Join Today and Benefit Daily from ABI's 35+ Years of Insolvency Expertise.
Join Today!
Help Center

Assumption of Provider Agreements and Personal Service Contracts

Journal Issue: 
Column Name: 
Journal Article: 

As politicians debate health care reform, bankruptcy practice is already affecting the means by which health care is provided. Health care providers have searched for cost-effective means of providing medicine in as profitable a manner as possible. Such managed health care often alters ownership rights and contractual obligations as managed care attempts to perfect the business side of medicine.

However, managed care is also discovering the potential failure rate for managed care companies, which has resulted in a disproportionate amount of health care bankruptcies in the past several years. Along with such bankruptcies comes the inevitable issue of ownership and disposition of assets. These assets often come in the form of accounts receivables, medical equipment and agreements with individual doctors, which create additional issues of assignment and public policy.

The Structure of Health Care Provider Agreements

Often such managed care arrangements include the sale of a medical practice to the managed care company, the execution of a provider agreement between the medical practice and the managed care company, and an employment agreement with the individual doctor.

The binding effect of such arrangements becomes more apparent than before the managed care company is insolvent and files a bankruptcy petition. Indeed, upon the filing of a bankruptcy petition, such agreements are typically entitled to treatment as executory contracts, which requires performance from the doctor without necessarily requiring corresponding performance from the debtor. Such a situation is frustrating indeed, particularly considering that the debtor often is responsible for payment of supplies and other essential health care services, the potential absence of which the doctor is left to explain.

Thus, negotiations and disputes begin as to the parties' exit strategy. Often such negotiations and disputes involve the sale of the medical practice and the assumption and assignment of the corresponding executory contracts.

The Assumption and Assignment of Personal Service Contracts

Pursuant to 11 U.S.C. §365(a), a debtor-in-possession (DIP), subject to court approval, may assume or reject any executory contract of the debtor. Often, a DIP assumes an executory contract for the express purpose of assigning the executory contract, whether to a successor/reorganized entity or to a purchaser of the debtor's assets.

However, a DIP may not assume or assign any executory contract of the debtor, whether or not such contract prohibits or restricts assignment of rights or delegation of duties, if (A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to any entity other than the debtor, whether or not such contract prohibits or restricts the assignment of rights or delegation of duties; and (B) such party does not consent to assumption and assignment. See 11 U.S.C. §365(c)(1). Thus, the ability of a DIP to assume and assign an executory contract is not a guaranteed right.

In many jurisdictions, contract law governing assignment of rights and delegation of duties limits the ability to assign and/or delegate the rights and duties arising under a "personal service contract." A personal service contract is a contract involving the performance of non-delegable duties, requiring the exercise of special judgment, taste, skill or ability. Accordingly, personal service contracts are ordinarily not assignable, as assignment would also require the delegation of duties. See, e.g., In re Terrace Apartments Ltd., 107 B.R. 382 (Bankr. N.D. Ga. 1989); In re Rooster, 100 B.R. 228 (Bankr. E.D. Pa. 1989); In re Pioneer Ford Sales Inc., 729 F.2d 27(1st Cir. 1984); In re Compass Van & Storage Corp., 65 B.R. 1007 (Bankr. E.D.N.Y. 1986).

Courts have often focused on the debtor's duties under the contract, as opposed to the duties of the non-debtor party to the contract (e.g., where a managed care contract requires the managed care company to provide office support, maintenance, advertising and collections services, and such contract specifically excludes the managed care company from any responsibility or right to participate in treatment decisions). Under such a contract, the managed care company is not required to provide any significant degree of specialized skill or ability, even though such contracts give the managed care company control over the practice's finances.

In fact, such contracts often provide for:

  • collection of accounts receivables
  • payment of accounts payable
  • control over the practice's checkbook
  • execution of contracts from outside vendors and suppliers
  • ordering of supplies and services
  • training and providing support staff
  • otherwise administering the business side of a medical practice.

While such services are integral to the operation of a medical practice, they do not require the special skill and ability that the practice of medicine requires. Thus, such a contract is not a personal service contract, and nothing would prevent the assignment of the contract and delegation of the managed care company's duties. See, e.g., In re VisionAmerica Inc., No. 01-24615-B, et al., 2001 WL 1097741 (Bankr. W.D. Tenn. Sept. 12, 2001).

More difficult is the ability to assign the contract and delegate the duties of the medical practice and/or the doctor under the corresponding provider and employment contracts. The doctor's duties under such a contract stem from the doctor's specialized skill and ability. In addition, the doctor will certainly assert that his practice requires the provision of such specialized skill and ability.

It would appear that such an analysis is simple. However, considering that such arrangements often include the assignment or sale of assets and accounts receivables to the managed care company, the doctor's preferred result is not so easily obtained.

The Assignability of Health Care Provider Agreements

As stated above, for a contract to be a personal service contract, and therefore not subject to assumption and assignment, the contract must require specific personal services requiring skill and ability. See Matter of Optimum Merchants Services, 163 B.R. 546, 554 (D. Neb. 1994). In Optimum Merchants, the debtor provided promotion and marketing of bankcard programs. The key contract previously included a provision that required the debtor's principal's exclusive participation in promotion and marketing services. The contract was subsequently amended, and the exclusivity requirement was removed.

Upon the debtor's motion to assume and assign, the court held that although the contract originally required the personal expertise of the debtor's principal, the amendment deleted that requirement, thereby removing the personal service nature of the contract. Specifically, the court stated that if a certain object or result is contracted for, and personality or personal services are not an essential consideration, then the contract is not a personal service contract. Id. Thus, a contract regarding the provision of medical services by a particular doctor cannot be assumed and assigned because it requires the specific skill and ability of that doctor. However, a contract regarding ownership of a business that provides medical services, regardless of the individual doctor that provides such services, is not a personal services contract and is subject to assumption and assignment.

Indeed, while a debtor may not be able to assume and assign contracts regarding the provision of services by a doctor, said inability does not necessarily prevent the debtor from selling the doctor's business to a third party and/or assuming and assigning the health care provider agreement to the new owner. Indeed, ownership of a business does not require special knowledge, only the provision of medical services, which may be provided by another individual with those skills and ability. See In re Sunrise Restaurants Inc., 135 B.R. 149 (Bankr. M.D. Fla. 1991) (where the court held that a franchise agreement is not a personal service contract because ownership of such an establishment did not require special knowledge or skill); see, also, In re Tom Stimus Chrysler-Plymouth Inc., 134 B.R. 676 (Bankr. M.D. Fla. 1991).

In fact, regardless of whether the debtor is the owner of the medical practice, the debtor may assume and assign a health care provider agreement to a successor entity because the services provided under such an agreement do not require specific skill and ability. While the doctor may not have his employment contract assumed and assigned, his or her practice may find a new managed care company in control of the medical practice's business operations.

Conclusion

The structure of many health care provider agreements with managed care companies is multi-faceted. While not all contracts under such an arrangement are subject to assumption and assignment, other contracts are. In fact, while the doctor's employment contract may be safe from assumption or assignment, the provider agreement itself may not. If not, then the debtor may assume and assign the provider agreement, along with selling the assets of the medical practice when applicable.

While the doctor may object, if all other requisites of Bankruptcy Code §365 are met, then the doctor has no choice, and the practical effect is that the doctor must leave the practice or submit to the successor entity. The end result is a doctor without a practice and a practice without a doctor. Unfortunately, it is probably uncommon for doctors to consult a bankruptcy practitioner prior to executing documents and entering into such arrangements. Perhaps they should.

Journal Date: 
Wednesday, May 1, 2002

Reprint Request