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State Sanctioned and Regulated Community Mental Health Center Is Entitled to Chapter 11 Relief

By: D. Nicholas Panzarella

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Seven Counties Services, Inc.,[1] a bankruptcy court held that a Kentucky non-profit corporation designated as a community mental health center (“CMHC”) was not a “governmental unit” and therefore, was eligible to be a debtor in a chapter 11 bankruptcy case.[2] In Seven Counties, the CMHC debtor filed for bankruptcy under chapter 11 of the Bankruptcy Code after the Kentucky General Assembly raised the contribution rate for participants in a state pension system, which the debtor participated in pursuant to a state statute.[3] After filing, the CMHC debtor sought to reject its executory contract with the pension system.[4] In response, the state pension commenced an adversary proceeding seeking (1) a determination that the CMHC debtor was a “governmental unit,” and not a “person,” and thus was statutorily barred from seeking relief under chapter 11 of the Bankruptcy Code and (2) the issuance of a preliminary injunction compelling the CMHC debtor to continue contributing to the pension.[5] The Seven Counties court held that the CMHC debtor was entitled to chapter 11 relief and permitted the CHMC debtor to reject its executory contract with the pension system.[6]