Quick Take
In a lawsuit filed this month, the trustee managing the bankruptcy of the former owners of Watsonville Community Hospital alleges that three of the hospital's previous executives transferred nearly $4 million in consulting and management fees, travel and living expenses and other illegitimate payments from the hospital to themselves and close associates.
Three former Watsonville Community Hospital executives face accusations that they transferred nearly $4 million from the hospital to themselves, along with friends and family, between the start of their ownership in 2019 and months before the hospital filed for bankruptcy in December 2021.
The allegations are contained in a lawsuit filed this month by Jeremy Rosenthal of Force 10 Partners LLC, the liquidation trustee managing the hospital’s Chapter 11 bankruptcy proceedings.
In the complaint, filed Dec. 1 in the U.S. District Court for the Northern District of California, Rosenthal alleges that three executives of Halsen Holdings “grossly mismanaged” the hospital and “their oversight, or lack thereof, also resulted in a continually worsening economic catastrophe that became so severe” that it ultimately led to the hospital filing for bankruptcy.
The lawsuit comes as the hospital enters its second year under new public ownership. The Pajaro Valley Health Care District purchased the hospital’s assets out of bankruptcy in September 2022. The hospital continues to struggle financially despite making significant improvements in its first year of public ownership.
The suit names the hospital’s former board chair, Daniel Brothman of Santa Ana; former CEO Stacy Sean Fowler of Manhattan Beach; and former chief financial officer Edmund C. King of Lehi, Utah. All three are listed in the lawsuit as the executives of Halsen Holdings, which owned Watsonville Community Hospital from September 2019 to its bankruptcy in December 2021.
Rosenthal is suing the executives to recover what he alleges was millions in unauthorized payments to the executives in order to pay the hospital’s creditors as part of the bankruptcy proceedings. He is also asking the the court to find the executives liable for “breaching their fiduciary duties owed to WHC and its stakeholders.”
Brothman, Fowler and King didn’t respond to requests for comment Tuesday, and no statement of defense has been filed. Watsonville Community Hospital spokesperson Nancy Gere said she wouldn’t comment on the case and that the hospital isn’t a party to the lawsuit, which involves its previous owners.
Lawsuit traces Halsen’s early moves
Los Angeles-based Halsen bought the hospital from Tennessee-based Quorum Health in September 2019 for $48.8 million, financing the purchase with a $55 million loan from Medical Properties Trust (MPT), according to the lawsuit. The three Halsen executives appointed themselves as the hospital’s sole executives and board members, the complaint says.
Rosenthal claims that “almost immediately” after buying the hospital, the executives began using $2 million of the hospital’s dwindling cash to pay a mix of “consulting fees and other payments” to themselves, organizations they controlled and close friends and family.
As part of the hospital purchase, Halsen and MPT had negotiated for a $10 million loan from MidCap Financial to provide working capital for the facility, but that deal fell through, causing the hospital to become insolvent shortly after it was purchased, Rosenthal alleges.
Rosenthal also claims the executives double-paid themselves, gave themselves “unlimited travel and living expenses” and mismanaged the hospital’s computer and billing systems.
On Oct. 1, 2019, the day after the hospital purchase, the three executives entered employment agreements with salaries ranging between $330,000 and $340,000 for themselves and added a management-services agreement with Halsen Healthcare that required additional $100,000-per-month payments as a “management fee.”
The executives also reimbursed themselves “for over $365,559 in living expenses, including car allowance, auto insurance, housing, groceries, dry cleaners, dining out, and more — again all without any reasonable independent oversight or justifiable business purpose,” the complaint reads. Those payments included $2,000-$4,000 in monthly car allowances for each executive, thousands in furniture payments and expenses related to a beachfront house in Watsonville, according to expense reports Rosenthal filed with the court.
‘Grossly negligent adventure’
In addition to those double-pay and living expense reimbursements, Rosenthal alleges that the executives’ mismanagement of the hospital led to “numerous inexcusable errors” resulting in worsened financial struggles and threats to patient care.
The executives contracted a company run by a friend of King’s that had no prior experience providing full-service IT management for a hospital to install and maintain the hospital’s internet and computer infrastructure, Rosenthal wrote.
“As a result of this grossly negligent adventure, the hospital’s network was consistently unreliable and was never good enough to provide a minimally acceptable level of performance,” the complaint alleges.
The internet’s poor quality resulted in a deficient-ridden medical records system and billing issues, the suit claims.
The executives, Rosenthal alleges, also installed an “untested” cloud-based electronic medical record system that further caused “disruptions, operational glitches and failures.”
“These examples reflect an unprepared and overwhelmed management team, unreasonably operating without independent oversight that did not, or could not, exercise the care and diligence required for running a complex operation such as the hospital,” the complaint reads.
In addition, the lawsuit alleges that the executives failed to transition to a new medical records system, causing the hospital to be unable to bill for services for about 30 days. Rosenthal claims the executives continued to pay themselves while slowing or stopping payments to vendors and employees – causing accounts payable to increase from $8 million to $26.2 million between December 2019 and December 2020.
As the executives stopped paying employee pharmacy and medical benefit claims, they caused the hospital to record more than $1.8 million in unpaid claims, the lawsuit says. Employees and their family members were “taken to collections for medical services they expected would be covered as part of their employer-provided health insurance.”
According to the lawsuit, the executives also cashed an IRS refund check for $741,053.50 despite knowing it was improperly issued.
Heading for default
Rosenthal alleges the executives stopped paying critical business expenses “at a time when they were prioritizing paying themselves above-market salaries, reimbursing themselves for exorbitant living expenses, and redeeming stock held by friends and family.”
By April 2020, just seven months after Medical Properties Trust gave the hospital a loan for the purchase, the lender issued the first of several default notices. That August, the executives updated their employment agreements to pay themselves a combined total of $3 million in severance if they were let go as a result of the hospital changing hands, the lawsuit alleges.
In January 2021, the lender terminated the executives from the hospital. Rosenthal alleges that the executives were also paid nearly $200,000 in unused paid time off, split evenly among the three, for 16 months of service.
The hospital filed for bankruptcy in December 2021 owing $33 million more to creditors than it had in assets, the trustee alleged in the lawsuit.
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