, the threat of the Alliance attachment meant that a bankruptcy filing was likely to be needed to protect the Hospitals working capital. CapitalSource made it known that it was not interested in providing DIP financing. Since the parties were working on a short time frame, HNB and the Hospital decided to work with the only interested lender who they believed would move expeditiously to complete the DIP financing process and fund. Therefore, HNB recommended HFG. 22. In providing the Hospital with prepetition services pursuant to the Engagement

Letter and other prepetition services, HNB worked closely with the Hospitals management and other professionals and has become familiar with its business, operations, debt structure, and related matters. HNB has been deeply involved with the negotiations for a debtor in possession revolving loan for $15 million (the DIP Loan) with HFG. In the process, HNB has developed expertise regarding the Hospitals business that will aid it in providing effective and efficient services in this case. The DIP Loan is still in process. The full loan will not fund until all conditions precedent

LA566938

-7-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

have been satisfied and an order has been entered approving the final DIP Loan. Debtor has filed a motion to approve the DIP Loan on both an interim and final basis. HNB is expected to play a critical role in finalizing all the terms and conditions of the DIP Loan. 23. An experienced investment bank such as HNB fulfills a critical need that

complements the services offered by Debtors other restructuring professionals. Debtor requires the services of a capable and experienced investment banking firm such as HNB because, among other reasons, its resources and capabilities, together with its prepetition experience advising Debtor, are crucial to Debtors success in this case. VI. SCOPE OF SERVICES 24. Debtor anticipates that during this Chapter 11 Case, HNB will render investment

banking services to Debtor as described in the Engagement Letter. Pursuant to the Engagement Letter, HNB has agreed to advise Debtor in connection with Debtors efforts to obtain debtor-inpossession financing and related matters. The specific services that HNB will provide to Debtor include, but are not limited to, the following: a. b. c. d. e. f. g. h. i. j. 25. Review of financial history Evaluation of potential financial structures Review Debtor business documents and operations Review of expected collection analysis and static pool analysis Review of financial projections and forecasts Search for potential lenders Providing information to potential lenders Discussions with potential lenders Participation in evaluating potential lender proposals Participation in chosen lender negotiations

Debtor intends for HNBs services to complement, and not duplicate, the services to

be rendered by any other professional retained in this case. HNB understands that Debtor has retained and may retain additional professionals during the term of the engagement and will work

LA566938

-8-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

cooperatively with such professionals to integrate any respective work conducted by the professionals on behalf of Debtor. VII. COMPENSATION 26. HNBs willingness to continue with its engagement to advise and assist Debtor is

conditioned upon its ability to be retained in accordance with its customary terms and conditions of employment, as set forth in the Engagement Letter, and to be compensated for its services and reimbursed for its expenses in accordance with its customary billing practices. 27. HNBs compensation structure, as set forth in the Engagement Letter, is comparable

to compensation generally charged by investment bankers of similar stature for comparable engagements, both in and out of court, and reflects a fair balance between monthly fees and fees that are contingent on the consummation and closing of the transactions contemplated by the engagement. It consists of a monthly retainer of $35,000 for the period from July 7, 2009 to the final approval and closing of the DIP Loan, payable at the beginning of every month, and a success fee of 1.25% of the full approved amount of the DIP Loan (the Success Fee). HNB has agreed that the Success Fee will be 50% payable upon funding of the initial advance under the DIP Loan, and 50% payable on the earlier of five business days after entry of the final order approving the DIP Loan or 30 days after entry of the interim order approving the DIP Loan, provided that a failure to obtain entry of the final DIP order by that date is not due to a default or breach of the DIP Loan agreements by HFG. 28. HNB hereby seeks approval of its compensation for professional services rendered

and reimbursement of expenses incurred in connection with this case, subject to the Courts approval and in compliance with applicable provisions of the Bankruptcy Code, the Local Rules, and any other applicable procedures and orders of the Court, and consistent with the proposed compensation set forth in the Engagement Letter (the Fee Structure). Because the Fee Structure consists in part of fixed monthly payments (due for the period from Petition Date through closing, expected to be less than 45 days) and a set percentage of the $15 million loan amount, no fee application should be required.

LA566938

-9-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

29.

The Fee Structure is consistent with and typical of compensation arrangements

entered into by HNB and other comparable firms in connection with the provision of similar services under similar circumstances. 30. HNBs strategic and financial expertise as well as its specialized healthcare financing

knowledge, financing skills, and restructuring capabilities, some or all of which may be required by Debtor during the term of HNBs engagement, were all important factors in determining the Fee Structure. Debtor believes that the ultimate benefit of HNBs services cannot be measured by reference to the number of hours to be expended by HNBs professionals in the performance of such services. Indeed, Debtor and HNB have agreed upon the Fee Structure in anticipation that a substantial commitment of professional time and effort will be required of HNB and its professionals in connection with this case and in light of the fact that (a) such commitment may foreclose other opportunities for HNB and (b) the actual time and commitment required of HNB and its professionals to perform its services under the Engagement Letter may vary substantially from week to week and month to month, creating peak load issues for HNB. 31. In determining the level of compensation to be paid to HNB and its reasonableness,

Debtor compared HNBs proposed fees with the range of investment banking fees in comparable chapter 11 cases and other complex transactions. In both instances, Debtor found HNBs proposed fees to be reasonable. Accordingly, HNBs engagement is appropriate under 328(a) of the Bankruptcy Code and HNB should be subject to review only pursuant to the standards set forth in 328(a) of the Bankruptcy Code rather than the standard of review set forth in 330 of the Bankruptcy Code. 32. Consistent with its ordinary practice and the practice of investment bankers in other

chapter 11 cases whose fee arrangements are typically not hours-based, HNB does not maintain contemporaneous time records or provide or conform to a schedule of hourly rates for its professionals. HNB will maintain records in support of any actual, necessary costs and expenses incurred in connection with the rendering of its services in this case. As HNBs compensation will be calculated and paid based on certain transaction fees (in addition to monthly fees), HNB requests that it not be required to file time records in accordance with Local Bankruptcy Rule 2016-2 and the

LA566938

-10-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

United States Trustee Fee Guidelines. Instead, notwithstanding that HNB does not charge for its services on an hourly basis, HNB will nonetheless maintain records (in summary format) of its postpetition services rendered for Debtor, including reasonably detailed descriptions of those services, the approximate time expended in providing those services on a daily basis, which will be made available to the U.S. Trustee and any committee appointed in the Chapter 11 Case. Brand expects to be providing all of those services personally. 33. HNB will not share or agree to share any compensation to be paid by Debtor in

connection with services to be performed after the Petition Date with any other person in accordance with 504 of the Bankruptcy Code. 34. Debtor respectfully submits that the employment of HNB is in the best interests of

Debtor, its creditors, and its estate. VIII. LIMITATION OF LIABILITY AND INDEMNIFICATION 35. Section 6 of the Engagement Letter provides as a material part of the consideration

for HNB to furnish its services, among other things, that in no event shall HNB or Howard Brand be liable to Debtor, whether in contract or in tort or under any other legal theory for lost profits or revenues, loss of use, or similar economic loss, or for any indirect, special, incidental, consequential or similar damages, arising out of or in connection with HNB or Howard Brands performance or non-performance of the Engagement Letter. Debtor has further agreed that it shall indemnify, defend and hold HNB and Howard Brand and their affiliates, and their respective directors, officers, agents, employees and each of their respective successors and assigns harmless from and against any and all liabilities, claims, suits, actions, demands, losses, damages, costs, expenses and attorneys fees incurred by HNB or Howard Brand as a result of the above or as a result of Debtors (or any of its affiliates, directors, officers, employees or agents) actions, inactions, statements, or omissions to state made to HNB or Howard Brand under the Engagement Letter. The Engagement Letter further provides that it is not a guarantee of loan approval, and that HNB and Howard Brand are working on a best efforts basis. 36. This limitation of liability and indemnification provision is necessary to protect HNB

and Howard Brand and is reasonably limited in scope. By its performance under the Engagement

LA566938

-11-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Letter, HNB should not be deemed a guarantor of Debtors profitability, revenues or economic success, and should not be held vicariously liable for related damage claims. Moreover, this provision of the Engagement Letter is consistent with the practices of other investment bankers. IX. HNBS DISINTERESTEDNESS 37. To the best of Debtors knowledge, and based on the Brand Declaration, HNB (a) is

a disinterested person under 101(14) of the Bankruptcy Code, as required by 327(a) of the Bankruptcy Code; (b) neither holds nor represents any interest adverse to Debtor or its estate; and (c) has no material connection with Debtor, its creditors, any other party in interest, their respective attorneys, the United States Trustee, or any person employed in the office of the United States Trustee. In addition, based on the Brand Declaration, neither HNB nor any of its staff is or was, within two years before the date of the filing of the petition, a director, officer, or employee of Debtor. 38. Prior to the Petition Date, Debtor paid approximately $105,000 in full payment of

HNBs prepetition monthly fees and $0.00 for reimbursement of HNBs expenses. HNB has received no other compensation from Debtor pursuant to the Engagement Letter. As of the Petition Date, HNB did not hold a prepetition claim against Debtor for services rendered in connection with the engagement. X. BASIS FOR RELIEF 39. Debtor seeks approval of the Engagement Letter and the Fee Structure contained

therein pursuant to Bankruptcy Code sections 327 and 328(a). Section 328(a) provides, in relevant part, that Debtors, with the courts approval, may employ a professional person pursuant to 327 on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis. Accordingly, 328(a) permits the compensation of professionals, including investment bankers, on flexible terms that reflect the nature of their services and prevailing market conditions for those services. 40. Under the circumstances, pursuant to the approval of the Engagement Letter under

Bankruptcy Code 328(a), HNB seeks entry of an order authorizing its payment without any

LA566938

-12-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

requirement for a fee application, consistent with the Fee Structure set forth in the Engagement Letter. 41. Debtor believes that the Fee Structure appropriately reflects the nature and scope of

services to be provided by HNB in this complex chapter 11 case, HNBs substantial experience with respect to healthcare industry investment banking services, and the fee structures typically utilized by HNB and other investment banks of similar stature that do not bill their clients on an hourly basis. This Court has granted similar relief in other cases in the form of fixed and contingent fees for services provided by investment bankers. See, e.g., In re Phoenix MC, Inc., Case No. 09-18372 (Bankr. C.D. Cal. April 27, 2009); In re Z Gallerie, Case No. 09- 18400 (Bankr. C.D. Cal. April 10, 2009); Linquist & Craig Hotels and Resorts Inc., Case No. 04-12603 (Bankr. C.D. Cal. Oct. 19, 2004). 42. In light of the foregoing, and given the numerous issues that HNB may be required

to address in the performance of its services hereunder, HNBs commitment to the variable level of time and effort necessary to address all such issues as they arise, and the market prices for HNBs services for engagements of this nature, Debtor believes that the terms and conditions of the Engagement Letter are fair, reasonable, and market-based consistent with the standards set forth in Bankruptcy Code 328(a). XI. REQUEST FOR EMERGENCY RELIEF 43. As mentioned above, Debtor acknowledges that it is requesting that the Court enter

an order authorizing the Debtor to use property of the estate prior to the expiration of the twenty (20) day period mandated by Bankruptcy Rule 6003(a). 44. Bankruptcy Rule 6003 specifically provides that the court can disregard the twenty

day period if relief is necessary to avoid immediate and irreparable harm. Debtor submits that the relief requested in this Application is necessary to avoid immediate harm. As stated above, the Debtor believes that the best way to maximize its potential for a successful reorganization is the immediate interim approval of the DIP Loan, from which HNB is entitled to 50% of its Success Fee upon interim funding. In light of the fact that HNBs services are critical to the completion of the DIP Loan, it is imperative that Debtor be allowed to compensate HNB on the terms and conditions

LA566938

-13-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

set forth in the Engagement Letter (as modified between HNB and Debtor with respect to timing of payment of the two Success Fee installments). Accordingly, the failure to approve Debtors application to employ HNB on expedited basis would likely result in the Debtors inability to ensure that the DIP Loan will obtain final approval and close, and that Debtor will receive all available funding under the DIP Loan. XII. CONCLUSION WHEREFORE, Debtor respectfully requests that the Court grant the Application and grant such other and further relief as may be just and proper.

Dated: Los Angeles, California September 14, 2009

Respectfully Submitted, /s/ Lisa Hill Fenning Lisa Hill Fenning Harry Garner Arnold & Porter LLP 777 South Figueroa Street, 44th Floor Los Angeles, California 90017 Telephone: 213.243.4000 Facsimile: 213.243.4199 Proposed Counsel to the Debtor and Debtor-inPossession

LA566938

-14-

Exhibit A

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 In re

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION Case No.: Chapter 11 DECLARATION OF HOWARD BRAND IN SUPPORT OF EMERGENCY APPLICATION OF DEBTOR FOR ORDER AUTHORIZING EMPLOYMENT OF HNB CAPITAL LLC AS INVESTMENT BANKER EFFECTIVE AS OF THE PETITION DATE

DOWNEY REGIONAL MEDICAL CENTERHOSPITAL, INC., a California non-profit, public benefit corporation, Debtor.

I, Howard Brand, declare as follows: 1. I am the principal and managing partner of HNB Capital LLC (HNB), whose

business offices are located at 1732 Aviation Boulevard, Suite 223, Redondo Beach, California. The matters set forth herein are made of my own personal knowledge and, if called and sworn as a witness, I could and would testify competently testify to the matters set forth herein. Unless stated otherwise, all capitalized terms used herein have the same meaning as ascribed to them in the accompanying Application. 2. This Declaration is made in support of the Emergency Application for Order

Authorizing Employment of HNB Capital LLC as Investment Banker Effective as of the Petition Date (the Application), filed by Downey Regional Medical Center-Hospital, Inc., the debtor and debtor in possession the above-captioned case (the Debtor or Hospital.). 3. I hold a B.A. from UCLA and an M.B.A from the University of West Los Angeles. I

have focused on corporate finance since 2000. Previously, I was employed by Kann Capital in Los Angeles where I focused on obtaining debt financing for small, troubled companies. In my work I have facilitated many financing deals for internet companies, computer equipment companies and packaging companies. I am not a licensed loan broker.

-15-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

4.

HNB is a financial advisory and investment banking firm with expertise in, among

other things, obtaining financing for hospitals and other healthcare businesses, hospital turnarounds, and restructuring, both out-of-court and in chapter 11 proceedings. Since 2004, HNB has focused almost exclusively on the field of healthcare finance. Since that time, HNB has been engaged as the financial consultant and helped to provide the debt capital for Olympia Medical Center in Los Angeles (Olympia). I also provided health care finance consulting services to Karykeion, Inc. d/b/a Huntington Park and Mission Community Hospital (Huntington Park). 5. Regarding Olympia, formerly known as Midway Hospital, I was engaged as the

financial consultant for Olympia when it acquired Midway from Tenet Healthcare in 2004. At the time it was purchased, the hospital had a negative (loss) EBITDA of $8.0 million on an annualized basis. With the institution of financial planning, budgets, cost controls, new systems, employee motivation programs, and close personal supervision, Olympia today is generating over $5.0 million in positive EBITDA. In regards to Huntington Park, I was called in to determine the best course of action to solve the hospitals financial situation. I recommended that Huntington Park enter into Chapter 11 bankruptcy. I also helped them get legal counsel and develop a plan of financial management while in bankruptcy. 6. HNB has also provided health care financing services to Sleepwell Laboratories

LLC, a chain of medical sleep diagnostic centers. 7. In July 2009, HNB undertook to assist the Hospital in its efforts to obtain post-

petition financing. The Hospital signed a consulting agreement with HNB on July 7, 2009 (the Engagement Letter). Pursuant to the Engagement Letter, the specific services that HNB will provide include, but are not limited to, the following: a. b. c. d. e. f. Review of financial history Evaluation of potential financial structures Review Debtor business documents and operations Review of expected collection analysis and static pool analysis Review of financial projections and forecasts Search for potential lenders

-16-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8.

g. h. i. j.

Providing information to potential lenders Discussions with potential lenders Participation in evaluating potential lender proposals Participation in chosen lender negotiations

The Hospital has agreed to pay HNB a monthly consulting fee of $35,000 at the

beginning of each month. In addition, the Hospital and HNB further agreed that in the event that the Hospital was successful in obtaining post-petition financing as a result of my introductions and other efforts with healthcare finance companies with whom I had relationships, then HNB would be paid a success fee of 1.25% of the gross amount of the funds financed (the Success Fee). HNB has agreed that the Success Fee will be 50% payable upon funding of the initial advance under the DIP Loan, and 50% payable on the earlier of five business days after entry of the final order approving the DIP Loan or 30 days after entry of the interim order approving the DIP Loan, provided that a failure to obtain entry of the final DIP order by that date is not due to a default or breach of the DIP Loan agreements by HFG. 9. For the Hospital, I have generally provided financial structuring plans and

suggestions. I reviewed and analyzed various company business operations, plans and documents in order to determine what was possible for achieving a workable capital structure. The Hospital and I determined that the best course of action would be to obtain accounts receivables financing after the Hospital entered into bankruptcy. 10. I have business relationships with over twenty-five healthcare finance companies.

Within this universe of healthcare lenders there is an even more limited universe of healthcare lenders who will consider lending to a company of the Hospitals size, and almost none that will consider lending in the shadow of a potential or actual bankruptcy filing. As part of HNBs efforts to obtain senior secured DIP financing for the Hospital on the basis of its accounts receivable, I contacted the following lenders that, in my experience, are the only lenders that are in the market offering receivables financing to medium-sized hospitals like Debtor: A. CapitalSource, Inc. (CapitalSource); B. Healthcare Finance Group (HFG);

-17-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

C. Gemino Healthcare Financing; D. Sun Healthcare; E. GE Healthcare Finance; and F. Presidential Healthcare. (collectively, the Lenders). Of those Lenders, the following had previously participated in or provided proposals for some of HNBs other healthcare financing consulting engagements: Capital Source, HFG, GE Healthcare Finance, Sun Healthcare and Presidential Healthcare. 11. With respect to the Hospital, I provided each of the Lenders with business

information that I had prepared and gathered from the Hospital, and then had multiple telephone conferences with them. When HFG expressed a potential interest in financing Debtor, I conducted numerous follow-up conversations and personal meetings with HFG to explain the Hospitals situation and assist in both diligence efforts and negotiations between HFG and Debtor. My intensive efforts over a two-month period have resulted in the HFG proposal for DIP financing that has become the basis of the DIP Loan. 12. Except for HFG and CapitalSource, none of the Lenders was willing to make a

proposal for the Hospital. Before my retention, CapitalSource had expressed an interest and had entered into a January 2009 term sheet with the Hospital. However, it had failed to commit to any financing, despite diligence efforts from January to July. By the time I was retained, the Hospital had reached the conclusion that CapitalSource would never commit. In addition, by July, the threat of the Alliance attachment meant that a bankruptcy filing was likely to be needed to protect the Hospitals working capital. CapitalSource made it known that it was not interested in providing DIP financing. Since the parties were working on a short time frame, HNB and the Hospital decided to work with the only interested lender who we believed would move expeditiously to complete the process and fund. Therefore, HNB recommended HFG. 13. HNB does not maintain contemporaneous time records or provide or conform to a

schedule of hourly rates for its professionals. HNB will maintain records in support of any actual, necessary costs and expenses incurred in connection with the rendering of its services in this case. Notwithstanding that HNB does not charge for its services on an hourly basis, HNB will

-18-

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

nonetheless maintain records (in summary format) of its post-petition services rendered for Debtor, including reasonably detailed descriptions of those services, the approximate time expended in providing those services on a daily basis, which will be made available to the U.S. Trustee and any committee appointed in the Chapter 11 Case. personally. 14. HNB will not share or agree to share any compensation to be paid by Debtor in I expect to be providing all of those services

connection with services to be performed after the Petition Date with any other person 15. its estate. 16. HNB is not related or connected to and, to the best of my knowledge, no other Neither HNB nor any of its staff hold or represent any interest adverse to Debtor or

member of HNBs staff is related or connected to, Debtor, its creditors, any other party in interest, their respective attorneys, or the United States Trustee for Region 16 or any employee in the offices thereof. 17. Neither HNB nor any of its staff is or was, within two years before the date of the

filing of the petition, a director, officer, or employee of Debtor. 18. Prior to the Petition Date, Debtor paid approximately $105,000 in full payment of

HNBs prepetition monthly fees and $0.00 for reimbursement of HNBs expenses. HNB has received no other compensation from Debtor pursuant to the Engagement Letter. As of the Petition Date, HNB did not hold a prepetition claim against Debtor for services rendered in connection with the engagement.

-19-

I declare under penalty of perjury that the foregoing is true and correct.
2 3
4

Executedonthis

/..?

dayof

J'f;.:tfer11t:t!_v ,

2009.

5
6 7
8
9
10

HOWARD BRAND Managing Partner, HNB Capital LLC

11 12 13
14

15

16
17 18 19 20 21 22 23

24
25

26
27
28

-20-

Exhibit B

LA: 568607v1

,.,

..
HNB Capital LLC
1732 Aviation Blvd. #223 Redondo Beach, CA 90278 FAX 310-379-0940 TEL 310-379-4605 Email hnb@gte. net

CONSULTING AGREEMENT

This Consulting Agreement ("Agreement") is made and entered into as of the 7th day of July 2009, by and between Downey Regional Medical Center (the "Company"), and HNB Capital LLC and/or Howard Brand ("Consultant"). In consideration of the terms, conditions and covenants contained herein, the parties hereto agree as follows: 1. Consulting. Consultant agrees to provide consultation and advisory services relating to corporate management, financing and discussions with the Company's lenders as may be reasonably requested from time to time with respect to the Company's business ("Services"). As part of this engagement Consultant shall review and analyze Company's business documents and operations. Company agrees that any projections, forecasts, exit plans, static pool analysis, expected collection analysis, audit reviews or IT systems analysis shall be solely developed by the Company. The Services to be performed pursuant to this Agreement may be rendered at or from any locations, including without limitation Manhattan Beach, California or Los Angeles, California, selected by Consultant in the exercise of his sole discretion. Company agrees to engage Consultant as its primary advisor for financing as described in paragraph 3 during the term of this engagement. 2. Cash Compensation. Company understands that Consultant's normal hourly rate is $350 an hour. Company agrees to pay Consultant a monthly non refundable cash retainer of $35,000 which shall equate to approximately 100 hours a month. If the number of hours spent by the Consultant exceeds 100 hours a month, then the parties shall negotiate in good faith for additional compensation. The first payment of this cash compensation shall be payable upon the signing of this Agreement and then payable at the beginning of every month thereafter until terminated by the Company or the completion of the Financing. 3. Bonus Compensation. In addition to the services Consultant is to render under this Agreement, Company shall pay to Consultant a bonus equal to one and quarter percent (1.25%) of the total amount of debt, mezzanine or equity financing ("Financing") Company obtains from or through any lender/investor identified by Consultant or to whom Company is introduced by Consultant, including, but not limited to, Healthcare Finance Group. Consultant may from time to time provide Company with a list of the lenders/investors Consultant has identified or introduced to Company. For purposes of this Agreement, the total amount of Financing shall include (i) the maximum principal amount of the Financing for which Company is approved without deduction for any kind or form of fees or costs which the lender or any other third party may charge or which Company may be obligated to pay in connection with the Financing; (ii) the total amount of Financing for which Company
HNB Downey Consulting Agreement v3 clean Page 1 of4

is approved irrespective of whether the Financing is funded in a lump sum, in draws, in stages or in any other increments; and (iii) the total amount of Financing for which Company is approved within two years of the date on which Company is first introduced to the lender by Consultant or within a one-year period prior to the termination date of this Agreement, whichever is later. Consultant's total bonus fee shall be earned and shall be due when the Company receives Financing. Company hereby authorizes Consultant to submit a copy of this Agreement to each lender/investor who approves Financing and each such lender is hereby authorized to deem this an irrevocable instruction to pay Consultant the fee herein provided. Company agrees to execute such further documents as Consultant may request or as the lender/investor may require in order to facilitate the payment of Consultant's fee. The Company shall be responsible for the payment of any and all lender/investor costs and appraisal costs necessary in completing the Financing. 4. Independent Contractor Status. It is understood that Consultant will be performing services under this Agreement as an independent contractor, and not as an employee. Consultant (a) shall not receive any fringe benefits pursuant to this Agreement, and (b) shall personally be responsible for the payment of all federal, state and local taxes incurred as a result of any fees or other payments received under this Agreement. 5. Confidentiality. Consultant agrees that all documents and information received from the Company will be held in strictest confidence and will only be divulged to parties directly involved in this Agreement. During the course of this engagement and transaction the Company will been introduced to certain information, techniques and parties that are business trade secrets of and are proprietary to Consultant. The Company and their respective affiliates agree to keep confidential all such information, forms, correspondence, writings and sources concerning Consultant and its business. The advice (written or oral) rendered by Consultant pursuant to this agreement is intended solely for the benefit and use of Company in considering the matters to which this agreement relates. The Company further agrees that neither such advice nor Consultant's retention may be disclosed publicly or made available to third parties without the prior written consent of Consultant. Furthermore, Company agrees for a period of three years from the signing of this Agreement that Company and its affiliates or associates shall not contact nor conduct business with any financial institution, investor, or placement agent introduced by Consultant to the Company without first obtaining written consent from Consultant and reaching an agreement for just compensation. 6. Limitation of Liability and Indemnification. The Company agrees that in no event shall Consultant be liable to the Company, whether in contract or in tort or under any other legal theory for lost profits or revenues, loss of use, or similar economic loss, or for any indirect, special, incidental, consequential or similar damages, arising out of or in connection with Consultant's performance or non-performance of this Agreement. Company shall indemnify, defend and hold Consultant and its affiliates, and their respective directors, officers, agents, employees and each of their respective successors and assigns harmless from and against any and all liabilities, claims, suits, actions, demands, losses, damages, costs, expenses and attorneys' fees incurred by Consultant as a result of the above or as a result of Company's (or any of its affiliates, directors, officers, employees or agents) actions, inactions, statements, or
HNB Downey Consulting Agreement v3 clean Page 2 of 4

om1sswns to state made to Consultant under this Agreement. This document does not guarantee loan approval. Consultant is working on a "best efforts" basis. 7. Obligations of Company. The Company shall provide Consultant with all required information and documentation (all such information and documentation so furnished being the "Information") in a timely fashion. Company represents and warrants that all Information previously or hereafter furnished by it or on its behalf to Consultant shall be complete, accurate and not misleading. Company agrees to promptly notify Consultant of any material change in the Company's business, condition (financial or other), assets, prospects or liabilities, whether or not such change is adverse. It is understood and agreed that Consultant assumes no responsibility for such information or the accuracy, completeness or fairness of the information memorandum prepared and distributed on behalf of the Company. The Company shall make available all appropriate personnel upon reasonable notice as may be needed for the purpose of conference calls, site inspections, meetings, and other due diligence information gathering as deemed necessary by Consultant. 8. Expense Reimbursement. The Company agrees to pay for all major out-of-pocket expenses of Consultant during the course of this engagement. These expenses will be billed as incurred and are immediately due and payable upon receipt. Prior to Consultant incurring any expense over $450.00 per item, a written approval and acknowledgement from the Company will be required. 9. Term of Engagement. Ifthe Company accepts this Agreement, it shall become effective as of the date signed by you, on behalf of the Company, and shall terminate on the earlier of (i) November 7, 2009, or (ii) the occurrence of one or more of the following: (a) Non-payment of any of the fees or expense reimbursements mentioned herein; (b) conclusion of a transaction between the Company and an investor and/or lender that accomplishes the purpose and goals of the engagement; (c) a determination by Consultant that the financing request is no longer feasible due to materially adverse changes in the Company, its circumstances or capital market conditions; or (d) either party from the other has received a written 30-day notice of engagement termination. Requirements of confidentiality, non-circumvention, indemnification and compensation due to Consultant shall survive termination of this Agreement. 10. Right to Advertise. Consultant, at its own expense, shall have the right to advertise its consulting and involvement with the Company. 11. Governing Law and Venue. This Agreement shall be governed by, construed and prosecuted in accordance with the laws of the State of California and the County of Los Angeles, notwithstanding any choice of law principles or rules of such State or any other State to the contrary. 12. Counterpart. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument.
HNB Downey Consulting Agreement v3 clean Page 3 of 4

13. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the engagement of Consultant by the Company and supersedes all prior and contemporaneous agreements, representations and understandings (either oral or written) of the parties. No modification, amendment, supplement or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto and executed by both parties.

14. Severability. To the extent that the terms set forth in this Agreement or any word, phrase, clause or sentence is found to be illegal or unenforceable for any reason, the balance of this Agreement shall not be affected thereby, such balance being construed as severable and independent, and the remaining portion of this Agreement shall remain in full force and effect as if this Agreement had been executed with the invalid provision eliminated. 15. Dispute Resolution. Any controversy or claim arising out of or relating to this Agreement, or performance or interpretation of it, may at the discretion of Consultant be submitted to final binding arbitration before a judge selected from the Directory of Independent Retired Superior Court Judges Available for Alternative Dispute Resolution (the "Gold Card"), and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Such arbitration shall take place as soon as practicable following the occurrence of any dispute. All costs of such arbitration shall be borne by the losing party.

16. Attorneys' Fees. The prevailing party in any litigation shall have its attorney fees and costs reimbursed by the losing party.

IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date first set forth above.
THE COMPANY: Downey Regional Medical Center Consultant: HNB Capital LLC

By:~ Howard Brand

Managing Partner

HNB Downey Consulting Agreement v3 clean

Page 4 of4