HCCA successfully moves to disqualify Southern Inyo bankruptcy attorney

The Southern Inyo Healthcare District needs a new bankruptcy attorney — and law firm — by May 10, after attorneys for Healthcare Conglomerate Associates (HCCA) successfully moved to disqualify the district’s current counsel.

Judge Frederick E. Clement ruled on April 10 that Ashley McDow and the law firm Foley & Lardner, which she works for, would be disqualified in the district’s bankruptcy case after HCCA argued that her prior work on HCCA matters represented a conflict of interest.

HCCA previously managed the district’s Southern Inyo Hospital, and previously managed the Tulare Local Healthcare District’s Tulare Regional Medical Center.

While the Southern Inyo district brought in special counsel to represent it in a lawsuit against HCCA, attorneys for the company claim that she continued to take adverse action against it.

“I would direct the Court’s attention to the August 29 hearing, where Ms. McDow asked this court to order the parties to mediation, in which she made numerous negative statements about her former clients, accusing them of bad faith, accusing them of failing to provide information as necessary, accusing them of slowing down the bankruptcy proceeding,” Brandon Krueger, a legal malpractice attorney representing HCCA, said during the April 10 proceeding.

McDow had previously worked for the Baker Hostetler law firm, including on matters related to the Management Services Agreement, the main contract between HCCA and the Southern Inyo district.

The Baker Hostetler firm was preferred by HCCA and its CEO, Dr. Benny Benzeevi, until Bruce Greene, an attorney with the firm, wrote in September 2017 that it would “commence termination” of its services to him and any of his companies.

Billing statements show that McDow billed HCCA 37.2 hours for activity related to Southern Inyo, Krueger said. Those hours included negotiations with Southern Inyo regarding the contract.

“The Court’s carefully reasoned decision to disqualify Ms. Ashley McDow (formerly of Baker Hostetler) and Foley Lardner is integral to the protection of HCCA, Vi Healthcare Finance and Dr. Benzeevi, and honors the law and equity’s abhorrence to conflicts of interest and violation of the duty of loyalty to one’s clients,” Hagop T. Bedoyan, an attorney representing HCCA, wrote to the Voice. “As to potential affirmative claims against Ms. McDow, Mr. Bruce Greene, and Baker Hostetler, my clients have suffered immense losses and prejudice and are evaluating their rights and available options.”

UPDATE: A press release from the Southern Inyo Healthcare District states that the district’s board voted on April 14 to not seek an appeal of Clement’s decision, and to begin searching for new counsel immediately.

“The District has been well-served by Ashley McDow, and she will be greatly missed. We thank her sincerely for all she has done for us,” Jaque Hickman, the Southern Inyo board president, said in the release. “However, there is pressing need for us to continue to make progress in the bankruptcy action, and we are already in the process of securing alternate representation.”

 

Set up for conflict?

The Southern Inyo district came to HCCA after a prior board shuttered the Southern Inyo hospital in December 2015, followed by a mass resignation; in January 2016, a new board was appointed — with the challenge of figuring out how to get the Southern Inyo Hospital open and stable.

According to a Visalia Times-Delta article from 2016, an Inyo County supervisor reached out to Assemblyman Devon Mathis, whose district includes the entirety of Inyo County, for help.

Mathis contacted HCCA; at the time, the company was in the process of turning around Tulare’s district hospital, Tulare Regional Medical Center. It was willing to step up to the challenge of working its magic at another hospital.

“This is what HCCA does,” Benzeevi told the Times-Delta. “We go into places other people don’t want to bother with.”

The board voted to file bankruptcy; and, at the same time, HCCA brought in Baker Hostetler to assist the Southern Inyo district with bankruptcy proceedings. HCCA had previously brought Baker to the Tulare Local Healthcare District when it struck its deal to manage Tulare Regional.

A conflict waiver signed January 2, 2016, states that the Baker firm would “assess the circumstances to determine our ethical obligations and determine any appropriate course of action” if it were asked to represent HCCA, Benzeevi, or the District in “any future matter which we determine may create an actual conflict of interest.”

When it sought loans from Benzeevi’s healthcare financing company, Vi Healthcare Finance, Benzeevi and the district signed a new waiver in July 2017, with similar language to the 2016 waiver.

Both waivers stated that if the firm “determines that its continued representation of the District in the Chapter 9 filing would require disclosure of material confidential information of the Benzeevi Group to the District, or vice versa, the Firm may elect to terminate its representation of the District in the Chapter 9 filing.”

In his ruling, Clement stated the conflict waivers were “ineffective, lacking full disclosure and that they were not informed” — if the situation between the parties were to change, rules required that a new conflict waiver must be signed, he said; and, while the situation had changed since, no new waivers appeared to have been signed.

The waivers didn’t anticipate the scenario that the firm could choose to represent Southern Inyo over HCCA, either, he said.

Benzeevi certainly didn’t anticipate that scenario, according to a declaration filed last November. He stated that he believed the declarations meant Baker would choose him, and not the district, if a conflict arose.

“At no time was I told that if the interests of HCCA and Inyo became in conflict, that Baker could continue to represent Inyo adverse to any member of the Benzeevi Group,” he wrote. “To the contrary, it was my understanding that if an actual conflict developed, Baker would terminate its representation of Inyo and continue representing the Benzeevi Group, including as to the Inyo [Management Services Agreement.]”

On Spetember 29, Greene broke the news — and Benzeevi’s understanding — in a termination letter.

Greene had represented HCCA since it began operating — records from the California Secretary of State’s office show that he signed the forms to incorporate the company, and Vi Heathcare Finance — but he wrote to tell Benzeevi that the firm had determined it “must commence termination” of its relationship with him, and any of his companies.

The letter did not set a hard termination date.

“Finally, we again request that you settle your outstanding accounts with the firm forthwith,” Greene added — HCCA owed the company approximately $7,832.89. Roughly two weeks earlier, on September 10, the firm received $499,727.93 in funds from HCCA.

They came from a transaction in which HCCA sold some assets of Tulare Regional Medical Center for $3m; The Tulare district filed suit against HCCA, claiming the transaction was unauthorized, and later settled it; the Tulare County District Attorney’s office has contended the action was illegal, and seized the remaining funds from the sale.

HCCA has previously denied that the transaction was illegal.

 

The conflict

The Southern Inyo board voted to terminate HCCA’s contract on October 11, 2017, and McDow filed an emergency motion to terminate the agreement in the United States Bankruptcy Court for the Eastern District of California on October 17, 2017, two weeks and four days later.

In it, McDow claims that the district had been making payments to HCCA for loans that were fictitious, that it presented inaccurate financial reports, that its management was lacking, and that funds had been shuttled between Tulare Regional and the Southern Inyo Hospital.

That emergency motion, the Baker firm’s letter terminating its relationship, and actions since then led to Clement’s decision to disqualify her, he said.

Clement cited a new rule in his decision, which states that “while lawyers are associated in a firm, none of them shall knowingly represent the client when any of them practicing alone would be prohibited from doing so by Rules 1.7, the concurrent representation rule, or 1.9, the former representation rule.”

That rule applied because it was forward-looking, he said, and an exception is only allowed if the attorney did not substantially participate in the matter, or a procedure is set up to screen the lawyer out of any participation in the matter in a manner which the former client approves.

Clement also cited multiple rules from the California Rules of Professional Conduct in his decision, including Rule 3-310. The rule has multiple points; his citations included those which state that:

  • an attorney cannot accept employment adverse to a prior client when they have received confidential information which could create a conflict,
  • and an attorney cannot continue representation of more than one client in a matter in which the interests of the clients actually conflict.

McDow may still have been considered to represent HCCA and Southern Inyo, because Greene’s letter did not include a termination date — and her motion was filed less than 30 days after the letter was sent, Clement said. It wasn’t possible to tell, he said, because the firm did not set a hard date for termination.

“One, as to the motion to terminate the management services agreement. The damage has already been done. It is true that these were an emergency — that this was an emergency situation,” Clement said. “And it may well be that Ms. McDow did the only thing available to her, but by doing so she has ensured that this rule is in play against her.”

 

Actions could open new battle

As part of its settlement with HCCA, the Tulare Local Healthcare District would be required to cooperate in any action the company brings against Baker Hostetler, including its representation of the Southern Inyo Healthcare District.

“With the exception of not releasing or disclosing privileged and/or confidential attorney-client documents and information or work product, the Parties further mutually agree to reasonably cooperate with one another, and direct their respective counsel to cooperate, in any lawsuit that either Party brings against Baker Hostetler and any and all attorneys who were, or who may or may not currently be, part of or affiliated in any way with Baker Hostetler for actions representing the District, the HCCA Parties, or Southern Inyo Healthcare District,” the settlement reads.

While the Tulare Local Healthcare District and HCCA have settled their claims against each other, Tulare would be required to cooperate with any lawsuits brought by HCCA against Baker, McDow, Greene, or other attorneys — and vice-versa.

Richard Fedchenko, a Southern Inyo Healthcare District board member, declined to comment.

McDow did not respond to a request for comment.

In Depth: Tulare Regional Medical Center

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