A new round of legal salvos have been unleashed in the bankruptcy case of the Southern Inyo Healthcare District — both from Healthcare Conglomerate Associates (HCCA), the district’s former management partner, and the district itself.
HCCA has claimed that the Southern Inyo district’s bankruptcy attorney, who previously represented both HCCA and the district, has an irreparable conflict of interest and should be removed from the case.
The company has also hired legal malpractice counsel to pursue that attorney — and a settlement agreement signed by the Tulare Local Healthcare District could help any potential case brought against the attorney or her former law firm, Baker Hostetler.
Meanwhile, in a separate battle, the district is fighting to ensure that upcoming tax revenues don’t head to Vi Healthcare Finance, a company owned by HCCA CEO Dr. Benny Benzeevi.
The revenues were signed away in a $2m credit arrangement that has since been contested; the district’s board members stated in declarations that HCCA officials presented the Vi line of credit in mid-2017 as the only option to ensure the Southern Inyo Hospital could continue to operate.
Tax Payments Signed Away
All tax revenues meant for the Inyo district — including any future taxes — were redirected to Benzeevi’s financing firm under the agreement, with the exception of a specific 2005 parcel tax. The agreement came as the district prepared to send a new parcel tax to voter, which later failed.
Those revenues serve as security on the line of credit extended from Vi to the district, which wants to keep the upcoming tax payment and prevent the possibility of the money being seized, noting that the Tulare County District Attorney’s office previously seized money in accounts belonging to Benzeevi.
HCCA had previously extended an unsecured $500k line of credit to the district to fund operations of the district’s Southern Inyo Hospital, but according to the declarations, the company refused to advance funds any further after its line of credit reached upwards of $1m.
The district’s board agreed in July 2017 to seek a line of credit from Vi Healthcare; according to a declaration by Jaque Hickman, an Inyo board member, the agreement was made “under the threat of not making payroll.”
Alan Germany, HCCA’s CFO and Inyo’s Chief Restructuring Officer, claimed that “[the Southern Inyo Healthcare District] has no choice but to accept the offer from Benny,” according to an email provided to the court.
Under the agreement, HCCA had rolled an existing $1m line of credit to Inyo into the Vi credit line at 10% interest; new withdrawals, including those to keep the hospital afloat, were made at 20% interest
The district’s filings claim that the line of credit was required due to mismanagement of the hospital.
“After leaving the District with no viable financial options, HCCA prevailed upon the Debtor to borrow money from Vi at absurd and abusive interest rates and to assign tax revenues to Vi under threat that HCCA would not pay crucial vendors and medical professionals resulting in closure of its facilities. Incredibly, it was HCCA’s acts and omissions that made the Vi financing necessary to continue operations,” Jeffrey S. Shinbrot, Inyo’s special litigation counsel, wrote.
“Most, if not all, of the amounts allegedly due to HCCA that required refinancing through the Vi line of credit not have been necessary had HCCA properly operated HCCA and made reasonable efforts to collect the Debtor’s accounts receivables during this Chapter 9 case,” Shinbrot adds in the filing.
Hickman, in her declaration, claims that HCCA transferred supplies from Tulare Regional Medical Center to Southern Inyo, failed to properly collect on Inyo’s accounts receivable, and used its own employees at the hospital instead of making efforts to hire in the Lone Pine area, where the hospital is located.
Broken Legal Ties
Ashley McDow has been the Southern Inyo Healthcare District’s bankruptcy attorney since HCCA initially brought in BakerHostetler, the company’s preferred law firm, to assist the district in its bankruptcy process.
The company likely spent big money for its representation: a 2016 letter from Bruce Greene to Richard Fedchenko, then-President of the Southern Inyo district’s board, said that Greene’s rate was $730 per hour, McDow’s rate was $550, and associates’ rates were $380.
The firm later separated from HCCA, and in October 2017, McDow represented the district in asking the United States Bankruptcy Court to terminate HCCA’s contract after the Southern Inyo Hospital was searched by the Tulare County District Attorney’s office.
She has since left Baker for the law firm Foley & Lardner, and the district hired Shinbrot as special counsel for matters relating to HCCA.
HCCA’s attorneys claim that neither McDow, nor her new firm, can represent the hospital due to her prior work with the company and knowledge of its inner workings; the attorneys claim she was instrumental in drafting the contract between the management company and Southern Inyo.
HCCA says that McDow and Baker also violated agreements to represent HCCA, not Southern Inyo, in the event that a dispute between the two arose, citing conflict of interest waivers that both sides signed in 2016.
“The waivers stated that none of the Benzeevi Parties’ confidential information would be used adverse to the Benzeevi Parties and also strongly implied that if a conflict arose, Baker would continue to represent the Benzeevi Parties and withdraw from its representation of Inyo,” a letter from HCCA’s attorneys to the Foley firm reads. “Instead, when a conflict arose, Ms. McDow and Baker, abandoned the Benzeevi Parties, used confidential information adverse to the Benzeevi Parties, and acted directly adverse to the Benzeevi Parties in assisting Inyo in attempts to terminate the MSA, going so far as to criticize the MSA that Baker drafted as one-sided in favor of HCCA.”
Benzeevi, in a declaration, says McDow was heavily involved in the creation of the contract between Southern Inyo and HCCA.
“Ashley McDow, a partner at Baker, was heavily involved, along with Mr. Greene, in these negotiations and drafting, with particular emphasis on advising HCCA concerning how the contemplated Chapter 9 proceedings, to be initiated by Inyo, would affect HCCA’s rights under the Inyo MSA,” the declaration reads. “I spoke multiple times per day during this period with both Mr. Green and Ms. McDow concerning the Inyo MSA and shared substantial confidential information with them concerning HCCA’s strategies and goals with respect to the Inyo MSA.”
Potential Malpractice Suit
The Tulare Local Healthcare District’s approval of a settlement agreement requiring their cooperation in any potential suits against the Baker firm — specifically including Southern Inyo — will likely help any case HCCA may bring against the firm or McDow.
HCCA’s attorneys put McDow on notice during a bankruptcy court hearing in August of 2018, when they stated that the company had hired malpractice counsel — which would put a damper on any potential mediation efforts between Southern Inyo and HCCA.
“My clients have recently hired malpractice counsel in Orange County as of August 20th. […] The idea that mediation, global or otherwise, could occur by mid-September is really not possible,” Hagop T. Bedoyan, an attorney for HCCA, said.
He added that the Southern Inyo bankruptcy had not “really made any progress,” and suggested that the case be dismissed if HCCA was the only creditor that had outstanding disputes with Southern Inyo.
“The truth is the disputes with my client don’t require a Chapter 9 case to resolve. If there are no other creditors to worry about, this case can be dismissed, and those disputes can be handled outside of this courtroom,” Bedoyan said, “whether it’s the malpractice claims or the claims that are serving the basis of the adversary, some of which are not even, I would argue, within the jurisdiction of this Court to resolve.”
McDow countered, stating that the dismissal of the Chapter 9 case would be just what HCCA wants.
“Your Honor, just a couple of points in response, and I’m going to limit it and be general for fear that my poor dead mother, God rest her soul, is going to be sued after this hearing. But the irony of this discussion that it is now — the District was playing catch-up and for all the reasons that special counsel has put in a complaint that Mr. Walter has filed similar lawsuits in his Chapter 9.
“Those allegations are not mine. Those are third-party counsel. And now for HCCA to sit here and tell the Court that this case should be dismissed, when the District is playing catch-up because of the allegations, allegedly, that are in those complaints, is so disturbing I can barely — I can barely stomach it, Your Honor.
“And of course, HCCA would love to have the case dismissed because they have — they’re the only who would benefit. They have an assignment right now of partial tax revenues, that if the case gets dismissed they will get until the end of time, until their 20 percent interest rate notes for $2 million is paid off in full, which means the hospital will shut down. It’s not a maybe. It is a certainty.
“And that would be great for them. They could get our tax revenues, even if the hospital was closed. That’s how it would look, okay. So of course they want dismissal, Your Honor.”