The public health care district that owns hospitals in Sun City and Hemet began bankruptcy proceedings Thursday morning, a move that managers said would allow breathing room while seeking to reverse a flow of red ink.

The Valley Health Systems district filed its Chapter 9 petition in the Riverside branch of the U.S Bankruptcy Court for the Central District of California, an act that allows its hospitals to delay payments to hundreds or even thousands of creditors.

If the court ultimately approves a reorganization plan, the hospitals would pay some portion of the debt and discharge the remainder. The district has more than $100 million in liabilities, including both long-term bonds and payments due immediately to suppliers, employees and physicians, according to its filing.

"At the moment, the district is losing money," said Gary Klausner, an attorney whose firm was hired to handle the bankruptcy process. "It is losing money at a significant rate. The goal of this process is to develop a business plan so as to return to profitability. In the meantime … it's more or less business as usual."

Managers said a break from payment obligations should allow them a bit of extra cash to invest in new equipment and recruit doctors.

In contrast to bankruptcies filed under Chapter 7 of the U.S. Bankruptcy Code, which can involve liquidation of assets, and Chapter 11, in which an outside trustee oversees the organization's restructuring, Chapter 9 bankruptcies allow cities, hospital districts and other public entities to maintain a measure of control.

Chuck Axelrod, another attorney with the firm, Stutman, Treister and Glatt, said he expects a judge to act on the petition in January or February. If its petition is rejected, the district would be back to square one, minus a few hundred thousand dollars, attorneys said. Otherwise, the district could emerge from the process in a year or two, Axelrod said.

The filing followed a 6-0 vote Thursday morning by the district's board of directors and comments from Axelrod, Klausner and a half-dozen employees and taxpayers in the district, which stretches from Menifee and Sun City to the San Jacinto mountains. Two of the speakers urged board members to follow the lead of former Chairman Patrick Searl, who resigned Wednesday.

Glen Holmes, a Hemet-area resident who campaigned in support of the district's sale that failed last month, praised Searl and other board members for what he called tough but necessary decisions over the last two years.

In mid-2006, the board approved a bond measure that would have refinanced existing borrowings and upgraded and expanded the district's hospitals. But a sizeable block of voters balked at the prospect of property taxes to repay $485 million in new borrowings, and Measure G fell 9 points short of the necessary 67 percent supermajority in a special election last year.

The district then sought buyers for one of its hospitals --- Moreno Valley Community Hospital, which is outside the district's boundaries. It ended up attracting a $135 million offer for the purchase of all the district's hospitals, including Menifee Valley Medical Center in Sun City and two facilities in Hemet. But voters shot down that deal 53 percent to 47 percent last month. Concentrated in Hemet and San Jacinto, opponents argued the buyout would remove local oversight from the district, while keeping its hospitals trapped in a web of money-losing contracts.

A lawsuit filed in September, in which the Hemet-based Hospital Defense League sought to block the "secret giveaway deal," will probably be put on hold while the bankruptcy proceeds, Axelrod said.

The same could also apply to the district's erstwhile plans to go ahead with a $47 million sale of the Moreno Valley Hospital to the jilted buyer, Axelrod said.

Bill Klippel, a member of the anti-sale group, praised Searl's decision to resign and urged new Chairman Tom Wilson and the other five directors to do the same. Klippel said he had already begun to organize a campaign to remove all six from the board.

"Your community, frankly, doesn't want you," Klippel told them.

None indicated any plan to leave, though Wilson welcomed the idea of a critic filling the seat, which represents voters in Romoland, northern Hemet and southern San Jacinto. Holmes, who lost bids for the seat to Searl in 2001 and 2002, called Klippel's remarks "out of line."

The district's debts range from the $2.7 million it owes Hemet Community Medical Group to several thousand others of less than $30,000, according to its filing Thursday.

Managers with Quorum Health Group Inc., which the district hired shortly before the Nov. 6 vote, said the bankruptcy should allow them to renegotiate contracts with suppliers, doctors, other hospitals and employee unions. Most of the 2,000 who work for the district belong to the Service Employees International Union, though nurses at Hemet Valley Medical Center are represented by the California Nurses Association.

Managers said they don't expect to cut any services or lay off any employees beyond the 40 who were cut late last month. But a pay raise scheduled to take effect in 2008 is now on the table along with the range of other possible cuts, chief executive Fred Harder said.

Greg Griffith, a steward with the service union, said he was prepared to forego the raise if creditors and doctors make similar sacrifices.

"I think most employees are willing to give up, give in, and right this ship in any way possible," Griffith said.

Harder said he expects a relatively small portion of the savings to come from salaries, even though they represent the district's single largest expense.

The possibility of bankruptcy has loomed large since the Nov. 6 vote. Harder said as recently as Nov. 26, in his fourth week at the helm, that he hoped to avoid it. But the district's finances had eroded significantly since then, he said. It lost $2.9 million in the month of October and managers said it will probably turn out to have lost a similar amount in November.

Patient counts have dwindled at the Hemet hospital in recent weeks, a development managers blamed partly on local residents' uncertainty over the hospitals' future. And one specialized insurer that helps hospitals guard against such fluctuations had recently backed out, creating a temporary but sudden gap in one revenue stream, managers said.

Even so, they said, many of the district's problems go far beyond central Riverside County, and many intersect with the quirks and problems of health care insurance in the United States: Many patients delay major surgical procedures until the new year, when insurance will cover a greater portion of it, while rising numbers of uninsured Americans are turning to emergency rooms for even basic health care, killing hospitals' profitability, Harder and numerous others in the industry say.

"Nothing has changed but a continued and greater understanding of the depth of our situation here," Harder said.

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com.