The Tulare Local Healthcare District’s Board of Directors has made it official: the district is in a financial crisis and will file Chapter 9 bankruptcy.
Kevin Northcraft, Senovia Gutierrez, and Mike Jamaica voted unanimously on the move at an emergency meeting declared and held on Friday, September 29. Richard Torrez resigned his position from the board effective Thursday morning.
The vote comes only two days after Dr. Benny Benzeevi threatened to shut down the hospital if the board didn’t pursue a loan. Benzeevi is the CEO of Healthcare Conglomerate Associates (HCCA), a company contracted to oversee day-to-day operations of the hospital.
A Chapter 9 bankruptcy proceeding could not only provide the district with some relief from multiple lawsuits currently pending against it for nonpayment, but also potentially invalidate the management company’s controversial agreement with the healthcare district.
Northcraft, the board’s chairman, stated that the board’s key goals would be to find a new management partner and to ensure that the partner would take on all of the employees currently working at Tulare Regional Medical Center.
“We will be looking for an interim [partner] and a more formal process for a longer term relationship,” Northcraft said. “And we’re certainly looking for people that can come in with instant credibility and begin to restore the quality.”
The hospital district could file its bankruptcy petition as soon as Monday — marked exhibits were already on hand to be provided to the public by the time the meeting was over.
The Rollercoaster to Bankruptcy
The bankruptcy filing is part of a rollercoaster ride that started when employees of the hospital didn’t receive their paychecks Thursday.
While it wasn’t the first time the company wasn’t able to make payroll in a timely fashion, the widespread nature appeared to be the straw that broke the camel’s back for many.
Administrators with HCCA called all-hands meetings on Thursday night and Friday morning and told employees that the fate of their paychecks, and the hospital, rested with the board — stating that a loan was needed to ensure the hospital’s continued operation. Press reports spread Thursday, and a video of Thursday’s meeting leaked out.
In a Thursday all-hands meeting that was recorded and published on the website of the Visalia Times-Delta, Germany told employees that multiple options for loans were presented to board members. Benzeevi was absent from that meeting.
Benzeevi and Germany both spoke Friday morning. One employee at the Friday meeting claims that Benzeevi stated the company had been reaching out to the board for “months and months” to pursue a loan without response.
“When we were at the forum this morning, all the blame was being shoved over to you guys, saying that you guys were the reason why we did not get our paychecks,” another employee, named Melissa, said at the Friday board meeting. “Right now, none of us in this auditorium knows who to believe anymore.”
Northcraft told the public at the Friday board meeting that claims from HCCA’s administration weren’t true — and they weren’t even provided any notice that the management company wasn’t able to pay its employees.
“As late as Wednesday night, they prepared an agenda — did not list any loans on that agenda, did not ask for any action items, did not present any information about a loan,” Northcraft said. “They did not mention — this was Wednesday night — that they could not make payroll the following day on Thursday.”
Germany had told the employees Thursday night that they all employees would likely receive paychecks by Tuesday, October 3, — but that it wasn’t guaranteed. On Friday morning, however, many employees reported receiving their pay, even though a loan wasn’t approved by the board.
No Financial Data
The company’s contract with the healthcare district — signed by prior board members — gives the company wide control over day-to-day operations and includes provisions sweeping the healthcare district’s bank accounts nightly into ones controlled by the company.
That’s been a perpetual thorn in the side for Northcraft and Jamaica, who told the public Friday they’d been continually seeking financial information on their district without success.
Northcraft had previously made requests for reports of accounts payable as far back as January of 2017, without response. Nothing changed at the Friday meeting — while Benzeevi was unable to attend due to the Yom Kippur holiday, Germany was also absent, even though he was at the hospital that morning to speak to staff.
Without data, the board was forced to file bankruptcy largely blind to any creditors that could exist, though Northcraft did state that the hospital is in arrears to the City of Tulare for water services, in addition to Southern California Edison.
“We’ve asked since January for accounts payable information, and had we received that, we would have had some understanding of what was happening and what was going down,” Northcraft said. “But this is a created emergency, certainly, by the operator of our hospital.”
The financial crisis comes as a complete 180 degree turn from statements as recent as March, when a promotional pamphlet by HCCA stated that the hospital had been profitable for 35 consecutive months, and that the findings were backed by multiple audits and credit upgrades.
Chapter 9 – The Pros and Cons
The board hired the Walter Wilhelm Law Group based in Fresno to assist in the hospital’s bankruptcy proceedings.
Riley Walter, an attorney with the group, spoke to the board and the public on the differences between Chapter 9 bankruptcy, a category only available to government entities, and other forms of bankruptcy.
“What’s important to you, as a community, is that your board remains in control,” Walter said. “Unlike a Chapter 11, where virtually every single action has to be approved by the court, that’s not the way it works in Chapter 9, so your board remains in place and your board remains in control.”
Walter also noted that a Chapter 9 filing would give the hospital district an automatic stay against any lawsuits that could be filed — giving the district a “breathing spell.”
That automatic stay took effect September 30, according to a court filing made available to the Voice.
The Chapter 9 filing would also allow the district to potentially recover some “inappropriate payments, or excessive payments, or payments made without appropriate consideration,” Walter said.
But a bankruptcy filing wasn’t an easy out, Walter said.
“You essentially are hitting that pause button and you’re having to restructure and start over,” he said.
In the contract signed by the district with HCCA, however, the district agreed to not reject the HCCA contracts and to designate HCCA as a “vendor supplier that is critical to the District’s business and obtain a critical vendor order” that would provide preferred status to HCCA’s pre-petition claims.
A series of email exchanges between the board’s lawyers, working for the McCormick Barstow law firm in Fresno, and attorneys with the Orrick law firm, representing HCCA, lay bare the deteriorating situation on Thursday.
After reports of Thursday’s events, Tim Thompson, representing the board, sent a pointed letter to Marshall Grossman, an attorney representing HCCA.
“As you will see in [the Times-Delta] video, contrasted with what we listened to last night, there are obvious false representations being made by Mr. Germany to the TRMC staff members. Specifically, Mr. Germany represents in this staff meeting that HCCA has presented the board with ‘a lot of information regarding loans’, including the ‘details and terms of those loans,’ and ‘the board is going to be considering the loans,’” Thompson wrote. “None of this occurred.”
Later in the evening, another attorney representing HCCA forwarded a letter from Benzeevi.
“At the […] meeting last night, I also informed Kevin Northcraft that he can call for a special board meeting the next day (today) and resolve the cash crisis. He did not do so. I am therefore hereby requesting that pursuant to sections 1.b or 1.c of the District bylaws, the Board conduct a special or an emergency meeting on Sunday, October 1, or Monday, October 2, the purpose of which will be for me to present the loan options to the Board and for the Board to consider and authorize the District to enter into a loan transaction,” Benzeevi wrote.
“I remind you again that the District is COMPLETELY out of cash, that many vendors are threatening to cease providing goods and services, that the District lacks sufficient cash to fund the entire gross payroll and that HCCA, which is owed in excess of $7 million, is unwilling to extend further credit to the District,” he continued.
Can’t Pay Vendors
Northcraft stated at the meeting that the hospital is in arrears to the City of Tulare for past due water bills, and to Southern California Edison.
“Both water and electric have asked if they have permission to shut off those for nonpayment,” Northcraft said. “The state, fortunately, said you do not have permission.”
Benzeevi also stated Wednesday that the company had “provided substantial revolving funding to the hospital over the years, to a cumulative total of $14m,” but that it would no longer do so due to a “destructive political environment.”
On September 15, the management company had deemed itself “insecure,” citing a section of its contract with the hospital district that allowed it to force the district to obtain a letter of credit from a financial institution “acceptable to HCCA” to show it was able to pay the contract’s termination fee, upwards of $8.4m.
If the district didn’t provide the company with a letter, it would have been forced to pay the company’s termination fee anyway.
Deanne Martin-Soares, a former board member and member of Citizens for Hospital Accountability, stated that the problems started as soon as HCCA came through the doors of the hospital.
“18 months ago, there were lawsuits already happening with your billing company,” Martin-Soares said, referring to a lawsuit against the hospital from Firstsource Solutions. “This is a pattern of not paying the bills.”
“When you have a CEO that is making $268,000 a month, and he’s making $20,000 a month to oversee the emergency room, and then you have on top of that Alan Germany — that we know for sure he’s making $39,000 a month, but actually reports we’re receiving is it’s more like $49,000 a month, plus an $8,000 per month expense report,” Martin-Soares said. “You need to do the math on that. This little hospital — I sat on the board, I know what it brings in revenue. There is no way this hospital can support those kind of salaries.”
Employees Speak Out
During the meeting’s public comment section, one employee described confusion among the hospital’s employees.
“We’re not getting paid, we’re here for our community, we’re here for our patients regardless. We’re scared, we’re concerned — we were told today that if we don’t get paid, it’s because you guys didn’t fund our paycheck. That’s why we’re confused,” one woman, an employee, stated. “We’re just there for the patients, and it’s really, really hard. And we don’t know what’s true or not true — we don’t know what’s coming or going.”
Another employee said that supplies were dwindling.
“We are in dire straits. It seems as though it’s constantly — and especially in the last few months — we have gone down to limited supplies, whether it be linen, whether it be IV supplies, whether it be life-saving material such as blood,” Tom Woodland, an employee at the hospital, said. “The bottom line is this: if this hospital closes, and working in EMS for ten years, your lives are at risk. Bottom line.”
“We need to get this straight, we are running out of supplies, we are in constant need of equipment, and miraculously every time the state shows up — oh my gosh, there it is, there’s some equipment for us,” Woodland continued.