Erlanger: Walker, Catoosa on hook for $20 million despite Hutcheson bankruptcy

Erlanger: Walker, Catoosa on hook for $20 million despite Hutcheson bankruptcy

November 21st, 2014 by Kate Belz in Local Regional News

Document: Hutcheson Petition

Hutcheson's petition for Chapter 11 bankruptcy.

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Hutcheson Medical Center in Fort Oglethorpe, Ga.

Hutcheson Medical Center in Fort Oglethorpe, Ga.

Photo by Dan Henry /Times Free Press.

 

While leaders at Hutcheson Medical Center called Wednesday's decision to file bankruptcy a chance to "hit the reset button," the drama with ex-partner Erlanger Health System is far from over.

On Thursday, Erlanger Health System leaders said Hutcheson's decision to file for Chapter 11 bankruptcy reorganization "comes as no surprise" -- but that the filing will not deter Erlanger's pursuit to recover $20 million owed by Hutcheson.

The chief reason? Two North Georgia counties are still on the hook for the $20 million, Erlanger officials say.

"Walker and Catoosa counties continue to hold the key as it pertains to the foreclosure," said Erlanger Chief Administrative Officer Gregg Gentry.

Hutcheson CEO Farrell Hayes has said such a determination should be left to the courts. But the questions over who owes what to whom speak to the complexity of Hutcheson's governance structure and the precise terms of the hospital's former relationship with Erlanger.

The Hospital Authority of Walker, Dade and Catoosa counties, run by county appointees, owns Hutcheson's main campus. Hutcheson Medical Center is a nonprofit organization that leases and operates the hospital.

Back in 2011, when Hutcheson was losing nearly $1 million a month, it contracted with Erlanger to manage the hospital. As part of the agreement, Erlanger loaned Hutcheson $20 million.

That loan was backed by the Hutcheson property and guaranteed by Walker and Catoosa counties.

When the agreement fell apart and Hutcheson did not repay the money, Gentry said, the terms of the contract required Erlanger to foreclose on the property before it could pursue payment from the counties. Erlanger sued Hutcheson and moved to foreclose, though a federal judge delayed the actual foreclosure to allow for public hearings about the impact of such a measure.

The Hospital Authority, which is technically a government entity, cannot file for bankruptcy under Georgia law. But the nonprofit Hutcheson Medical Center can and, on Thursday, did.

Gentry claimed the filing changes nothing about what the counties still owe Erlanger.

Erlanger would never have tried to foreclose on Hutcheson if the counties would own up to the debt and allow for "meaningful and thoughtful discussions" for repayment, Gentry said.

Walker County Commissioner Bebe Heiskell said Thursday that will not be happening any time soon.

"We won't know the answer to [what is owed Erlanger] until we have our day in court," Heiskell said. "Erlanger has sued us, and we have sued them."

Hutcheson's countersuit says the Chattanooga hospital did not live up to its obligations while managing Hutcheson, and in fact owes Hutcheson $90 million.

Heiskell also called the decision to file for bankruptcy "the wisest thing they could do at this point," saying the hospital has done everything to avoid the move.

But Chad Young, attorney for the Catoosa County Commission, said the bankruptcy announcement was the culmination of "years of bad decisions" and that Catoosa leaders would "turn over every rock and every nook and cranny and every Hutcheson asset before we put county taxpayers on the hook for this."

He is eager to see an outline of the hospital's recovery plans once they are filed with the U.S. Bankruptcy Court in Rome, Ga.

"We have heard again and again that they have great plans for turning around the hospital, but we just don't know what those plans are," he said.

"Given what was going on with Erlanger, the decision was that this was within the hospital's best interest -- to a get a breather, and to restructure," said Hutcheson's Atlanta-based bankruptcy attorney, Rob Williamson.

The next step will be to file plans with the court to reorganize leadership and put together a debt repayment plan.

Hutcheson leaders said hospital staff and patients should not notice any significant changes in day-to-day operations.

"If anything, it really ought to look better in a lot of ways," Williams said. Cash flow will be eased up, he said, because Hutcheson will not be trying to pay monthly bills plus debt.

But even without the fight with Erlanger, Hutcheson still faces tough odds.

Bebe Heiskell

Bebe Heiskell

Nearly 70 percent of hospitals that file for bankruptcy end up closing their doors, a 2009 study by a University of Alabama at Birmingham professor found.

The Erlanger debt is only about a third of Hutcheson's roughly $60 million in debt. The hospital owes about $31 million to Regions Bank, which declined to comment Thursday on the bankruptcy filing, and millions more to other vendors, according to the bankruptcy petition.

Hayes said in November the hospital's assets were appraised at $23 million.

The hurdles in such a dilemma are especially high for small hospitals that are not part of a health system, said Dr. Amy Landry, assistant professor in the Department of Health Services Administration at UAB, who coauthored the study.

It is still somewhat rare for hospitals to declare bankruptcy, and it usually comes after a lengthy history of financial problems, Landry said.

"By the time you start seeing financial erosion, the ball is already rolling," she said. "If you can identify those problems early on, you can make adjustments."

Hayes acknowledged that Hutcheson probably should have looked into filing bankruptcy two or three years ago, when its financial situation became dire. He said he did not know why former hospital leaders did not do that.

Heiskell said she and other county leaders urged the board to file for reorganization years ago, when the hospital was hemorrhaging money under former CEO Charles Stewart.

But there was heavy resistance, and the contract with Erlanger was supposed to help the hospital recover. After that fell apart, Hutcheson hoped for a federal injunction to stave off foreclosure until the civil lawsuits with Erlanger was finished.

And when the judge set the foreclosure date for Jan. 6, Hayes said there was no other option.

Getting through the bankruptcy process will be a challenge, he said, but one the hospital is ready to take.

"We've heard loud and clear that people love Hutcheson," Hayes said. "We've got a lot of work to do, but we are ready to do it."

Staff writer Tyler Jett contributed to this story.

Contact staff writer Kate Harrison Belz at kbelz@timesfreepress.com or 423-757-6673.