New Rules Concerning Patient Record Disposal Section 351 May Not Reduce Controversies over the Proper Procedures to Be Followed by Health Care Debtors

New Rules Concerning Patient Record Disposal Section 351 May Not Reduce Controversies over the Proper Procedures to Be Followed by Health Care Debtors

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) created new rules governing the disposal of patient records by a debtor that is a "health care business,"2 that are now codified in §351 of the Bankruptcy Code. One of the purposes of §351 is to clarify and define the procedures for the disposal of patient records in the hopes of reducing controversies that have arisen among parties who have widely diverging views of the best practices for protecting the rights of patients. Although the new rules are still in their infancy, an examination of §351, its interplay with other sections of the Code and the incentives and goals of various parties in a health care case suggests that attaining Congress' goal of reducing disagreements over the proper procedures to be followed by the debtor may be elusive, at best.

Section 351

Under §351 and Interim Federal Rule of Bankruptcy Procedure 6011, a health care debtor in a chapter 7, 9 or 11 proceeding that lacks the necessary funds to pay for the storage of patient records pursuant to applicable federal and state legislation must take certain precautions to safeguard such records.3

• The trustee or debtor-in-possession (DIP) must publish, in one or more newspapers, a notice informing patients that their records will no longer be kept at the health care facility and that, if they are not claimed by the patient or an insurance provider within 365 days of such publication date, the trustee will destroy such records.
• The notice shall not identify patients by name or contain any other identifying information, but must (i) identify with particularity the health care facility whose records the debtor intends to destroy; (ii) state the name, address, telephone number, e-mail address and Web site, if any, of a person who can provide additional information about how the records can be claimed; and (iii) state the date by which the records must be retrieved.
• During the first six months after publication, the trustee must attempt to notify each patient directly regarding their rights to claim their records and the fact that such records will otherwise be destroyed, by mailing a notice to (i) the most recently known address of each patient, a family member or a contact person for that patient; (ii) any insurance company known to have provided health care insurance to the patient; and (iii) any person who has given their name and address to the trustee or the debtor for the purpose of providing information regarding the patient's health care.

After the expiration of the 365-day period, if any patient records still remain unclaimed, the trustee is required, by certified mail, to send a written request to each appropriate federal agency requesting permission to deposit the records with such agency. Section 351 neither identifies the appropriate federal agencies, nor requires any agency to accept such records, nor imposes any time limit by which a response must be received.4 If the records have not been accepted by any federal agency, the trustee shall5 dispose of the records by shredding, burning or otherwise permanently destroying them so that they cannot be retrieved and must file a report with the bankruptcy court within 30 days certifying that the records have been destroyed, including an explanation of the method employed to destroy the records. The report must not identify the patients by name or contain any other patient-identifying information.

Records Retention under Nonbankruptcy Law

Although §351 may be new to the Code, there exists a mature body of federal and state statutes covering the storage and disposal of medical records. The federal Medicare and Medicaid provisions, for example, generally require hospitals to retain a patient's records for at least five years following treatment.6 Two of the largest states in the nation, New York and California, have enacted statutes that are even more stringent. New York requires that patient records be retained for at least six years,7 and under California law, if a licensed health care provider ceases operation, the provider has an obligation to preserve records for a minimum of seven years following the discharge of the patient, except for records of minors, which must be kept for at least one year after a minor has reached the age of 18.8 In general, although the various states' record retention laws vary widely (some requiring retention of records for as long as 25 years), at least one conclusion can be drawn: nonbankruptcy law concerning records retention and disposal is generally much more patient-friendly and stringent than §351 of the Code.

At least with respect to debtors in bankruptcy, it appears that Congress has effectively superseded the records-retention requirements of federal law and, presumably through its constitutional powers, superseded state laws concerning medical records retention.9 Because records retention can be very expensive and §351 permits debtors to dispose of records in a fraction of the time that would be required under federal and state law, §351 can be viewed as one of the few benefits bestowed on debtors by BAPCPA.

Contesting the Use of §351

Given the conflict between §351 and existing nonbankruptcy law, the use of §351 by a debtor or trustee is likely to be opposed by federal and state health care regulators, as well as patient advocates, who may view the section's notification requirements as being inadequate. Newspaper notification, like class action notices buried in the back pages of "one or more newspapers," will rarely reach its intended audience. Addressing mail to patients at their last known address may be slightly more effective, but many people move and forget to leave forwarding addresses, which expire after one year in any event. The additional requirement to notify doctors and insurers may be helpful, but many people neglect to visit their physicians on a regular basis, or they may change physicians or insurers and may not even realize that their records are located in a particular facility.

A patient's medical records may be very important to his/her future well-being. Among other things, records generally contain lab results, diagnoses and a history of prescribed medications, the majority of which the patient may have forgotten or not be aware of. Without such information, there is a risk of a physician misdiagnosing a patient. Patients may also face difficulties obtaining insurance coverage from companies that require proof of medical records to insure for certain services.

Any party opposing the use of §351 will likely look to contest the threshold showing that must be made by the debtor that it does not have "a sufficient amount of funds to pay for the storage of patient records in the manner required under applicable federal or state law."10 This language suggests that unless the debtor has absolutely no unencumbered cash, or assets that can be turned into cash, the debtor should not be entitled to use §351. For example, in many hospital cases where the debtor is a not-for-profit entity, the lien of the debtor's pre-petition lender does not extend to gifts and bequests. It might be argued that those funds need to be exhausted before §351 could be invoked. To the extent that a debtor claims that such gifts and bequests are restricted as to use, a dispute may develop over the validity and extent of such nonbankruptcy restrictions.

The Use of Carve-outs to Pay for Records Retention

Even if the debtor's pre-petition lender does not have a blanket lien, it is likely that the debtor's DIP lender will be granted a security interest encumbering all assets.11 The debtor might argue that the all-encompassing extent of the DIP lender's lien is proof that it does not have sufficient funds to pay for records storage and retention. In order to avoid giving the debtor this excuse, parties who are active at the beginning of the case when the DIP loan is typically scheduled for approval, e.g., the U.S. Trustee or the Unsecured Creditors Committee (UCC), would need to insist that the DIP loan contain a carve-out from the DIP lender's collateral in order to pay for future storage costs, if any.

The UCC may have a strong incentive to request a carve-out from the DIP lender's collateral to pay for storage costs. In addition to §351, BAPCPA also added §503(b)(8)(A) of the Code, which provides that the trustee's costs under §351 are entitled to administrative expense priority. If the DIP loan does not contain a carve-out, the amount of such costs would effectively reduce any recovery for unsecured creditors. Even in those cases where the DIP lender does not have a blanket lien—e.g., where the DIP lender does not have a lien on avoidance actions, if no carve-out is obtained, the debtor may be required to fund storage and disposal costs from the proceeds of such avoidance actions that would otherwise have been distributed to unsecured creditors.

Surcharging Collateral to Pay for §351 Costs

In the circumstance where a carve-out is not obtained, the unsecured creditors or the debtor may be able to surcharge the secured party's collateral for §351 costs if the debtor cannot pay its administrative claims.12 The legislative history to §351 states that Congress believes that such costs should be surcharged against a secured creditor's collateral if the debtor is administratively insolvent.13 BAPCPA did not, however, expressly amend §506(c) to provide for a surcharge of a secured party's collateral for the costs of records storage and disposal, nor did it change the general legal standard for awarding a surcharge. §506(c) continues to require that any surcharge be limited to the extent that a benefit is received by the secured party. The pronouncement in the legislative history of §351 is merely an interpretation of §506(c). In many circumstances, it may be difficult to demonstrate that a secured party receives any "benefit" from the debtor's ability to dispose of records. Either the debtor or its unsecured creditors, not the secured party, may be the true beneficiaries of the abbreviated disposal procedures permitted by §351.

The Role of the Patient Care Ombudsman

A debtor may also discover that it has a new adversary when attempting to invoke §351. Given the importance of medical records to the facility's current and former patients, the patient care ombudsman, who is appointed pursuant to §333 of the Code, may attempt to intervene. In addition to monitoring patient care, the ombudsman must also "represent the interests of the patients of the health care business."14 One of the interests of a patient of any health care business lies in the preservation of his or her medical records. However, the debtor may resist any attempted intervention on the grounds that the ombudsman should be restricted only to issues concerning existing patients. Even if correct, the ombudsman might still have an interest in assuring that the records of all existing patients be protected after discharge from the facility, which records would, presumably, be stored or disposed along with all of the debtor's other medical records pertaining to its former patients.


Although it is too early to predict exactly how the effect of §351 will play out, an examination of the interplay of §351, other sections of the Code, and the goals of the various parties in interest suggests that §351 will continue to spawn contention among debtors, their secured lenders, committees, health care regulators, patient advocates and, perhaps, the patient care ombudsman. Debtors may encounter strong opposition to any attempted use of the streamlined procedures of §351, and may not want to admit that the estate is administratively insolvent. In order to avoid a contest under §351, debtors may ultimately propose a retention and disposal procedure that goes far beyond the requirements of §351 in order to achieve a consent order among all parties. Despite Congress' apparent attempt to reduce or eliminate any controversy over the procedures to be used for the disposal of patient records, §351 may turn out to be yet another ground for conflict that will need to be resolved in a health care bankruptcy case.



1 Sara Langer of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. also contributed to this article.

2 11 U.S.C. §101(27A).

3 A close reading of the text of §351 and Interim Rule 6011 indicates that the safeguarding requirements set out in the statute and the rule are not identical. However, an argument can be made that any differences are supplementary and not inconsistent. Therefore, the description of the standards set forth in this article assumes that the debtor would be required to satisfy the highest common denominator of both the statute and the rule.

4 Following the closing of a health care facility, some states, e.g., Indiana, Mississippi and Tennessee, permit medical records to be deposited with a state agency. However, under §351, the debtor or trustee must request that a federal agency accept its records. There is no indication in the legislative history that Congress considered giving debtors the right to deposit records with state agencies, some of which have been fulfilling this role for many years.

5 (emphasis added) 11 U.S.C. §351(c).

6 See 42 U.S.C. §1395cc(a)(1)(I)(ii); 42 C.F.R. §482.24(b)(1)(1).

7 N.Y. Comp. Codes R. & Regs. tit. 8, §29.2(a)(3).

8 Cal. Health & Safety Code §123145.

9 See In re Adelphi Hospital Corp., 579 F.2d 726 (2d Cir. 1978) (trustee for a hospital could not be prevented from abandoning medical records under federal bankruptcy law even though state law required insolvent hospitals to maintain and store them, because federal law prevails over inconsistent state laws).

10 11 U.S.C. §351.

11 Some courts refuse to grant a lien to DIP lenders covering avoidance actions. If so, this might be a possible source of funds to pay for records storage.

12 Many DIP lenders and many pre-petition secured parties with a lien on cash collateral request orders insulating collateral from surcharge under §506(c). The legislative history to §351 may be another reason to argue that such waivers should not be granted.

13 H.R. Rep. No. 109-31, pt. 1, at 139 (2005) (stating, "it is anticipated that if the estate of the debtor lacks the funds to pay for the costs and expenses related to the disposal of patient records, the trustee may recover such costs and expenses under 11 U.S.C.A. §506").

14 11 U.S.C. §333(a)(1).

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Friday, December 1, 2006