Pacifica Hospital of the Valley - Chapter 11 Case Summary

Business Description

Headquartered in Sun Valley, California, Pacifica of the Valley Corporation, doing business as Pacifica Hospital of the Valley (the "Debtor"), is an integrated healthcare system that has delivered more than $3.3 billion in healthcare to its patients over the past 30 years.

The Debtor offers complete service lines spanning 24/7 Emergency Care, Acute Care, an Intensive Care Unit ("ICU"), Behavioral Health (locked), a Distinct Part Subacute Skilled Nursing Facility ("SNF"), Outpatient Surgery and Rehabilitation, and In/Outpatient Ancillary Services.

At the core of the system is the Hospital, a 231-bed safety-net acute care hospital located at 9449 San Fernando Road in Sun Valley, California, serving a catchment area of 13 zip codes.

• The Hospital provides a full range of inpatient and outpatient services, including 24-hour emergency care, elective surgery, and imaging.
• It treats more than 50,000 emergency patients each year, including some of the most seriously ill and injured individuals in Los Angeles.

The Debtor operates as a vital safety-net hospital, caring for vulnerable, uninsured, and low-income populations regardless of their ability to pay. Approximately 84% of its patients live at or below the poverty line, resulting in heavy reliance on Medi-Cal, California's Medicaid program.

• Medi-Cal accounts for approximately 85% of the Debtor's total revenue and patient volume, with roughly half of inpatient revenue coming directly from Medi-Cal and another substantial portion arriving through Medi-Cal Managed Care.
• The Hospital frequently ranks among the top hospitals nationwide for its share of Medi-Cal patients, which currently stands at 81%.

As of July 2026, the Debtor employed approximately 697 employees.

Pacifica of the Valley Corporation is incorporated in the State of Delaware and is licensed by the State of California to operate the Hospital.

---

Operations Overview

Beyond its flagship acute care hospital, the Debtor operates a range of specialized facilities and programs that together form a broad continuum of clinical and rehabilitative care.

Facilities and Programs

• Subacute SNF Unit: A 98-bed, separately licensed subacute Skilled Nursing Unit that draws referrals from more than 400 miles away, including rural areas. The unit currently averages 60 patients, all of whom require a specialized level of care, including tracheostomy and ventilator support.
• Behavioral Health Urgent Care Clinic: Located at 14228 Saranac Lane, Sylmar, California, the clinic treats individuals experiencing a mental health crisis that can be stabilized in under 24 hours and those who do not meet the medical necessity threshold for inpatient care. It is estimated to generate $2.5 million in annual revenue.
• Medical Surgical Program: Provides care for patients requiring minor surgical procedures. Initially comprising 10 beds, the program has expanded to 30 beds dedicated to patients requiring medical release with psychiatric conditions who have recently been released from incarceration, referred directly by the California Department of Mental Health ("DMH").
  • The program and its contractual arrangement with DMH have proven critical to the Debtor's financial stability and serve as a vital revenue stream enabling continued operations.
• EmPATH Behavioral Health Urgent Care Clinic: Currently in the process of opening adjacent to the emergency room, this clinic will provide Medi-Cal Certified crisis stabilization services 24 hours a day, seven days a week, including holidays. It will offer immediate psychiatric evaluation, crisis intervention, and stabilization for acute psychiatric patients for up to 24 hours in a therapeutic space, avoiding stressful emergency room settings. The Hospital was one of six acute care hospitals selected in California to provide an EmPATH program.
• Organic Farm Produce: In support of the Centers for Clinical Standards and Quality initiative (Ref: QSSAM-26-03-Hospital/CAH, dated March 30, 2026) and a directive from Secretary Kennedy and Dr. Oz encouraging adherence to the 2025-2030 Dietary Guidelines, the Debtor is transitioning certain processed foods to fresh produce where feasible. It has converted three acres of adjacent open property into a working farm to cultivate fresh produce for inpatients, with the first corn harvest anticipated in September 2026.

EmPATH Grant Funding

• In December 2023, the Debtor received a $2.9 million grant from the Mental Health Services Oversight and Accountability Commission ("MHSOAC") to establish and operate an Emergency Psychiatric Assessment, Treatment, and Healing ("EmPATH") Behavioral Health Unit at the Hospital.
  • The Debtor was selected as one of the highest-scoring applicants under a competitive procurement process. The grant carries a term of approximately three years, with funding distributed across three annual payments, and requires the Debtor to adopt the EmPATH model for its crisis stabilization care.
  • The EmPATH Unit is designed to operate as a 24-hour crisis stabilization facility offering immediate psychiatric evaluation and monitoring in a less restrictive environment than traditional inpatient hospitalization — reflecting the State of California's investment in, and the Debtor's commitment to, the community's behavioral health needs.

Clinical and Rehabilitative Services

The Debtor's broader service lines include an intensive care unit, laboratory services staffed by board-certified pathologists, diagnostic imaging, pulmonary medicine, and subacute programs offering individualized therapy.

• The rehabilitation department employs skilled physical, occupational, and speech therapists who treat conditions ranging from traumatic brain injury and post-operative orthopedic procedures to neurological disorders and cancer-related impairments.
• The Debtor is also pursuing licensure for outpatient behavioral health services and intends to expand its outpatient and rehabilitation offerings once its application is approved.

Workforce

As of July 2026, the Debtor employed approximately 697 employees, including registered nurses ("RNs"), technicians, housekeepers, and food-service workers. In addition to full-time and part-time staff, the Debtor engages per-diem employees on an as-needed basis.

• Approximately 597 employees are represented by unions—SEIU-121RN and SEIU-UHW (collectively, the "Unions")—under multiple collective bargaining agreements (the "CBAs").
• Historically, the Debtor has worked collaboratively with the Unions to negotiate the CBAs and other employment terms for its represented employees.

Government Reimbursement and Receivables

Like other hospitals serving similar communities, the Debtor relies on the Hospital Quality Assurance Fee ("HQAF") and Disproportionate Share Hospital ("DSH") programs, along with other government support, to help bridge the gap between Medicare and Medi-Cal reimbursement and the actual cost of providing care, as Medicare and Medi-Cal reimburse only approximately 80% of those costs.

• The HQAF, established in 2010, funds supplemental payments to California hospitals serving Medi-Cal and uninsured patients and has provided billions of dollars in such payments. The DSH programs provide at least partial compensation to hospitals treating the most vulnerable patients.
• Under the Patient Protection and Affordable Care Act of 2010, federal DSH allotments were scheduled to be reduced to reflect anticipated decreases in uncompensated care. Congress has consistently delayed these reductions since they were first scheduled in 2014, though significant cuts remain pending.
• Both programs have proven difficult to rely on, as payments have been reduced and delayed.

With respect to receivables, the Debtor received $7 million under HQAF Program 9 (covering Calendar Year 2025) and estimates it will receive approximately $16 million more in the coming months, as HQAF payments are typically made retroactively in lump-sum quarterly intervals. The Debtor further projects $10 million from HQAF Program 10 (for Calendar Year 2026), though the timing of that payment remains uncertain.

---

Prepetition Obligations

As of the Petition Date, the Debtor's principal prepetition financial obligations included a $35 million senior secured Main Street loan, approximately $9.5 million owed to the Landlord Entities under the Master Lease, and approximately $7.5 million associated with L.A. Care's purchases of future HQAF receivables. The Landlord Entities and L.A. Care have asserted security interests in certain of the Debtor's assets, although the validity, priority, and extent of those interests remain subject to investigation. The Debtor's principal prepetition obligations are summarized below:

Secured Debt — Main Street Priority Loan

• In July 2020, at the height of the COVID-19 pandemic, the Debtor sought additional liquidity under the Main Street Loan Program established pursuant to the CARES Act to address unprecedented pandemic-related operating costs while continuing to provide essential healthcare services to its community.
  • On December 10, 2020, the Debtor entered into the Main Street Priority Loan Agreement (the "MSL") with First Western Trust Bank ("First Western") and the Federal Reserve Bank of Boston, under which First Western extended a senior secured loan in the principal amount of $35 million.
  • The MSL is secured by a Pledge and Security Agreement granting First Western a security interest in the Debtor's personal property. Paul R. Tuft, the Debtor's sole shareholder, further backstopped the facility with an unconditional personal guaranty and a pledge of 100% of his equity interests in the Debtor.
  • First Western's interest under the MSL is now the subject of a claimed interest asserted by Axios.

Master Lease — Landlord Entities

• Since 2013, the Debtor has operated the Hospital — its principal operating facility and indispensable to its delivery of acute care services to the surrounding community — under a long-term Master Lease with Reliq Pacifica LLC, Beverly Gemini Investments, LLC, Taking the 5th, LLC, and Fifth/Arizona Investors, LLC (collectively, the "Landlord Entities").
  • During the pandemic, the Debtor became unable to timely satisfy certain obligations under the Master Lease. As of the Petition Date, the Debtor estimates it owes the Landlord Entities approximately $9.5 million on account of accrued and unpaid rent and other obligations.
  • In November 2022, the Landlord Entities filed a UCC-1 financing statement seeking to perfect a lien on all of the Debtor's personal property. That lien was subordinated to First Western's interest (and now Axios's claimed interest) pursuant to a Subordination Agreement. The Debtor's investigation of these security interests remains ongoing.

L.A. Care Health Plan

• The Local Initiative Health Authority for Los Angeles County, operating as L.A. Care Health Plan ("L.A. Care"), a publicly operated health plan, filed UCC-1 statements in January 2026 and May 2026 asserting an interest in the future proceeds of certain HQAF funds.
  • These interests arise from agreements under which L.A. Care purchased the Debtor's right to future receipt of HQAF payments. Should any such sale later be held not to constitute a true sale, the Debtor granted L.A. Care a "Back-Up Security Interest" in its HQAF receivables.
  • As of the Petition Date, the Debtor estimates it owes L.A. Care approximately $7.5 million on account of these agreements. The Debtor has not yet determined the validity of L.A. Care's asserted security interests.

Financials and Cash on Hand

• The Debtor's 2024 audited financial statements reflect revenue of approximately $100 million for 2024 and $107 million for 2023; audited statements for 2025 are not available. As of July 4, 2026, the Debtor held approximately $240,797 in its unrestricted bank accounts.
• The Debtor anticipates receiving additional HQAF funds and other governmental receivables, though the timing of such receivables is difficult to predict. Historically, to bridge cash-flow shortfalls pending receipt of these funds, members of the Debtor's executive team have personally lent funds to satisfy its most immediate obligations.
• The Hospital has previously navigated chapter 11, with its most recent prior case closing in 2017 following plan confirmation.

---

Events Leading to Bankruptcy

Overview

• The Debtor commenced this Chapter 11 Case to protect patient care and its employees, maintain ongoing business operations, and preserve the going-concern value of its enterprise for the benefit of stakeholders and parties in interest.
  • A protracted liquidity crisis, legacy liabilities, and persistent operational challenges—compounded by the Colorado Action—forced the Debtor to seek relief on an emergency basis.
  • Shortly before the Petition Date, the Debtor appointed Peter Chadwick of Berkeley Research Group as Chief Restructuring Officer to evaluate strategic options, develop and implement a turnaround plan, and institute treasury management procedures and controls.

COVID-19 Pandemic

• The COVID-19 pandemic materially disrupted the Debtor’s operations and caused it to incur substantial debt while serving as a surge center for which it received only nominal reimbursement.
  • Beginning in early 2020, the Debtor implemented a mitigation plan to prepare for a potential patient surge and to sustain compliance with environmental, staffing, training, infection control, personal protective equipment, and specialized equipment requirements.
  • Pursuant to the California Department of Public Health’s All Facilities Letter (AFL 20-23, effective March 20, 2020)—which directed hospitals to convert unoccupied space into additional ICU and telemetry beds—the Debtor expanded capacity inside and outside the Hospital, adding beds in hallways, closed units, and outdoor areas, and increasing its ICU beds from 7 to 66.
  • In early December 2020, during the second wave, EMSA Secretary Dr. Mark Ghaly toured the Hospital and requested that it utilize any remaining unused space to treat COVID-19 patients, driving further surge-related expenses.
• Operational and staffing pressures mounted throughout the crisis:
  • Facing severe staffing shortages, the Debtor engaged traveling nurses at significantly elevated rates, placing substantial additional strain on its finances as it worked to maintain adequate care levels.
  • After persistent outreach to the State of California, the Debtor secured three National Guard strike teams in December 2020, which supplied additional healthcare workers and remained on-site for approximately three weeks until operations stabilized.
  • At EMSA’s further request, the Debtor also assumed responsibility for reopening a closed Los Angeles hospital to serve as a designated satellite surge facility.
• The Debtor never fully recovered from the pandemic’s impact.
  • Although staffing shortages were substantially resolved by January 2021, a continuing shortage of billing personnel resulted in a pause in billing.
  • The Debtor received only nominal reimbursement for its surge-center costs, and an approximately 60% decline in emergency-rate occupancy reduced future QAF funds—leaving the Debtor to absorb unprecedented expenses incurred in caring for COVID-19 patients.

Seismic Compliance and Related Costs

• California law requires general acute care hospitals to conduct seismic evaluations and to retrofit and repair their facilities to meet prescribed seismic performance standards.
  • The Debtor’s role as a surge center during the pandemic severely impaired its ability to complete the required improvements, as contractors were unable to come on-site, causing the Debtor to miss critical construction and seismic milestones and incur fines.
  • The state-mandated retrofit rendered 38 of the Debtor’s SNF beds unusable, resulting in a loss of approximately $20 million in annual revenue. Those beds are scheduled to return to operation in January 2027, and their restoration will be critical to the Debtor’s future financial viability.
• The Debtor pursued legislative relief after missing the seismic deadlines:
  • Through Assembly Bill 2404, approved by the Governor of California on September 27, 2022, the Debtor obtained an 18-month extension to complete the seismic work.
  • The extension did not fully resolve the Debtor’s challenges, as post-pandemic construction costs significantly exceeded pre-COVID estimates, creating substantial financial hardship, and the resulting cost overruns led to litigation that further delayed the work.
  • The extension expired on January 1, 2025, triggering fines of $15,000 per day—totaling approximately $9 million through June 2026. The Debtor intends to submit an additional draft assembly bill to extend its compliance deadline to April 20, 2028 and to abate the daily fines.
• The Debtor has invested heavily in seismic compliance, spending approximately $7.8 million and $7.9 million as of December 31, 2023 and 2024, respectively. In April 2026, it obtained new quotes for the required retrofits totaling approximately $6.5 million from a contractor and approximately $650,000 from an architectural firm.

Rising Labor Costs

• Consistent with hospitals nationwide, the Debtor confronted increased labor costs and other labor-related financial pressures driven by both statewide and facility-specific factors.

Working Capital Shortages

• The Debtor relies on HQAF, DSH, and other government support to bridge the gap between Medicare and Medi-Cal reimbursement and the actual cost of care. The frequent reduction and delay of HQAF and DSH payments has been a major driver of the financial challenges facing the Hospital.

Cybersecurity Attack

• In February 2024, Change Healthcare—a subsidiary of UnitedHealth Group—was compromised by a cyberattack that breached its IT systems and sensitive data, affecting the Debtor and hospitals across the country.
  • The attack disrupted healthcare operations on a national scale and resulted in interrupted operations and cash collections, data loss, and reputational damage to the Debtor.

Colorado Litigation

• Colorado Action:
  • On May 13, 2025, First Western filed a breach-of-contract suit against the Debtor in Colorado state court—now captioned Axios Capital Solutions v. Pacifica of the Valley Corporation, et al., Case No. 2025CV31732 (Dist. Ct., County of Denver, Div. 209)—based on the Debtor’s failure to timely meet its repayment obligations.
  • The dispute arises from a December 10, 2020 Loan Agreement for an original principal amount of $35 million, executed by Paul R. Tuft as Executive Chairman and supported by a Promissory Note and an Unconditional Guaranty. Between 2021 and 2024, the Debtor paid approximately $5.13 million in interest and late fees but no principal, and the loan matured on December 10, 2025.
  • In November 2025, Axios Capital Solutions, LLC claimed to have purchased the Debtor’s Main Street Loan and stepped into First Western’s shoes as plaintiff. The Debtor contests the validity of that assignment, arguing that the loan—issued under the federal Main Street Loan Program and subject to terms prohibiting transfers to borrower affiliates—was improperly assigned because Axios allegedly concealed that Ehab Yacoub is a common owner of both Axios and Pacifica, rendering the transfer void ab initio under the CARES Act.
  • On June 26, 2026, the Colorado court denied Axios's motion for partial summary judgment, finding a genuine dispute of material fact as to whether Yacoub holds any ownership interest in Pacifica and, correspondingly, whether Axios validly acquired the Main Street Loan.
• Special Monitor and Receivership Dispute:
  • On May 15, 2026, pursuant to a joint motion of Axios, the Debtor, and Mr. Tuft, the Colorado court appointed Westwood Healthcare Partners, LLC as Special Monitor to the Debtor.
  • On June 12, 2026, Axios and the Special Monitor filed an ex parte motion to expand the Special Monitor’s role into a receivership. The Debtor and Mr. Tuft filed a joint opposition on June 24, 2026, and Axios and the Special Monitor replied in support on July 1, 2026, with a hearing on the Receivership Motion scheduled for July 8, 2026.