A federal bankruptcy court has been asked to decide whether a deed of trust placed on Tulare’s Evolutions gym, and its adjacent property, is legal.
The Tulare Local Healthcare District, which owns Evolutions, filed a new lawsuit against Healthcare Conglomerate Associates (HCCA) on January 23, claiming the company’s move to place a lien on the gym just one day before the district filed bankruptcy wasn’t authorized by the district or the contracts it had in place with HCCA.
The district’s suit also claims that the lien constitutes a “preferential transfer” of assets, favoring the company over the district’s other debtors within 90 days of the bankruptcy filing. Preferential transfers can be “clawed back” under the bankruptcy code.
“The board urgently is trying to obtain bridge financing in order to reopen our hospital. If there is any silver lining to our temporary closure, it is that we now know how critical our hospital is to the overall medical needs of our county,” said Kevin Northcraft, chairman of the hospital’s new board of directors.
“We hope to obtain a loan using Evolutions as a lien. There is an unauthorized loan and lien processed by HCCA that we are trying to cancel as soon as possible,” he added.
The deed, and new suit
That deed was signed September 22 by Dr. Benny Benzeevi, the CEO of HCCA, who represented himself on the form as the CEO of “Tulare Local Healthcare District d/b/a Tulare Regional Medical Center.”
The deed was to secure multiple promissory notes for money HCCA allegedly loaned to the hospital, which the hospital describes in its suit as “disputed.”
Marshall Grossman, an attorney representing HCCA, dismissed claims that the deed wasn’t authorized.
“Their position is one of fiction and a lack of accuracy, which is apparent to anybody who takes a minute to read the Management Services Agreement,” Grossman said. “The Management Services Agreement was in full force and effect at the time these bankruptcy proceedings were filed.
“Section 4(j)(i) 2-3 expressly provides that if HCCA advances funds, then the Management Services Agreements itself creates a security interest in all district assets, which HCCA can perfect through whatever instruments may be appropriate to do so.”
The Management Services Agreement, one of multiple contracts entered into by former hospital board members, allowed HCCA to unilaterally issue promissory notes if the hospital was unable to reimburse the company for day-to-day expenses.
The sections cited by Grossman appear to allow the company to place the deed against Evolutions.
In a prior filing, the district called those notes “fraudulent and void,” but their legitimacy isn’t disputed in the January 23 suit — nor is their legitimacy being confirmed.
“The issue about the notes will be determined in a different kind of proceeding,” Riley Walter, the district’s bankruptcy attorney, told the Voice. “We’re not conceding that any money is owed to HCCA, but a court’s going to have to rule on that at some point.”
HCCA claims the notes total $10,233,950.05; under the Management Services Agreement and its associated contracts, the company was authorized to unilaterally make interest-bearing loans to the district if it deemed that the district wasn’t able to repay the company.
“Manager shall have the right, but not the obligation, in its sole and absolute discretion, to advance funds or agree to undertake to advance funds to any Person, as a loan to the District and to meet the shortfall caused by the District’s failure,” the agreement reads.
The text of the contract also appears to have allowed the company to have power of attorney over the district, which it could use to “prepare and execute” security instruments, such as deeds, to “perfect and continue its security interest” on the loans it was able to unilaterally advance.
“What this adversary proceeding is about is to invalidate or avoid the deed of trust that was recorded against Evolutions; and, yes, the guts of the [proceeding] is that they were not authorized to do so, and it was a preferential transfer,” Walter said.
Grossman also dismisses claims that the promissory notes are fraudulent or unauthorized. The contract allowed the notes to be extended to the district, and they exist, he said.
“The notes are not fraudulent — the notes exist, demand was made for the payment of the funds by HCCA on the district. The district didn’t pay its obligations — so, under their deal, there was the right on the part of HCCA to advance the funds necessary to meet obligations,” he said. “They exist. They were authorized under the terms of the contract. They were provided under the terms of the contract. The only thing that lacks credibility is the claim that they do not exist or were not authorized.”
HCCA files to move its suit back to Los Angeles County
Separately, the hospital’s former management company filed to move its lawsuit against the hospital back to Los Angeles County.
Under the terms of the Management Services Agreement, still in effect when HCCA’s suit was filed, any litigation regarding the agreement was to take place only in the Los Angeles County Superior Court.
“This is fairly common in a suit like this, where a lawsuit’s filed in one place and a bankruptcy is pending in another, so you remove it to the place where the bankruptcy is, then people enter into battle over which court should hear it,” Walter said.
When the Voice spoke to Walter, he had not yet had a chance to read the suit.
“HCCA, to its credit, had told me it would be coming,” he said.
In a filing, the company’s lawyers claimed that the Tulare Local Healthcare District’s countersuit against HCCA was a “smorgasbord of claims and theories” and stated that moving the case back to Los Angeles was required by law.
“Here, remand of the Lawsuit is required because the removal of the Lawsuit was in direct
violation of federal law,” the filing reads.
The company’s filing additionally states that even if the move from Los Angeles County were legal, it shouldn’t have been moved to the Fresno bankruptcy court.
“The law is crystal clear. If you’re going to seek removal of a case from the state court to the federal court, you must remove it to the federal district court in that area. You can’t go forum shopping throughout the United States to find what you think may be a more favorable court,” Grossman said. “That’s a recipe for chaos. The lawyers for the district acted in direct violation of the applicable statute, which required removal to the local district court, which is the Central District in California. All they had to do was move it to that district court, instead of forum shop.”
The company’s filing accuses Northcraft of forum shopping, quoting prior statements regarding the contract between HCCA and the Tulare hospital.
“In his comment to the public and the media, the now Chair of TMRC Board
expressed his disdain for Los Angeles in attacking HCCA, announcing that the District should
‘renegotiate or throw out the current HCCA contract…. [and] do it ‘the Tulare way’—not the
Southern California divisive, divisive secretive, and machine politics way,’” the filing reads.