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Samuel R. Maizel (CA Bar No. 189301) Scotta E. McFarland (CA Bar No. 165391) Mary D. Lane (CA Bar No. 71592) PACHULSKI STANG ZIEHL & JONES LLP 10100 Santa Monica Blvd., 13th Floor Los Angeles, California 90067-4100 Telephone: 310/277-6910 Facsimile: 310/201-0760 E-mail: [email protected] [email protected] [email protected] Attorneys for Victor Valley Community Hospital, Debtor and Debtor in Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION In re: Case No.: 6:10-39537 CB Chapter 11NOTICE OF EMERGENCY MOTION EMERGENCY MOTION OF DEBTOR FOR ORDER (A) AUTHORIZING DEBTOR TO OBTAIN POSTPETITION FINANCING AND GRANTING LIENS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS PURSUANT TO 11 U.S.C. 364; (B) SCHEDULING A FINAL HEARING AND ESTABLISHING RELATED NOTICE REQUIREMENTS; AND (C) AUTHORIZING DEBTOR TO ENTER INTO CONSULTING SERVICES AGREEMENT; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF [Declaration of Edward Matthews in Support Thereof]

12 13 14 Debtor. 15 16 17 18 19 20 21 22 23 24 25 26 27 28The Debtor is a California nonprofit public benefit corporation, Fed. Tax I.D. No. 95-2475762. The Debtors address is 15248 Eleventh Street, Victorville, CA 92395.1

VICTOR VALLEY COMMUNITY HOSPITAL,1

Interim Hearing: Date: October 20, 2011 Time: 10:00 a.m. Place: Courtroom 303 U.S. Bankruptcy Court 3420 Twelfth Street Riverside, CA 92501-3819 Judge: Catherine E. Bauer

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TO THE HONORABLE CATHERINE BAUER, THE OFFICE OF THE UNITED STATES TRUSTEE, DEBTORS SECURED CREDITORS, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS, AND OTHER PARTIES IN INTEREST: PLEASE TAKE NOTICE that Victor Valley Community Hospital, the above-captioned debtor and debtor in possession (the Debtor or VVCH), through its undersigned counsel, hereby moves (the Motion) the Court for the entry of an interim order substantially in the form attached to the Motion as Exhibit A (the Interim Order) and setting a hearing on approval of a final order (the Final Order), pursuant to sections 105(a) and 364 of title 11 of the United States Code (the Bankruptcy Code) and Rules 4001(c) and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), (i) authorizing the Debtor to incur up to $6 million in postpetition indebtedness (the DIP Financing or DIP Facility), (ii) approving the Postpetition Revolving Credit and Security Agreement between the Debtor and Prime Healthcare Management, Inc. (Prime Management) dated as of October 14, 2011 (the DIP Loan Agreement)2 substantially in the form attached to the Motion as Exhibit B, and authorizing the Debtor to enter into the DIP Loan Agreement and to execute any other reasonable and necessary documents in order to implement the terms of the DIP Loan Agreement, (iii) granting subordinate liens in the Debtors assets securing the DIP Facility, and superpriority administrative expense claim status to the DIP Facility, and (iv) granting related relief as further set forth in the Interim Order. The Motion further requests entry of an order authorizing the Debtor, pursuant to section 363(b) of the Bankruptcy Code, to enter into a Consulting Services Agreement substantially in the form attached to the Motion as Exhibit C (the Consulting Agreement). with Prime Management. PLEASE TAKE FURTHER NOTICE that, as set forth in the attached Memorandum, the Debtor has limited operating funds and is losing money at a burn rate of almost $1.2 million per month on a cash basis. Its daily census continues to decline and its staff is failing to appear for work with increasing regularity resulting in greatly increased labor costs. Further, the Debtor has suffered attrition of key personnel, including the retirement of its Chief Executive Officer.32 3

All capitalized terms not otherwise defined herein shall have the meaning given them in the DIP Loan Agreement. The Debtor and Catherine M. Pelley, the Debtors former CEO, have entered into a Consulting Agreement, subject to the approval of this Court, whereby Ms. Pelley will continue to perform the functions of the CEO, pending the Debtor making other arrangements for the management of its hospital.

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Although the Debtor has on two occasions sought and obtained Bankruptcy Court approval to sell substantially all of its assets, both sales have failed to close. The first approved sale failed to close because the buyer, Victor Valley Hospital Acquisition and another related entity (collectively, VVHA) declined to close on the terms that had been approved by this Court. The second approved sale failed to close as scheduled because the Attorney General for the State of California (the AG) denied consent to the sale of the Debtors assets to PHSF Victor Valley, LLC, an affiliate of Prime Healthcare Services Foundation, Inc. (collectively, Prime).4 The Debtor is at this point in urgent need of stable management of its hospital (the Hospital) and financing in order to continue to operate, pay its critical expenses and preserve and maximize its value for the benefit of the estate and its creditors until it is able to close the sale to Prime or to otherwise reorganize. After arms length negotiations undertaken in good faith by the Debtor and Prime Management, the Debtor has determined that the terms and conditions of the Consulting Agreement and the DIP Financing are fair, reasonable and appropriate and that approval of the DIP Financing is in the best interest of its estate. PLEASE TAKE FURTHER NOTICE that, pursuant to Bankruptcy Rule 4001(c)(1)(B), the following chart summarizes certain material provisions of the DIP Financing.5DIP Facility: A revolving credit facility in an aggregate amount of up to $6,000,000.00 secured by liens on all the assets of the Debtor and granted a superpriority claim status. Prime Healthcare Management, Inc. The DIP Facility will be used to pay the Debtors operating losses through consummation of the sale of Debtors asset or until the Debtor confirms a plan of reorganization or liquidation. Operating losses is the difference between actual cash collected by Borrower during the Advance Period and Borrowers cash operating expenses attributable to the Advance Period. Operating expenses include, but are not limited to, wages, employee benefits, professional fees, utilities, supplies and other general and administrative expenses. No interest will be charged.

DIP Lender: Purpose:

Interest:

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The Debtor and Prime are continuing their efforts to obtain the AGs consent to the sale of the Debtors assets to Prime.

This section contains a summary of the principal provisions of the DIP Facility; the Court and other parties in interest, however, are respectfully referred to the DIP Loan Agreement and the Interim Order, attached hereto as Exhibits B and A, respectively, for a more extensive recitation of the terms and conditions of the DIP Facility.

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Events of Default Liens/Superpriority Administrative Claim

The Events of Default are rather lengthy and can be found in Article VIII of the DIP Loan Agreement. Subject and subordinate to all existing, valid and perfected security interests and liens, a continuing security interest in and lien upon all of the Debtors right, title and interest in and to all of its assets of any nature whether now owned or hereafter acquired. Amounts owed under the DIP Facility shall be an allowed superpriority administrative expense claim with priority (except as otherwise provided in the Interim Order) in Debtors case under sections 364(b), 503(b), and 507(b) and otherwise over all administrative expense claims and unsecured claims against Debtor and its estate, now existing or hereafter arising, of any kind or nature whatsoever including, without limitation, except as otherwise provided in the Interim Order, administrative expenses of the kinds specified in, arising, or ordered pursuant to sections 105, 326, 328, 330, 331, 503(a), 503(b), 506(c) (subject to entry of the Final Order), 507(a), 507(b), 546(c), 546(d), 726(b), 1113, and 1114, whether or not such expenses or claims may become secured by a judgment lien or other nonconsensual lien, levy or attachment. Subject to the provisions of Section 2.6 and Section 2.9 of the DIP Loan Agreement, all Advances and all other outstanding Obligations under the DIP Facility shall be immediately due and payable in full in cash, if not earlier in accordance with the terms of DIP Loan Agreement, the Interim Order and the Final Order, without further application to or order of the Bankruptcy Court, on the earlier of (i) acceleration of maturity of the Obligations upon the occurrence of an Event of Default; (ii) twenty (20) days after the Bankruptcy Court enters an order (a) confirming a chapter 11 plan for the Borrower that does not provide for the payment of the Obligations in full no later than 30 days from entry of the confirmation order ; or (b) granting a motion to sell substantially all of Borrower's assets pursuant to a transaction that does not provide for the Obligations to be paid in full at closing of the sale transaction; (iii) upon termination of the Consulting Agreement; (iv) if an order is entered confirming a chapter 11 plan that is not based upon a sale of the Debtors assets to Prime and that Prime Management consents to in writing, then the date which is seven years from entry of such confirmation order; or (v) March 1, 2012 (the date upon which the first of the foregoing occurs is referred to herein as the Maturity Date) If an order is entered confirming a chapter 11 plan which does not contemplate a sale of substantially all of the Debtors assets and that Prime Management consents to in writing, then the Debtor shall repay the outstanding Obligations in quarterly payments based on a ten (10) year amortization schedule, with payments to commence on the first business day following the first quarter in which Debotr has experienced Positive Cash Flow. Nothing in this section shall modify the Maturity Date. Notwithstanding anything in this Section to the contrary, repayment of the Obligations shall not commence until such time as general unsecured creditors of the Debtor holding allowed claims receive collectively $2 million.

Term:

Payment in the Event That a Plan Is Confirmed That Does Not Provide for the Sale of the Hospital but that is approve by Prime and Prime Management

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Forgiveness in Event of Sale of Hospital to Prime

Other provisions of the DIP Loan Agreement Disclosed Pursuant to Bankruptcy Rule 4001(c):

In the event that the Debtor sells substantially all of its assets to Prime Healthcare Services Foundation, Inc., or PHSF Victor Valley, LLC, or any Affiliate of either one, pursuant to a sale transaction approved of in writing by Lender and by Prime Healthcare Services Foundation, Inc., Lender shall release the Debtor of its duty to pay the remaining balance of the Obligations to Prime Management under this Agreement as of the date of closing of the sale transaction. Unless otherwise agreed to in writing by Lender, all other rights of Lender under the DIP Facilily and the Financing Orders shall survive the closing of the sale transaction. In the event of such acquisition by a party other than Prime Management or an affiliate or an affiliate, successor or assignee of Prime Management, the Obligations hereunder are required to be paid in full at the time of and as part of such acquisition. Sections 2.10(b) and 7.1 contain certain limits on the Debtors ability to obtain financing pursuant to section 364 of the Bankruptcy Code. Section 2.1(b) contains a waiver of nonbankruptcy law regarding the perfection of liens and security interests. Section 12.4 contains indemnity provisions.

PLEASE TAKE FURTHER NOTICE that the Consulting Agreement specifically lists the tasks related to the day-to-day operations of the Hospital that Prime Management, as an independent contractor, will perform and oversee during the term of the Consulting Agreement. The Consulting Agreement also authorizes Prime Management to implement Major Decisions (as defined in the Consulting Agreement) as approved by the Debtors Board of Directors. The management fee to be paid to Prime Management by the Debtor under the Consulting Agreement is $10,000 per month. PLEASE TAKE FURTHER NOTICE that this Motion is brought on an emergency basis pursuant to Local Bankruptcy Rule (LBR) 9075-1 because the Debtor cannot continue to operate without prompt relief as requested herein. PLEASE TAKE FURTHER NOTICE that pursuant to LBR 9075-1, the Court has scheduled a hearing on this Motion on an emergency basis for October 20, 2011 at 10:00 a.m. Counsel for the Debtor has served this Motion (and thereby notice of the hearing) by email, facsimile, personal delivery, or overnight delivery on the counsel for the Official Committee of Unsecured Creditors (the Committee), the Debtors prepetition and post-petition secured lenders,

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the Office of the United States Trustee and those parties entitled to notice pursuant to the Courts order limiting notice in this chapter 11 case (the Case). PLEASE TAKE FURTHER NOTICE that, pursuant to Local Bankruptcy Rule 9075-1, any party in interest intending to oppose the relief sought in this Motion or the adequacy of the notice of the hearing must attend the scheduled hearing and either file a written opposition or orally raise the opposition at the hearing. Failure to respond in opposition to the Motion or to appear at the scheduled hearing may constitute consent to the relief requested herein. PLEASE TAKE FURTHER NOTICE that the Motion is based on and supported by this Notice, the attached Memorandum of Points and Authorities, the Declaration of Edward Matthews, Chief Financial Officer of the Debtor filed concurrently herewith, and the extensive record in this Case. WHEREFORE, the Debtor respectfully requests that the Court (ii) enter the Interim Order; (iii) schedule a final hearing on the Motion (the Final Hearing) on or about October __, 2011; (iv) grant the Motion on a final basis at the Final Hearing, (v) approve the Consulting Agreement and authorize the Debtor to enter into and to take all reasonable and necessary actions to implement the Consulting Agreement, and (vi) grant such other and further relief as the Court deems just and proper. PACHULSKI STANG ZIEHL & JONES LLP Dated: October 17, 2011 By /s/ Samuel R. Maizel Samuel R. Maizel (CA Bar No. 189301) Attorneys for Victor Valley Community Hospital, Debtor and Debtor in Possession

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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 IX. VII. VIII. V. VI. IV. I. II. III.

Page SUMMARY OF RELIEF REQUESTED .......................................................................... 8 JURISDICTION .............................................................................................................. 10 BACKGROUND ............................................................................................................. 11 A. The Bankruptcy Case Background ...................................................................... 11 B. General Description of the Debtor ....................................................................... 11 C. The Debtors Physical Plant................................................................................. 11 D. The Debtors Staff at the Petition Date ................................................................ 12 E. The Hospitals Current Situation ......................................................................... 12 F. The Debtors Board of Directors ......................................................................... 14 G. The Debtors Secured Debt .................................................................................. 14 1. The Desert Community Bank Obligations............................................... 14 2. The PHM Obligations .............................................................................. 15 3. The Corwin Medical Group Obligations ................................................. 15 4. VVHA ...................................................................................................... 16 H. The Debtors Unsecured Debt ............................................................................. 16 I. Events Related to the Sale of the Hospital ........................................................... 16 PROPOSED DEBTOR IN POSSESSION FINANCING ............................................... 18 A. The Critical Need for Postpetition Financing ...................................................... 18 B. Overview of the DIP Facility ............................................................................... 18 C. Current Alternative to the DIP Financing ............................................................ 20 D. The DIP Facility Is the Best Alternative for the Debtor ...................................... 21 PROPOSED CONSULTING SERVICES AGREEMENT ............................................. 22 BASIS FOR APPROVAL OF THE DIP FACILITY AND THE GRANTING OF SUPERPRIORITY ADMINISTRATIVE CLAIMS IN CONNECTION THEREWITH .................................................................................................................. 25 A. Section 364(c) of the Bankruptcy Code Is Satisfied ............................................ 25 B. The Debtor Has Exercised Its Reasonable Business Judgment .......................... 25 C. Provisions that Potentially Implicate Local Bankruptcy Rule 4001-2................. 27 REQUEST FOR IMMEDIATE INTERIM APPROVAL OF RELIEF REQUESTED HEREIN ........................................................................................................................... 27 NOTICE WITH RESPECT TO EMERGENCY INTERIM FINANCING REQUEST AND FINAL HEARING ................................................................................................. 28 THE DEBTORS ENTRY INTO THE CONSULTING AGREEMENT HAS A SOUND BUSINESS PURPOSE AS REQUIRED BY SECTION 363 OF THE BANKRUPTCY CODE................................................................................................... 28 CONCLUSION ................................................................................................................ 29 iDOCS_LA:246156.5 90231-002

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TABLE OF AUTHORITIES Page CASES Bray v. Shenandoah Fed. Sav. & Loan Assn (In re Snowshoe Co.), 789 F.2d 1085 (4th Cir. 1986) ............................................................................................... 25 In re Ames Dept Stores, Inc., 115 B.R. 34 (Bankr. S.D.N.Y. 1990) .................................................................................... 26 In re Canyon Partnership, 55 B.R. 520 (Bankr. S.D. Cal. 1985)..................................................................................... 29 In re Moore, 110 B.R. 924 (Bankr. C.D. Cal. 1990)................................................................................. 29 In re WPRV-TV, Inc., 143 B.R. 315 (D.P.R. 1991), affd in relevant part, ............................................................. 29 STATUTES 28 U.S.C. 1334 ................................................................................................................... 10, 17 28 U.S.C. 1408 ......................................................................................................................... 10 28 U.S.C. 1409 ......................................................................................................................... 10 28 U.S.C. 157(b)(2)(A) ............................................................................................................ 10 28 U.S.C. 157(b)(2)(D) ............................................................................................................ 10

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MEMORANDUM OF POINTS AND AUTHORITIES The Debtor, by the Emergency Motion of Debtor for Order (a) Authorizing Debtor to ObtainPostpetition Financing and Granting Liens and Superpriority Administrative Expense Status Pursuant to 11 U.S.C. 364; (b) Scheduling a Final Hearing and Establishing Related Notice Requirements; and (c) Authorizing Debtor to Enter Into Consulting Services Agreement (the Motion), requests entry of an6

interim order substantially in the form annexed hereto as Exhibit A and thereafter a final order, approving the DIP Facility and authorizing the Debtor to enter into the DIP Loan Agreement, a copy of which is attached hereto as Exhibit B and an order authorizing the Debtor to enter into the Consulting Agreement in order to avoid immediate and irreparable harm to the Debtor and its creditors that would result from the Debtors failure to obtain financing and stable management for the Hospital. This Motion seeks authority for the Debtor to incur up to $6 million in postpetition indebtedness in exchange for (1) continuing security interests in and liens upon all of the Debtors right, title and interest in and to all of its assets of every kind and nature, whether now owned or hereafter acquired (the Collateral), which security interest and liens shall be subject and subordinate to all existing valid and perfected security interests and liens upon the Collateral, and (2) superpriority administrative expense claim status pursuant to sections 364(b), 503(b) and 507 as more fully described below and in the Interim Order. It also seeks authorization for the Debtor to enter into the Consulting Agreement whereby Prime Management will manage the Hospital under the direction of the Debtors Board of Directors. As set forth in the Declaration of Edward Matthews, the Debtor is losing on an accrual basis almost $2 million per month and its efforts to sell the Debtors assets have been unsuccessful thus far. Further, the Debtor is facing attrition of its key personnel, including the retirement of its CEO. The Debtor is continuing with its efforts to consummate its Court-approved sale to Prime. In addition, the Debtor is working on legal challenges to the AGs recent denial of consent of the sale to Prime. In the meantime, if the Debtor is to keep the Hospital open and preserve the value of the estate for its creditors, it needs funds to cover its operating losses. The Consulting Agreement will

Capitalized terms not otherwise defined in this Memorandum of Points and Authorities shall have the meaning given them in the Motion.

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result in the Debtor obtaining valuable advice on the management of the Hospital at a time that the Debtor has been suffering from personnel attrition and it should enable the Debtor to realize savings based on Primes experience in similar situations with distressed hospitals. The terms of the DIP Facility are extremely beneficial to the Debtor and its estate. If the Debtor and Prime are able to consummate the court-approved sale of the Debtors assets, all of the funds advanced by Prime Management under the DIP Facility (i.e., potentially a $6 million benefit) will be forgiven by Prime Management and shall not count as a credit against the purchase price or serve in any other way to deplete estate resources. In the event that the sale to Prime is not consummated and the Debtor must repay the DIP Financing, the terms of repayment are also beneficial to the Debtor in that the DIP Financing is interest free and, if the Debtor confirms a plan approved by Prime and Prime Management, the DIP Financing can be repaid over a seven (7) year period. In addition, the Debtor will have had the benefits of the Consulting Agreement. In light of the Debtors current operating and financial condition and the existing encumbrances on its assets, the Debtor does not believe that it could obtain such favorable terms from any other source. I. SUMMARY OF RELIEF REQUESTED By this Motion, the Debtor seeks an order: a. Authorizing, on an interim and permanent basis, the Debtor to: (i) obtain, pursuant to Sections 364(b), (c) and (e) of the Bankruptcy Code,7

postpetition financing in the form of a $6 million debtor in possession revolving credit facility pursuant to the terms of the DIP Loan Agreement, a copy of which is attached hereto as Exhibit B; (ii) grant to Prime Management, as security for repayment of all obligations

arising under the DIP Facility, (1) subject and subordinate to all existing valid and perfected security interests and liens, a continuing security interest in and liens upon all of the Debtors right, title and interest in and to all of all of its assets of any

7

Unless otherwise noted, all references to Section refer to a section of the Bankruptcy Code. All references to Rule refer to the Federal Rules of Bankruptcy Procedure. All references to LBR refer to the local rules of this Court.

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nature, whether now owned or hereafter acquired, and (2) superpriority administrative expense claim status pursuant to sections 364(b), 503(b) and 507 as more fully described below and in the Interim Order; Approving the terms and conditions of the DIP Loan Agreement and the documents to be executed in connection therewith, and authorizing the Debtor to execute and deliver, from time to time, all such documents, instruments and agreements and perform such other acts as may be required, necessary or desirable in connection with the DIP Loan Agreement; Authorizing, pursuant to the Interim Order, the Debtor to borrow funds under the DIP Facility on an interim basis through and including the date of a final hearing regarding the Motion (the Final Hearing); Authorizing the Debtor, after entry of a Final Order, to borrow funds under the DIP Facility on a permanent basis including to fund the Debtors working capital needs and for other purposes as provided in the DIP Facility; Modifying the automatic stay under section 362 to the extent necessary to permit the DIP Lender to implement the terms and other provisions of the DIP Loan Agreement and the Financing Order; Scheduling and approving the form and manner of notice of the Final Hearing; Approving the Consulting Agreement; and Authorizing the Debtor to enter into the Consulting Agreement and to take all reasonable and necessary actions to implement said agreement. The Debtor submits that the requested relief is critical to its ability to preserve its estate for the benefit of its creditors while it continues to attempt to complete the sale of its assets to Prime. If the Debtor can consummate its sale to Prime, Prime Management will waive the obligations under the DIP Facility and the Debtor will be able to pay secured creditors the full amount of their prepetition secured claims, fund its administrative expenses and make a substantial distribution to unsecured creditors, which the Debtor believes will be considerably more than any distribution that would result from any other outstanding offer. If it is impossible for the Debtor to close the sale to 9DOCS_LA:246156.5 90231-002

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Prime, the DIP Facility and the Consulting Agreement will enable the Debtor to operate until it can determine how to maximize the recovery of its creditors. If it is to maximize the recovery to creditors and ensure the safety of its patients, the Debtor must remain open. As set forth in the Matthews Declaration filed concurrently herewith, funds advanced under the DIP Facility will allow Debtor to remain open through consummation of the sale or confirmation of a reorganization plan, either of which the Debtor projects will be completed within 90 days. Absent the DIP Facility, Debtor could be forced to close, putting hundreds of employees out of work, putting patients at risk, and destroying the potential value to creditors from the proceeds of the sale as a going concern. The Debtor requires immediate access to working capital to fund and support ordinary business expenditures, including payroll and employee benefits, professional fees, utilities, and other overhead expenses. Absent immediate and uninterrupted access to adequate financing, Debtor will have insufficient liquidity to sustain any level of business activity. Debtor requires immediate funding specified in the DIP Facility to preserve and maximize the value of its assets. Further, the Debtor has been suffering the loss of key personnel and other staff members. The Consulting Agreement will ease the stress put on the Debtor caused by these losses. In addition, it is expected that Prime Management will help the Debtor stabilize and perhaps increase the Hospitals daily patient census and achieve meaningful cost savings based on Prime Managements experience and negotiating power. As more fully set forth below, the Debtor submits that the financing and consulting arrangements proposed herein are reasonable and necessary, serve the best interests of the Debtors creditors and estate, and should be approved in all respects. II. JURISDICTION The Court has jurisdiction over this Motion under 28 U.S.C. 1334. This is a core proceeding within the meaning of 28 U.S.C. 157(b)(2)(A) and (D). Venue of these proceedings is proper pursuant to 28 U.S.C. 1408 and 1409.

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The Bankruptcy Case Background On September 13, 2010, (the Petition Date), the Debtor filed a voluntary petition for relief

under chapter 11 of the Bankruptcy Code. The Debtor continues to operate its business and manage its affairs as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. An official committee of unsecured creditors was appointed on September 28, 2010. No trustee or examiner has been appointed in this chapter 11 case. B. General Description of the Debtor The Debtor, a California nonprofit public benefit corporation, was founded in 1967 and operates a non-profit community hospital in the California High Desert, a service area that includes the communities of Adelanto, Apple Valley, Hesperia and Victorville, serving a population of over 300,000 people. The High Desert communities served by the Debtor are culturally and ethnically diverse. They also are economically depressed, and suffer under unemployment rates that are higher than 20%. The Debtor, therefore, serves a high volume of medically underserved and indigent patients and has been designated as a Disproportionate Share Hospital. C. The Debtors Physical Plant The Hospital is located at 15248 Eleventh Street, Victorville, California 92392. The facility was designed and constructed as an acute care hospital, and over the years it has been renovated and expanded to accommodate the needs of its patients and the communities it serves. Originally the facility was operated as a 115 bed facility, but the capacity was reduced in the mid-2000s to approximately 106 beds, and subsequently further reduced to its current 101 bed capacity. The Debtor owns the main, two-story, hospital building and its adjacent modular office complex which houses its administrative offices. The Debtor also leases two other facilities: (a) the Womens Center and Outpatient Imaging facility, along with the Debtors human resources department, at 15203 Eleventh Street in Victorville, and (b) the Education Center, at 15366 Eleventh Street, Suite R, in Victorville.

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D.

The Debtors Staff at the Petition Date As of the Petition Date, the Hospital was staffed to operate approximately 65 beds on a

normal day, although it has access to visiting nurse registries, which allow it to quickly albeit expensively increase its staff to meet patient needs. As of the Petition Date, the Debtor employed approximately 572 people and approximately 257 doctors from the local community had privileges at the Hospital. E. The Hospitals Current Situation The Hospital is in serious financial and operational decline. First, the average daily patient census for the month continues to decline; on Friday, October 14, 2011, the month to date ADC was only 41.1 patients. Second, doctors conduct fewer and fewer procedures at the Hospital every day. Third, because of statutory nurse staffing ratios, the Debtor is compelled to hire visiting nurses from nurse registries at approximately twice the cost on an hourly basis as its regular staff nurses. For this, and other reasons, the burn rate of the hospital is increasing. The hospitals CFO estimates that to maintain sufficient cash to properly close the Hospital and transfer its patients, it will have to cease operations no later than November 23, 2011. Additionally, the Federal Government has revoked the Hospitals CLIA License necessary to operate the laboratory, and has granted an extension, allowing the Hospital to operate with its existing CLIA License only through October 31, 2011. Without a CLIA License, the Debtor will have to close the Hospital.8 That the sale has failed to close on several occasions and with different buyers since September, 2010 has caused the employees great concern and apprehension. Therefore, many have left and the Debtor cannot staff the hospital appropriately. Many registered nurses (RN) have left and this coming week the Hospital is short up to eight RNs per day depending on the census. The Debtor may be able to replace these missing RNs with visiting nurses from a nurse registry service, but at much higher costs. The Hospital has reduced from five operating rooms to three and has notified the California Department of Public Health of its voluntary reduction of beds by 38. If more8

If the DIP Facility and the Consulting Agreement are approved, Prime Management has offered to provide laboratory services to the Hospital, upon the Debtors request, if the Federal Government does not extend the CLIA certificate revocation date.

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nurses and other clinical staff depart, the Hospital will have to close more operating rooms and suspend more beds. Further, California has regulations regarding nursing ratios and the Hospital is struggling to stay compliant. The Hospital has had no success hiring RNs due to the uncertainty of its situation and most of the nurse registries will not provide the Hospital with nurses if someone else more reliable needs them. Several of the Hospitals managers are being provided by agencies, and nonclinical staff are leaving. The Hospitals CEO retired as of September 30, 2011, and the Hospital had to enter into a consulting agreement (subject to this Courts approval) with the former CEO so that she could continue to perform the duties of the CEO until other arrangements can be made. To summarize, the following are the main points in the acceleration of the cash burn rate: (1) The average daily census (ADC) is approaching the lowest levels in several years due to lack of physician support. This month the ADC will be 41 and the prior year to date average was 58. Additionally, the decrease in census has been from payors that reimburse at levels above the Hospitals cost and the Hospital is left with Medi-Cal, Medi-Cal managed care, Medicare managed care and self pay as major payors and all reimburse at less than cost. (2) Clinical staff voluntary terminations have increased due to uncertainty and capacity increases at St. Mary's Hospital and Kaiser Hospitals. This has given opportunities to RNs to increase their hourly pay by $5 to $12 per hour. The vacancies created by these terminations are being filled by registries. However, registries are having increased difficulty finding staff to meet the Debtors needs, which is due, at least in part, to the uncertainty of the Hospital and the stability of facilities such as St. Mary's and Kaiser. The result is a 20% reduction in full time RN staff in the last four weeks, and the cost to replace with registry RNs, when available, is $60 hour compared to $32 hour for full time employees. (3) Loss of staff has created potential staffing ratio issues which has necessitated the Chief Nursing Officer/Chief Operating Officer to reevaluate the level of services offered. To be compliant with required staffing ratios and to ensure good patient care, the Hospital will have to reduce beds and operating rooms, but once that has been done, the Hospital reduces its up-side potential for the ADC, which will dampen revenue potential.

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(4) The "ripple effect" of reducing beds and operating rooms will suggest staff reductions in the non-clinical areas of the Hospital as well. But some of these areas will be unable to reduce staff below fixed levels required to operate, and therefore, the positive economic effect of staff reductions will be less than one would expect and insufficient to make up for lost revenue. All of these factors have created an accelerated cash burn rate. This year the largest contributor to cash has been the Quality Assurance Funds (QAF) paid to the hospital. The slowness of the CMS approval for the current six-month plan and ADC below break-even requirements (breakeven ADC is 63) has showcased the extreme vulnerability of the facility to the poor patient mix. The Debtor does not expect any material payments of QAF or SB 90 payments until the end of this year or thereafter. The result is that the current cash burn rate of $1 million a month will increase to $1.2 million a month and absent QAF monies the cash will be depleted between the end of October, 2011 and the middle of November, 2011. F. The Debtors Board of Directors The Debtor is governed by a Board of Directors (the Board) that is comprised of six members who are leaders in the High Desert community: Kathy Davis, Chair (retired political consultant); Dennis G. Killion, Vice-Chair (educator);Thomas Brown (retired bank president); Michael Fermin (Deputy District Attorney); Tim Jasper (local business owner); and Herbert Williamson, III (Public Defender). G. The Debtors Secured Debt 1. The Desert Community Bank Obligations

In 2007 the Debtor desired to establish a revolving line of credit with Desert Community Bank, now a division of East West Bank (the Bank) in the maximum amount of $4.9 million (the Bank Loan), which line of credit was authorized pursuant to a Note dated August 27, 2007 and a Loan Agreement, also dated August 27, 2007, between the Debtor and the Bank. The Bank and the Debtor asked OSHPD to insure the Debtors obligations to the Bank, and on or about August 30, 2007, the Debtor entered into an Amendment to Regulatory Agreement with OSHPD and HFFA under which Debtor obtained permission to enter into the line of credit with the Bank to finance

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working capital and pay expenses related to the execution and issuance of the line of credit and related documents. On or about August 27, 2007, the Debtor executed for the benefit of OSHPD a Deed of Trust with Fixture Filing and Security Agreement (OSHPD Trust Deed) which was duly recorded on August 30, 2007. The OSHPD Trust Deed conveyed a security interest to secure both the HFFA Loan and the Bank Loan, in, among other things, all of Debtors land, improvements, fixtures, equipment, leases, rentals, accounts, accounts receivable, and inventory, and replaced the earlier Deed of Trust which related only to the HFFA Loan. After the Petition Date, OSHPD paid the Bank the amount owned and was subrogated to the Banks claim. The Debtor owes OSHPD approximately $4.26 million on account of this obligation. This obligation is paid at the rate of approximately $82,000 monthly from the Hospitals general account. 2. The PHM Obligations

On or about February 2, 2005, the Debtor entered into a Loan Agreement with Physicians Hospital Management, LLC (PHM) that provided for a loan of $6 million, some funds of which had been previously provided and previously evidenced by other notes. Interest accrues and was to be paid monthly and the principal is due to be paid in 2012 in a balloon payment. The Debtor has not made a payment on this obligation since prior to the Petition Date. The Loan Agreement is secured by a trust deed on Debtors real estate subordinate to the OSHPD Deed of Trust. 3. The Corwin Medical Group Obligations

On or about September 1, 2010, Debtor borrowed $700,000.00 from Corwin Medical Group, Inc., IPA in order to pay its September 3, 2010 payroll (the Corwin Loan). The promissory note evidencing the Corwin Loan provides that (a) the principal amount of the note will be due and payable on December 1, 2010, with interest at 5.00% annually; (b) that it is secured by the DSH adjustment receivable and by Medicare Settlement receivables; and (c) that the proceeds of either or both of these receivables shall be used to repay this note prior to satisfying other obligations of the Hospital.

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Doc 1836 Filed 10/17/11 Entered 10/17/11 18:15:25 Main Document Page 18 of 118 VVHA

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4.

VVHA, was the second post-petition lender to the Debtor, replacing Prime after VVHA submitted the winning bid to purchase the Debtors assets at the November 5, 2010 auction. Pursuant to the terms of the debtor in possession financing agreement with VVHA (the VVHA DIP Facility), the Debtor borrowed approximately $4.5 million, all of which was advanced to the Debtor from the good faith deposit VVHA had delivered to the Debtor pursuant to the sale agreement between the Debtor and VVHA. The advances under the VVHA DIP Facility are secured by liens on substantially all of the Debtors assets. The Debtor disputes that it owes VVHA any amount under the VVHA DIP Facility because it alleges that VVHA breached its sale agreement with the Debtor by refusing to close the sale and, thereby, caused the Debtor substantial damage (VVHA strongly disputes this asserting). Nonetheless, the Debtor is holding in an escrow account $4.5 million that is earmarked for payment to VVHA in the event that the dispute over the amount owed under the VVHA DIP Facility is resolved in VVHAs favor. This Motion does not in any way affects the rights and obligations of the Debtor or VVHA regarding the VVHA DIP Facility or the failed sale of the Debtors assets to VVHA and the proposed DIP Facility from Prime Management is to be secured by a lien junior in priority to that of VVHA. H. The Debtors Unsecured Debt On the Petition Date, the Debtor estimated that it had approximately $16.5 million in total unsecured debt, comprised of obligations to vendors of goods and services, employees, and a significant obligation to Medi-Cal, which is being paid off over 40 years pursuant to an agreement with Medi-Cal. As a result of paying various priority claims pursuant to orders of this Court, numerous claims objections and settlements the Debtor believes the current estimate of unsecured claims is $9,382,703.45, however, this estimate does not include any valid damage claims resulting from the eventual rejection of contracts and leases. I. Events Related to the Sale of the Hospital Prior to the Petition Date, the Debtors Board, Chief Executive Officer, and Chief Financial Officer concluded that the Debtor could not survive at its then current cash flow levels and would have to close absent drastic measures. In order to avoid closure, the Debtor negotiated the Asset Sale 16DOCS_LA:246156.5 90231-002

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Agreement with Prime which was presented as part of the initial bankruptcy filings. Shortly after the Petition Date, the Court approved sale procedures and an auction took place on November 5, 2010 at which VVHA was the prevailing bidder. Shortly after the auction, the Court approved the sale of substantially all of the Debtors assets to VVHA. The Debtor and VVHA worked to obtain the AGs approval of the sale on original terms approved by this Court, however, the eventual approval of the sale by the AG was conditional. Despite various concessions made by the Debtor in an attempt to satisfy the AGs conditions and the approval of such concessions by the Attorney General, VVHA declined to close the sale. Because Primes bid at the auction had been approved by the Court as the back-up bid, the Debtor immediately started to negotiate with Prime regarding a sale of the Debtors assets on the terms of the back-up bid. Although Prime was no longer bound by its back-up bid, it agreed to proceed on those terms with a few minor changes. On or about July 5, 2011, the Debtor moved for the approval of this Court to sell the Hospital to Prime. This Court granted the Debtors motion and on July 29, 2011, the Court entered an order approving the sale [Docket No. 1612]. Once again, the Debtor and the purchaser of its assets, this time Prime, worked to obtain the consent of the AG to the sale to Prime. On September 20, 2011, three days after the statutory deadline, the AGs office delivered its letter denying its consent to the sale of the Hospital to Prime (the AG Denial Letter). The AG Denial Letter merely stated that the proposed sale was not in the public interest but did not set forth findings for its ultimate decision. On September 23, 2011, the Debtor filed its Emergency Motion of Debtor for a Writ of Mandamus to Compel Attorney General to Vacate Her Determination Denying Sale of Assets to PHSF Victor Valley, LLC or, Alternatively, to State Her Findings and the Evidence Supporting Them Regarding Her Denial of Consent to the Sale and for Order Authorizing Debtor to Consummate Sale of Assets (the Writ Motion) (Docket No. 1770). On October 7, 2011, the Court entered an order pursuant to 28 U.S.C. 1334(c)(1) abstaining from hearing the Writ Motion. Based upon further negotiations and discussions between the Debtor and Prime, the Debtor and Prime determined that they will continue their efforts to obtain the AGs consent to the sale of the Hospital to Prime. However, in order keep the Hospital operating during the time it will take to 17DOCS_LA:246156.5 90231-002

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attempt to obtain such approval and to preserve the value of the Debtors assets for its creditors, the Debtor needs financial and management assistance. As a result, the Debtor and Prime Management negotiated the terms to the DIP Facility and the Consulting Agreement that are the subject of this Motion. IV. PROPOSED DEBTOR IN POSSESSION FINANCING A. The Critical Need for Postpetition Financing The Debtor needs immediate postpetition financing under the DIP Facility to continue to pay its postpetition operations and to preserve the value of its assets for its creditors. The DIP Facility will preserve Debtors going concern value, and will enable the Hospital to remain open long enough to either complete the sale of its assets as a going concern, thereby maximizing the returns to all creditors and stakeholders, or propose a alternate chapter 11 plan. The Debtors operations are dependent upon uninterrupted access to necessary working capital. In light of the Debtors cash situation, immediate access to the DIP Facility will prevent irreparable harm to Debtors estate and allow it to remain operating while it attempts to consummate the sale of its assets for the benefit of the community, employees and creditors. The DIP Facility also is necessary to provide assurance to employees, utilities and other parties that they will be paid on a timely basis for post-petition services. Without the DIP Facility, Debtors day-to-day operations would soon come to a halt, a result that would be devastating as the Debtor attempts to maximize the value of its assets. B. Overview of the DIP Facility The principal terms of the DIP Facility are as follows: 9DIP Facility: A revolving credit facility in an aggregate amount of up to $6,000,000.00 secured by liens on all the assets of the Debtor and granted a superpriority claim status. Prime Healthcare Management, Inc.

DIP Lender:

This section contains a summary of the principal provisions of the DIP Facility; the Court and other parties in interest, however, are respectfully referred to the Interim Order and the DIP Loan Agreement, attached hereto as Exhibits A and B, respectively, for a more extensive recitation of the terms and conditions of the DIP Facility.

9

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Purpose:

Interest: Events of Default Liens/Superpriority Administrative Claim

The DIP Facility will be used to pay the Debtors operating losses through consummation of the sale of Debtors asset or until the Debtor confirms a plan of reorganization or liquidation. Operating losses is the difference between actual cash collected by Borrower during the Advance Period and Borrowers cash operating expenses attributable to the Advance Period. Operating expenses include, but are not limited to, wages, employee benefits, professional fees, utilities, supplies and other general and administrative expenses. No interest will be charged. The Events of Default are rather lengthy and can be found in Article VIII of the DIP Loan Agreement. Subject and subordinate to all existing, valid and perfected security interests and liens, a continuing security interest in and lien upon all of the Debtors right, title and interest in and to all of its assets of any nature whether now owned or hereafter acquired. Amounts owed under the DIP Facility shall be an allowed superpriority administrative expense claim with priority (except as otherwise provided in the Interim Order) in Debtors case under sections 364(b), 503(b), and 507(b) and otherwise over all administrative expense claims and unsecured claims against Debtor and its estate, now existing or hereafter arising, of any kind or nature whatsoever including, without limitation, except as otherwise provided in the Interim Order, administrative expenses of the kinds specified in, arising, or ordered pursuant to sections 105, 326, 328, 330, 331, 503(a), 503(b), 506(c) (subject to entry of the Final Order), 507(a), 507(b), 546(c), 546(d), 726(b), 1113, and 1114, whether or not such expenses or claims may become secured by a judgment lien or other nonconsensual lien, levy or attachment. Subject to the provisions of Section 2.6 and Section 2.9 of the DIP Loan Agreement, all Advances and all other outstanding Obligations under the DIP Facility shall be immediately due and payable in full in cash, if not earlier in accordance with the terms of DIP Loan Agreement, the Interim Order and the Final Order, without further application to or order of the Bankruptcy Court, on the earlier of (i) acceleration of maturity of the Obligations upon the occurrence of an Event of Default; (ii) twenty (20) days after the Bankruptcy Court enters an order (a) confirming a chapter 11 plan for the Borrower that does not provide for the payment of the Obligations in full no later than 30 days from entry of the confirmation order ; or (b) granting a motion to sell substantially all of Borrower's assets pursuant to a transaction that does not provide for the Obligations to be paid in full at closing of the sale transaction; (iii) upon termination of the Consulting Agreement; (iv) if an order is entered confirming a chapter 11 plan that is not based upon a sale of the Debtors assets to Prime and that Prime Management consents to in writing, then the date which is seven years from entry of such confirmation order; or (v) March 1, 2012 (the date upon which the first of the foregoing occurs is referred to herein as the Maturity Date)

Term:

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Payment in the Event That a Plan Is Confirmed That Does Not Provide for the Sale of the Hospital but that is approve by Prime and Prime Management

Forgiveness in Event of Sale of Hospital to Prime

Other provisions of the DIP Loan Agreement Disclosed Pursuant to Bankruptcy Rule 4001(c):

If an order is entered confirming a chapter 11 plan which does not contemplate a sale of substantially all of the Debtors assets and that Prime Management consents to in writing, then the Debtor shall repay the outstanding Obligations in quarterly payments based on a ten (10) year amortization schedule, with payments to commence on the first business day following the first quarter in which Debotr has experienced Positive Cash Flow. Nothing in this section shall modify the Maturity Date. Notwithstanding anything in this Section to the contrary, repayment of the Obligations shall not commence until such time as general unsecured creditors of the Debtor holding allowed claims receive collectively $2 million. In the event that the Debtor sells substantially all of its assets to Prime Healthcare Services Foundation, Inc., or PHSF Victor Valley, LLC, or any Affiliate of either one, pursuant to a sale transaction approved of in writing by Lender and by Prime Healthcare Services Foundation, Inc., Lender shall release the Debtor of its duty to pay the remaining balance of the Obligations to Prime Management under this Agreement as of the date of closing of the sale transaction. Unless otherwise agreed to in writing by Lender, all other rights of Lender under the DIP Facilily and the Financing Orders shall survive the closing of the sale transaction. In the event of such acquisition by a party other than Prime Management or an affiliate or an affiliate, successor or assignee of Prime Management, the Obligations hereunder are required to be paid in full at the time of and as part of such acquisition. Sections 2.10(b) and 7.1 contain certain limits on the Debtors ability to obtain financing pursuant to section 364 of the Bankruptcy Code. Section 2.1(b) contains a waiver of nonbankruptcy law regarding the perfection of liens and security interests. Section 12.4 contains indemnity provisions.

C.

Current Alternative to the DIP Financing As part of its revised offer to purchase the Hospital for $30 million, VVHA, has agreed to

fund the Debtors operating losses until AG approval of the sale (if such approval is forthcoming) to VVHA is obtained and the sale closes. Although the Debtor will not be required to repay to VVHA the funds advanced for the operating losses, VVHA has reduced its purchase offer of $35 million10 to reflect these advances. The Debtor, in its reasonable business judgment and based upon all of the facts and circumstances of this Case, has determined that the offer from VVHA for the funding of the Debtors operating losses, although appealing on its face, is not as beneficial to the Debtor as the offer of the DIP Facility from Prime Management. First, based upon a $30 million sale price, and

10

VVHA has stated publically and to the AG on various occasions that it would pay $35 million for the Hospital.

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assuming that the AG (if she approved the new sale to VVHA) would still require $6 million in funds to be escrowed as she did in her previous approval of VVHA as the purchaser of the Hospital, the Debtor would be left with insufficient funds to pay even the administrative expenses of the Case, and unsecured creditors, who would not be assured of receiving any distribution due to the terms of the escrows accounts holding the $6 million, would have to wait for that ethereal distribution for as much as 5 years. Second, there is no assurance that the AG will approve the new sale terms offered by VVHA. Finally, a sale to VVHA would entail a release by the Debtor of any claims against VVHA resulting from its declining to close a sale at $37 million that was approved by the AG and which the Debtor was ready, willing and able to close. D. The DIP Facility Is the Best Alternative for the Debtor The Debtor is well aware of the risks involved regarding being able to close a sale of the Hospital to Prime and the resulting additional postpetition debt that will be due to Prime Management if the sale to Prime does not close. However, based upon a reasoned consideration of all of the facts and risks involved with both transactions, the Debtor determined that the best opportunity to maximize the value of the estate for its creditors was to seek approval of the DIP Facility and the Consulting Agreement. The Debtor submits that the DIP Facility, under which (i) only a subordinate lien in the Debtors assets and a superpriority administrative expense claim is granted to the Prime Management, (ii) the DIP Financing being interest free, (iii) the principal balance is forgiven if the Debtors assets are eventually sold to Prime, (iv) the potential sale of the assets to Prime for an amount that would result in the full satisfaction of the Debtors secured debt and administrative claims and a substantial distribution to unsecured creditors, which would not be possible absent approval of the DIP Facility and the Consulting Agreement, and (v) if a plan that does not provide for the sale of the Hospital is confirmed with the consent of Prime and Prime Management, repayment is subordinated to payments to creditors holding allowed unsecured claims until they have received $2 million, is on favorable and advantageous terms to the Debtor and its estate. Based on its previous attempts to obtain financing, the Debtor asserts that is cannot obtain unsecured financing. The Debtor, in the exercise of its considered business judgment and in consultation with 21DOCS_LA:246156.5 90231-002

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its professional advisors, has determined that the DIP Facility provides the most favorable financing alternative available under the circumstances. The DIP Facility pursuant to the DIP Loan Agreement is reasonable and fair under the circumstances and, therefore, the financing provided under the DIP Facility serves the best interests of the Debtor, its creditors and its estate. V. PROPOSED CONSULTING SERVICES AGREEMENT The principal terms of the Consulting Agreement are as follows:11 Consultant shall be an independent contractor. Consultant is being engaged to perform the following tasks: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) Contract development and maintenance; Materials and supplies cost sourcing and management; Accreditation; Risk management credentialing; Physician relations; Oversight of day-to-day management; Cash and revenue cycle management; Continuing education for staff; Utilization review; Vendor contracting; Regulatory compliance and auditing; and Preparation of financial statements.

The following actions shall require the prior written authorization of the Board prior to being undertaken by Prime Management: (1) The sale of assets of VVCH not in the ordinary course of business; (2) A material change of the business of VVCH, or in the scope of services offered at the Hospital, including the material modification of any material license, permit or contract of VVCH (expressly including the Consulting Agreement); (3) Engaging in any transaction that could result in the termination or reorganization of VVCH or the partial or total dissolution of VVCH; (4) The purchase of assets for VVCH; (5) The incurrence of debt or leases by the Hospital; (6) Any real property lease or modification of such a lease for the Hospital; and (7) The implementation of any policy or the taking of any action that could involve the violation of federal or state fraud or abuse laws, or similar laws, rules or regulations.

This section contains a summary of the principal provisions of the Consulting Agreement. Please refer to the Consulting Agreement attached hereto as Exhibit C for the complete terms of the Consulting Agreement.

11

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VVCH and its Board shall at all times retain control and governance over the assets and operation of the Hospital, subject to the rights and obligations of Consultant under the Consulting Agreement. By entering into the Consulting Agreement, VVCH does not delegate to Consultant any of the powers, duties and responsibilities required to be retained by VVCH under law (including all certificates and licenses issued under authority of law for operation of the Hospital by VVCH). VVCH may, according to the terms of the Consulting Agreement, direct Consultant to implement existing policies and may adopt policy recommendations or proposals made by Prime Management.

All medical and professional matters shall be the responsibility of the Debtor and its Board. The Debtor shall have authority and responsibility to oversee the provision of services for the Hospital and to conduct, supervise and direct the day-to-day operations of the Hospital.

As compensation for the management services to be rendered under the Consulting Agreement, the Debtor will pay Prime Management a monthly management fee of $10,000.

VVCH also shall pay (in addition to the Management Fee as described above) all of Prime Managements reasonable out-of-pocket costs and expenses directly and necessarily related to the performance of services Prime Management pursuant to the Consulting Agreement, any third party vendors or contractors paid for directly by Prime Management for the benefit of the Hospital, any supplies, utilities, insurance or other costs incurred by Prime Management for the benefit of the Hospital, and all transportation and related travel costs and expenses incurred by Prime Management in the course and scope of its performance of services rendered by Prime Management pursuant to the Consulting Agreement. Any such out-of-pockets costs and expenses or additional fees and expenses paid for or incurred by Prime Management shall not exceed $25,000 in any calendar month without the prior, written authorization of the Board Representative or the Board.

The term of the Consulting Agreement shall commence upon the date it is approved by the Court, and terminate on September 30, 2013, except that either party may terminate the Consulting Agreement for cause upon deliver of a written notice.

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Either party may terminate the Consulting Agreement without cause on one hundred and eighty (180) days notice or thirty (30) days after the occurrence of any of the following events: the dismissal of or conversion to a case under chapter 7 of the Case pursuant to 11 U.S.C. section 1112; the appointment of a chapter 11 trustee pursuant to 11 U.S.C. section 1104; the confirmation of a plan of reorganization for VVCH in the Bankruptcy Court that does not include a provision for continuation of the Consulting Agreement; or the sale by the Debtor of substantially all of its assets to another person or entity pursuant to an order of the Bankruptcy Court. Notwithstanding any other provision of the Consulting Agreement, it shall terminate immediately if separate debtor in possession financing for VVCH by Prime Management is not approved by the Court by a final order.

To the extent not covered by insurance, VVCH shall defend, indemnify and hold harmless Prime Management and Prime Managements officers, agents, and employees from and against liability for any and all costs (including court costs), expenses, fees (including reasonable attorneys fees) and payments by, and losses and damages that arise out of, or are in any way connected with, the grossly negligent or intentional acts or omissions of VVCH, its directors, employees, members, officers, agents or subcontractors (excepting Prime Management), or any member of the medical staff at the Hospital, unless such act or omission is caused by the negligence or willful misconduct of Prime Management or one of its consultants, members, officers, employees, subcontractors or agents.

To the extent not covered by insurance, Prime Management shall defend, indemnify and hold harmless VVCH, its directors, officers, consultants, members, officers, agents, and employees from and against liability for any and all costs (including court costs), expenses, fees (including reasonable attorneys fees) and payments by, and losses and damages that arise out of, or are in any way connected with, the grossly negligent or intentional acts or omissions of Prime Management or its officers, agents, employees or subcontractors in the performance of Prime Managements duties under the Consulting Agreement unless such act or omission is caused by the negligence or willful misconduct of VVCH or its directors, officers, consultants, members, officers, agents, or employees.

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BASIS FOR APPROVAL OF THE DIP FACILITY AND THE GRANTING OF SUPERPRIORITY ADMINISTRATIVE CLAIMS IN CONNECTION THEREWITH Section 364(c) of the Bankruptcy Code Is Satisfied Section 364 authorizes the Court to allow Debtor to obtain postpetition financing from the Prime Management as proposed herein. Section 364(c) that provides [i]f the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as an administrative expenses, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt-(1) with priority over any and all administrative expenses of the kind specified in section 503(b) and 507(b) of this title; (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien. Section 364(c) of the Bankruptcy Code is satisfied because Debtor cannot obtain unsecured credit sufficient to sustain its day-to-day business operations or to maintain the going concern value of its assets. It could not do so at the start of the Case when the Hospital was generating more revenue and its assets were less encumbered and it cannot do so now. Further, no priming lien is granted. As security for all borrowings under the DIP Facility, Debtor proposes to grant the DIP Lender a subordinate lien in the Debtors assets and a superpriority administrative expense claim. B. The Debtor Has Exercised Its Reasonable Business Judgment Further, the Debtor negotiated the DIP Loan Agreement at arms length and in good faith. In the exercise of its business judgment and in consultation with its professional advisors, it has determined, based upon all of the facts and circumstances of this Case (of which this Court is well aware) and the potential sale to Prime with the resultant benefit to the Debtors creditors, that the DIP Facility provides the most favorable financing alternative available. In fact, approval of the DIP Facility and the related Consulting Agreement is the only available method of the Debtor having any chance to sell its assets for a sufficient amount to pay administrative and secured creditors in full and to make a substantial distribution to its unsecured creditors. Courts grant a debtor considerable deference in acting in accordance with its business judgment. See, e.g., Bray v. Shenandoah Fed. Sav. & Loan Assn (In re Snowshoe Co.), 789 F.2d 1085, 1088 (4th Cir. 1986); In re Ames Dept 25DOCS_LA:246156.5 90231-002

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Stores, Inc., 115 B.R. 34, 40 (Bankr. S.D.N.Y. 1990) (cases consistently reflect that the courts discretion under section 364 is to be utilized on grounds that permit reasonable business judgment to be exercised so long as the financing agreement does not contain terms that leverage the bankruptcy process and powers or its purpose is not so much to benefit the estate as it is to benefit parties in interest). The provisions described in Bankruptcy Rule 4001(c)(1)(B)(i)-(xi) are set forth at the following sections of the DIP Loan Agreement and/or Interim Order, as applicable: a. Grant of priority or a lien on property of the estate: DIP Loan Agreement 2.10; Interim Order H and 8. b. Adequate protection for a claim that arose before the commencement of the Case: Not applicable. c. Determination of the validity, enforceability, priority, or amount of a claim that arose before the commencement of the case, or of any lien securing the claim: Not applicable. d. e. Waiver or modification of the automatic stay: Interim Order 14. Waiver or modification of debtors authority to file a plan, request use of cash collateral or request authority to obtain credit under section 364 of the Bankruptcy Code: DIP Loan Agreement 2.10(b) and 7.1 (modification of the right to obtain credit under section 36). f. The establishment of deadlines to file a plan, get a disclosure statement approved, have a confirmation hearing or get an order entered confirming a plan: Not applicable. g. Waiver or modification of the applicability of nonbankruptcy law related to the perfection of a lien on property of the estate, or on the foreclosure or other enforcement of the lien: DIP Loan Agreement 2.1(b) (waiver of nonbankruptcy law regarding the perfection of liens and security interests). h. Release, waiver or limitation on any claim or other cause of action belonging to the estate: Not applicable. 26DOCS_LA:246156.5 90231-002

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Doc 1836 Filed 10/17/11 Entered 10/17/11 18:15:25 Main Document Page 29 of 118 The indemnification of an entity: DIP Loan Agreement 12.4.

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Release, waiver, or limitation on rights under section 506(c): Not applicable. Lien granted on claims arising under Chapter 5: Not applicable.

Provisions that Potentially Implicate Local Bankruptcy Rule 4001-2 LBR 4001-2(b) requires that certain provisions contained in the DIP Loan Agreement be

identified in this Motion, including provision granting cross-collateralization, binding parties to the validity and amount of a prepetition lien or debt or waiver of claims against the lender, waiving or limiting the estates rights under section 506(c), granting liens on avoidance actions, deeming prepetition secured debt to be postpetition secured debt or paying prepetition loans with postpetition advances, providing disparate treatment for the professionals, proving for a priming lien. The only one of the listed provisions that is contained in the DIP Loan Agreement is a provision granting a lien on the proceeds of avoidance actions, as discussed above. Thus, for all of the reasons set forth above, the Debtor submits that the circumstances of this case require the Debtor to obtain financing pursuant to Sections 364(b). The Debtor further submits that the terms of the DIP Facility and the Interim Order are fair, reasonable and necessary under the circumstances, and should be approved in their entirety. VII. REQUEST FOR IMMEDIATE INTERIM APPROVAL OF RELIEF REQUESTED HEREIN Pursuant to Rule 4001(c)(2), a minimum of fourteen (14) days notice is required before a final hearing on this Motion may commence. Upon request, however, the Court may conduct a preliminary expedited hearing on the Motion to the extent necessary to avoid immediate and irreparable harm to the estate pending a final hearing. Fed. R. Bankr. P. 4001(c)(2). In accordance with Rule 4001(c), the Debtor respectfully requests that the Court conduct an emergency preliminary hearing on the Motion and authorize the Debtor to borrow under the DIP Facility on an interim basis by entry of the Interim Order, pending entry of a Final Order. Debtor submits that such relief is vital in order to maintain and finance its ongoing operations, preserve the going concern value of Debtors assets pending the conclusion of the

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proposed sale process, and, therefore, to prevent immediate and irreparable harm to the Debtors estate. Debtor further requests that the Court schedule a hearing to consider entry of a Final Order. As discussed above, it is essential to the continued operation of its business that the Debtor be authorized to obtain emergency financing under the DIP Facility on an interim basis pending the Final Hearing. Funds are urgently needed to meet Debtors immediate and considerable working capital and other liquidity needs, and to attempt to consummate the proposed sale. In the absence of emergency access to interim financing, Debtors sale efforts would be immediately and irreparably jeopardized, resulting in significant harm to the Debtors estate and creditors. Furthermore, to successfully implement the foregoing, the Debtor requests a waiver of the ten day stay under Bankruptcy Rule 6004(h). VIII. NOTICE WITH RESPECT TO EMERGENCY INTERIM FINANCING REQUEST AND FINAL HEARING Debtor has or will give notice of this Motion and the interim relief sought herein, by hand delivery, email, fax or overnight delivery to (a) the Office of the United States Trustee; (b) all Secured Creditors or their respective counsel; (c) Prime; (d) counsel to the Creditors Committee; (e) the AG and her counsel; and (f) all persons requesting notice under Rule 2002 (collectively, the Initial Notice Parties). In light of the nature of the relief requested, the Debtor submits that no other or further notice need be provided. The Debtor further requests that the Court schedule the Final Hearing and authorize it to mail copies of the signed Interim Order, which fixes the time, date and manner for the filing of objections, to the Initial Notice Parties and (i) any party that has filed prior to such date a request for notices with this Court; (ii) the Securities and Exchange Commission, and (iv) the Internal Revenue Service.

IX. THE DEBTORS ENTRY INTO THE CONSULTING AGREEMENT HAS A SOUND BUSINESS PURPOSE AS REQUIRED BY SECTION 363 OF THE BANKRUPTCY CODE Pursuant to section 363(b)(1) of the Bankruptcy Code, the Debtor, after notice and a hearing, 28DOCS_LA:246156.5 90231-002

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may use, sell, or lease property, other than in the ordinary course of business. A debtor must demonstrate a sound business justification for the use of assets outside the ordinary course of business. However, the debtors application of its sound business judgment in this context is subject to great judicial deference. In re WPRV-TV, Inc., 143 B.R. 315 (D.P.R. 1991), affd in relevant part, 983 F.2d 336 (1st Cir. 1993); In re Moore, 110 B.R. 924 (Bankr. C.D. Cal. 1990); In re Canyon Partnership, 55 B.R. 520 (Bankr. S.D. Cal. 1985). A sound business justification exists for entering into the Consulting Services Agreement with Prime. Primes knowledge of the Debtor, the community served by the Debtor, and of hospital operations in the State of California are valuable to the successful operations and management of the Debtor at this critical juncture of the Case, when the Debtors daily patient census is declining, it is losing its key personnel and is faced with serious financial challenges. The Debtor anticipates that Prime Management will help it stabilize and perhaps increase its daily patient census and achieve meaningful cost savings based on its experience and negotiating power. The Consulting Agreement specifically lists the tasks that Prime Management is to perform regarding the day-to-day operations of the Hospital and requires approval of the Debtors Board for any Major Decisions (as defined in the Consulting Agreement). The Board, therefore, will remain actively involved in the management of the Debtor. Further, the management fee of $10,000 per month is well below market for managers performing the same tasks. As this Court may recall, when this Case was filed, the Debtor was party to a management agreement with Physicians Hospital Management, LLC, which it immediately rejected. The fee under that agreement was approximately $30,000 per month. The terms of the Consulting Services Agreement are reasonable and are not duplicative of other services being provided by the Debtor. Thus, the Debtor respectfully submits that its entry into the Consulting Services Agreement should be approved. X. CONCLUSION WHEREFORE, Debtor respectfully requests that the Court (i) enter the Interim Order authorizing, inter alia, the Debtor to obtain financing pursuant to the DIP Facility on an emergency 29DOCS_LA:246156.5 90231-002

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interim basis through the conclusion of the Final Hearing on the terms set forth herein and in the DIP Loan Agreement, (ii) set the date for a final hearing on the relief sought herein; (iii) enter a Final Order authorizing the Debtor to obtain financing under the DIP Facility on a permanent basis on the terms set forth herein and in the DIP Loan Agreement, (iv) grant all related relief requested in this Motion, (v) approve the Consulting Services Agreement, and (vi) grant the Debtor such other or further relief as may be just and proper. PACHULSKI STANG ZIEHL & JONES LLP By /s/ Samuel R. Maizel Samuel R. Maizel (CA Bar No. 189301) Attorneys for Victor Valley Community Hospital, Debtor and Debtor in Possession

Dated:

17 October __, 2011

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EXHIBIT A

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1 Samuel R. Maizel (CA Bar No. 189301) Mary D. Lane (CA Bar No. 71592) 2 Scotta E. McFarland (CA Bar No. 165391) PACHULSKI STANG ZIEHL & JONES LLP 3 10100 Santa Monica Blvd., 11th Floor Los Angeles, California 90067-4100 4 Telephone: 310/277-6910 5 Facsimile: 310/201-0760 E-mail: [email protected] [email protected], 6 [email protected] 7 Attorneys for Debtor and Debtor in Possession 8 Victor Valley Community Hospital 9 10 11 12 13 In re 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Hearing: Date: October 20, 2011 Time: 10:00 a.m. Final Hearing: Date: Time: Place: Courtroom 303 U.S. Bankruptcy Court 3420 Twelfth Street Riverside, CA 92501-3819 Judge: Honorable Catherine E. Bauer VICTOR VALLEY COMMUNITY Chapter 11 HOSPITAL, a California nonprofit public benefit corporation., INTERIM ORDER GRANTING DEBTORS EMERGENCY MOTION FOR ORDERS (A) Debtor. AUTHORIZING DEBTOR TO OBTAIN POSTPETITION FINANCING AND GRANTING LIENS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS PURSUANT TO 11 U.S.C. 364; (B) SCHEDULING A FINAL HEARING AND ESTABLISHING RELATED NOTICE REQUIREMENTS; AND (C) APPROVING CONSULTING SERVICES AGREEMENT Case No. 6:10-39537 CB UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION

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This matter came before the Court on the Emergency Motion of Debtor for Order (a)

5 Authorizing Debtor to Obtain Postpetition Financing and Granting Liens and Superpriority 6 Administrative Expense Status Pursuant to 11 U.S.C. 364; (b) Scheduling a Final Hearing and 7 Establishing Related Notice Requirements; and (c) Authorizing Debtor to Enter Into Consulting 8 Services Agreement (the "Motion")1 [Docket No. ___] filed by debtor and debtor in possession, 9 Victor Valley Community Hospital (the "Debtor"). Appearances are as reflected on the Courts 10 record. 11 Having reviewed the Motion, the concurrently filed Declaration of Edward T. Matthews

12 Filed In Support Of Emergency Motions [Docket No. __], all matters brought to the Court's 13 attention at the above referenced hearing (the Interim Hearing), after hearing arguments of 14 counsel for and against the Motion, the Court makes the following findings of fact and 15 conclusions of law: 16 17 THE COURT HEREBY FINDS AND DETERMINES AS FOLLOWS: A. The Court has jurisdiction over the Case, the parties and the Debtor's property

18 pursuant to 28 U.S.C. 157(b) and 1334. This is a core proceeding pursuant to 28 U.S.C. 19 157(b)(2). Venue for the Case and the Motion is proper under 28 U.S.C. 1408 and 1409. 20 B. An ongoing need exists for the Debtor to obtain financing of the type sought in

21 the Motion, to continue the operation of its business as debtor in possession under chapter 11 of 22 the Bankruptcy Code, to minimize the disruption of its operations as a "going concern," and to 23 reassure its vendors, patients, employees and other constituents, including physicians, of the 24 Debtor's continued viability. 25 C. Debtor has been unable to obtain financing in the form of unsecured credit

26 allowable under section 503(b)(1) of the Bankruptcy Code as an administrative expense, or 27 solely in exchange for the grant of a administrative expense priority pursuant to section 364(c)(1) 281

All capitalized terms not otherwise defined herein shall have the meaning given to them in the Motion.

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1 of the Bankruptcy Code. Considering all of the circumstances of this Case and the history of the 2 Debtors attempts to sell its assets, the financing offered by Prime Healthcare Management, Inc. 3 (DIP Lender) is on the best terms available to the Debtor at this time. 4 D. The Debtor has requested that DIP Lender make available to the Debtor a

5 revolving credit facility (the DIP Facility) in a maximum principal amount at any time 6 outstanding of up to Six Million Dollars ($6,000,000), the proceeds of which shall be used by the 7 Debtor only to the extent that the Debtors receipts are insufficient to pay operating expenses of 8 the Debtor and only to the extent permitted under that certain Post-Petition Revolving Credit and 9 Security Agreement, a copy of which is attached to this Order. That agreement, together with all 10 schedules, exhibits and annexes thereto, and as at any time amended or restated, is referred to 11 herein as the "DIP Loan Agreement." 12 E. A condition to the willingness of DIP Lender to establish the DIP Facility, Debtor

13 shall provide DIP Lender with: 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (i) A security interest in and lien upon, and pledge to DIP Lender of,

all of Debtors right, title and interest in and to all of its real and personal property assets, whether now owned or hereafter acquired, including, without limitation, all of the Debtors interest in any real property or leases of real property, tangible personal property, all present and future Goods, Inventory, Equipment (including items of Equipment which are or become Fixtures), Computer Hardware and Software, now owned or hereafter acquired; all of the Debtors intangible personal property, including, without limitation all present and future Accounts, securities, contract rights, Permits, General Intangibles, Intellectual Property, Chattel Paper, Documents, Instruments, Deposit Accounts, Investment Property, Letter-of-Credit Rights and Supporting Obligations, rights to the payment of money or other forms of consideration of any kind, tax refunds and insurance proceeds (including, without limitation, the proceeds of any life insurance policy), now owned or hereafter acquired, all rights and interests in Distressed Hospital Funds, all rights and interests in Quality Assurance Fee funds; any and all

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Vvch Emerg Motion

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captioned debtor

c authorizing debtor

consulting agreement

interim order

dip facility

final order

bankruptcy court approval

bankruptcy rules