Hutcheson hospital faces foreclosure as Erlanger moves to collect unpaid debt

Hutcheson hospital faces foreclosure as Erlanger moves to collect unpaid debt

July 31st, 2014 by Dave Flessner in Business Around the Region

What's next?

U.S. District Court Judge Harold Murphy will hear arguments at 10:30 a.m. Friday in Rome, Ga., about whether to grant a temporary restraining order to block the planned foreclosure sale of Hutcheson next Tuesday.

The Hutcheson Medical Center building in Fort Oglethorpe, Ga.

Photo by Doug Strickland/Times Free Press.

Three years after Erlanger Health System promised to revive Hutcheson Medical Center with a $20 million loan and new management, Chattanooga's biggest hospital has severed its management and talks with Hutcheson and plans to foreclose on the Fort Oglethorpe hospital on Tuesday to try to recover its unpaid debt.

But Hutcheson and its senior lender, Regions Bank, claim such a sale of a public hospital is not allowed in Georgia and will ask a federal judge in Rome, Ga., on Friday to stop the planned sale of Hutcheson assets.

Farrell Hayes, the president of Hutcheson who took over management of the hospital from Erlanger last November, said he had hoped to arrange a plan to repay the Erlanger debt along with other hospital obligations. But talks with Erlanger officials stopped a month ago when Erlanger initiated a foreclosure action against Hutcheson.

"Hutcheson belongs to the citizens of Walker, Catoosa and Dade counties, and we cannot understand why a big Chattanooga hospital would go to such lengths to try and put a community hospital out of business," Hayes said. "But until and unless there is a court order to the contrary, Hutcheson will continue to do what it has done for the past 62 years, which is to provide quality, local health care to the citizens of Northwest Georgia."

Hayes said he still sees a need for a hospital to serve Northwest Georgia and is even eager to restore services such as labor and delivery that Hutcheson had to cut out due to its recent operating losses.

But Erlanger contends that Hutcheson, which terminated its management agreement with Erlanger last year, still owes more than $20 million to Erlanger and may no longer be viable as a free-standing hospital.

Representatives of the two public hospitals met and tried to negotiate a repayment plan during June, but talks broke off earlier this month.

The three counties that own the hospital and secured the debt declined an Erlanger offer last month to waive a foreclosure requirement for debt recovery, Erlanger attorney Karen Bragman said in a 26-page court filing this week.

"Erlanger made plain it had no burning inclination to proceed with foreclosure," Bragman said. "Unfortunately, neither the counties nor (Hutcheson hospital) have signaled an inclination to accept Erlanger's offer."

Hayes said he still hopes there can be a negotiated settlement to avoid a costly and image-damaging foreclosure and legal fight over the hospital.

But Erlanger spokesman Pat Charles said Erlanger has tried to keep the hospital operating while the debt is repaid without success and Erlanger's last offer to Hutcheson was rejected.

"Despite protracted, vigorous efforts, the debtor and its guarantors were never able to make any settlement offer that would have provided Erlanger with any material or timely repayment of its indebtedness," she said. "Based on this history, Erlanger is not optimistic about the chance of settlement."

Hutcheson has struggled to pay its debts in recent years as physicians and patients have shifted to other hospitals. Hutcheson sold its majority interest in Battlefield Imaging for $5.2 million in early July to help the hospital refinance its debt and pay its employees and debtors, including a $650,000 line of credit previously provided by Walker County.

But Hutcheson remains $60 million in debt, including more than $20 million still owed to Erlanger for a 2011 loan that was supposed to recapitalize and strengthen Hutcheson.

Former Georgia Gov. Roy Barnes, an attorney hired by Hutcheson, claims that it is Erlanger that owes money to Hutcheson because Erlanger did more to damage the Fort Oglethorpe hospital during its management tenure than it lent or helped the hospital. Barnes claims Erlanger mismanaged Hutcheson to boost its own hospital business.

"In just over 18 months, with Erlanger and its leadership fully in charge of all Hutcheson's operations and expenditures, Erlanger exhausted the entire $20 million line of credit (plus another $550,000 promissory note executed on May 3, 2013 to pay staff) while refusing to properly staff Hutcheson with physicians and executive officers and generally taking this opportunity to funnel potentially profitable patients across state lines to its own hospital back in Chattanooga," Barnes said in a legal filing last week.

The foreclosure, if it occurs, doesn't mean that Hutcheson hospital would shut down. The purchaser at any foreclosure sale would likely want to keep the hospital running to maintain a revenue stream and the value of the property, although a new owner could sell off some equipment or try to change the way the hospital operates.

But Erlanger's chief administrative officer, Gregg Gentry, said in a court hearing that he doesn't think the Fort Oglethorpe hospital can continue to operate for much longer.

"Erlanger has worked diligently to keep Hutcheson open, but genuinely believes that there is little chance for the hospital to survive," Gentry said.

Beyond the initial $20 million loan, Erlanger lent another $550,000 last year to help the hospital meet its payroll and Regions Bank also loaned millions of dollars over and above the bond financing to keep Hutcheson operating, Gentry said.

Walker, Catoosa and Dade counties are financially obligated to repay Erlanger for the $20 million loan even if the hospital fails, Gentry said. The intergovernmental agreement that provided the loans to Hutcheson includes provisions that property taxes would have to be raised, if necessary, to repay the Erlanger loan.

Beyond the financial bleeding at Hutcheson, the hospital's unpaid debts are also hurting the fiscal health of the three counties that own the public hospital.

The bond rating agency Standard and Poor's recently downgraded Walker County's general obligation bonds by four notches to BBB-plus "based on the county's weak liquidity stemming from the loans it guarantees that are subject to immediate acceleration (at Hutcheson hospital)."

The lower bond rating means Walker County will have to pay a higher rate of interest when it goes to the bond market for future borrowings.

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340.