In re RHA Stroud, Inc., Case No. 20-13482-SAH
| Decision Date | 30 December 2020 |
| Docket Number | Case No. 20-13482-SAH |
| Parties | In re: RHA Stroud, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Oklahoma |
The following is ORDERED:
(Jointly Adminstered)
ORDER (A) GRANTING FP GROUP'S AMENDED MOTION TO DISMISS OR ABSTAIN, WITH BRIEF, AND WITH NOTICE OF OPPORTUNITY FOR HEARING [Doc. 65], AND (B) DENYING DEBTORS' MOTIONS FOR ENTRY OF INTERIM AND FINAL ORDERS (i) AUTHORIZING THE HOSPITALS TO USE CASH COLLATERAL; (ii) GRANTING CONDITIONAL ADEQUATE PROTECTION TO THE SECURED PARTY, (iii) SCHEDULING A FURTHER INTERIM HEARING; (iv) SCHEDULING A FINAL HEARING, AND (v) GRANTING RELATED RELIEF [Doc. 4]
The Court conducted a contested hearing on the following matters on December 15, 17, and 18, 2020:
1. FP Group's Amended Motion to Dismiss or Abstain, with Brief, and with Notice of Opportunity for Hearing [Doc. 65], filed on November 6, 2020, by Rural Hospital Acquisition, LLC ("RH Acquisition"), First Physicians Realty Group, LLC ("FP Realty"), First Physicians Business Solutions, LLC ("FP Business"), First Physicians Services, LLC ("FP Services"), and First Physicians Resources, LLC ("FP Resources"; RH Acquisition, FP Realty, FP Business, FP Services, FP Resources, collectively, "FP Group");
2. United States Trustee's Response in Support of FP Group's Amended Motion to Dismiss or Abstain, with Brief in Support and Notice of Opportunity for Hearing [Doc. 195], filed on November 27, 2020, by the United States Trustee ("UST");
3. Debtors' Response to FP Group's Amended Motion to Dismiss or Abstain, with Brief and Notice of Opportunity for Hearing [Doc. 197], filed on November 27, 2020, by RHA Stroud, Inc. "Debtor Stroud") and RHA Anadarko, Inc. ("Debtor Anadarko"; Debtor Stroud and Debtor Anadarko, collectively, "Debtors");
4. FP Group's Reply to the Debtors' Response to the Motion to Dismiss or Abstain [Doc. 242], filed on December 4, 2020, by FP Group;
5. Debtors' Motions for Entry of Interim and Final Orders (i) Authorizing the Hospitals to Use Cash Collateral; (ii) Granting Conditional Adequate Protection to the Secured Party, (iii) Scheduling a Further Interim Hearing; (iv) Scheduling a Final Hearing, and (v) Granting Related Relief [Doc. 4], filed on October 25, 2020, by Debtors;
6. Response of the United States Trustee to the Debtors' Motion for Use of Cash Collateral [Doc. 15], filed on October 27, 2020, by UST;
7. Limited Objection to Debtors' Motion to Use Cash Collateral [Doc. 20], filed on October 27, 2020, by RH Acquisition;
8. Rural Hospital Acquisition's Sur-Reply to the Debtors' Request to Use Cash Collateral [Doc. 266], filed on December 9, 2020, by RH Acquisition; and
9. Debtors' Sur Sur Reply to Rural Hospital Acquisition's Sur-reply to the Debtors' Request to Use Cash Collateral [Doc. 268], filed on December 10, 2020, by Debtors.
This Court has jurisdiction of these matters pursuant to 28 U.S.C. §§ 1334, 157(a) and (b)(1).
After consideration of the documentary evidence and testimony presented during the hearing, as well as the arguments of counsel, the record in these jointly administered chapter 11 cases, and applicable law, the Court makes the following findings of fact and conclusions of law.
1. Debtors operate two licensed "Critical Access Hospitals,"1 one in Stroud, Lincoln County, Oklahoma, and one in Anadarko, Caddo County, Oklahoma (collectively, the"Hospitals"). Each Debtor has 25 beds and emergency rooms.2
2. Debtors are exempt non profits under Section 501(c)(3) of the Internal Revenue Code and are subject to numerous federal, state, and local laws and regulations, including licensing from the Oklahoma Health Care Authority and the Oklahoma State Department of Health.
3. Charles Eldridge ("Eldridge") acquired Debtors in 2011. Eldridge subsequently contributed his equity interests in Debtors to One Cura Wellness, Inc. ("One Cura"). Debtors are currently owned 100% by One Cura. [Doc. 1 in both cases, List of Equity Security Holders].
4. Eldridge is the president and a director of Debtors and is also the founder and sole employee of One Cura.
5. Eldridge visits the Hospitals with some degree of regularity but no more than 3-4 times a year. In 2020, he has not visited the Hospitals in large part due to travel restrictions associated with the Covid-19 pandemic. However, Eldridge did travel to Oklahoma twice for litigation matters but did not visit the Hospitals.
6. One Cura's only source of income is a "director's fee" paid by Debtors to One Cura. One Cura pays Eldridge's salary, currently $225,000 annually, as its only employee.
7. As part of the purchase in 2011, Debtors executed notes in favor of RH Acquisition, which were later amended and restated in 2015, as follows: $5,928,028.05 by Debtor Anadarko and $8,097,684.06 by Debtor Stroud (collectively, the "Notes"). FP Exhibits 3 and 4. The Notes are interest only, with quarterly payments, and the principal amounts are due and payable in full on March 31, 2021. FP Exhibits 3 and 4.
8. To secure the Notes, Debtors granted blanket liens on all Hospital assets3 to RH Acquisition including accounts receivable and rights of Debtors to payment of money or any other form of consideration (the "Pre-petition Collateral"). FP Exhibit 12.
9. Debtors operate on land and in facilities that are owned by FP Realty. Debtors enteredinto a lease with FP Realty for the Hospital land and facilities dated April 1, 2011 (the "Lease"). The Lease has a 20-year primary term commencing April 1, 2011, and is renewable. Monthly rent is set per Exhibit "B" to the Lease and provides for an automatic 3% increase in base rent for years 2-20. FP Exhibit 17.
10. The current aggregate monthly rent under the Lease owed by Debtors to FP Realty is approximately $110,000 per month.
11. The Hospitals' state licenses to operate are tied to the Hospitals' physical locations. The Medicare designations as Critical Access Hospitals are also tied to the physical locations and state licenses. Neither the Critical Access Hospital designations nor the state licenses are transferrable. Debtors cannot, therefore, reorganize without the long-term Lease of the physical locations and facilities.
12. Contemporaneous with the purchase, Debtors also entered into multiple contracts with the various members of the FP Group including (collectively, the "Service Contracts"):
13. Under Section 2(a) of MSAs, FP Business has the sole and exclusive right and obligation to furnish or perform or arrange for the furnishing or performance of the management services "in whatever manner" FP Business "reasonably determines is appropriate under the circumstances," and Debtors will "not interfere with or prevent . . . [FP Business] from carrying out its responsibilities under the [MSAs]." Debtors Exhibits 6 and 7, p. 2, ¶ 2(a).
14. The MSAs provide FP Group is not obligated to pay third-party vendors unless there are sufficient funds to do so. Debtors Exhibits 6 and 7, p. 5, ¶ 3(a)(xi). FP Group has always prioritized payment of third-party vendors over payment of its own fees, interest, and rent.
15. As a result of the Service Contracts: (a) FP Group handles all day-to-day operations and transactions for Debtors; (b) FP Group prepares the Hospitals' financial statements and provides them to Eldridge monthly; (c) Debtors have no employees as all physicians, medical staff, and other employees are retained by FP Group; (d) revenues generated bythe Hospitals are swept daily by FP Group and used to pay third-party vendors and a portion of its fees under the Service Contracts; (e) FP Group submits to Eldridge weekly cash disbursements by vendor, the cost report and supporting financial documentation, and a daily status on the Hospitals; and (f) FP Group maintains and has possession of Debtors' books and records.
16. Eldridge provides oversight of Debtors and develops their policy, reviews and signs cost reports submitted to Medicare, works with community outreach, attempts, albeit unsuccessfully to date, to fund-raise and obtain grants, deals with Southern Plains, attends a variety of meetings, and works with consultants and the Hospitals' advisory boards.
17. Eldridge described the arrangement between Debtors and FP Group as essentially a "hospital in a box" as FP Group provides the physical locations and buildings in which the Hospitals operate, the physicians and medical personnel and all other staff, completes all back office work, and performs all operation and information technology services for the Hospitals.
18. Debtors generate significant revenues and cash flow but are not profitable and have not been so since 2014.
19. Debtors have two sources of active cash flow: cash and check by patients deposited directly to the respective operating account for each Debtor and wires directly into Debtors' lockbox accounts from insurance, Medicare, Medicaid, Veterans Administration benefits, and merchant services.
20. A significant portion of Debtors' revenues is derived from Medicare reimbursements. Debtors are reimbursed based on cost reports submitted to Medicare once a year containing a breakdown of the reimbursable expenses. It is critical that the costs reports be correct and are generally prepared by an expert in Medicare cost reimbursement. However, because of the structure of Debtors' operations and One Cura's lack of involvement therein, Debtors are entirely dependent on FP...
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