After a partnership, a breakup, a lawsuit, a counter lawsuit and two years of waiting for a result from those lawsuits, a federal judge ruled Wednesday that Hutcheson Medical Center owes Erlanger Health System $36.4 million.
But while the ruling seems to shut the door on a chaotic rivalry between the two local hospitals, in fact, it is really just another step. Now, holding a favorable court order in its hands, Erlanger will go about trying to actually collect the money.
But it may discover it is dipping its bucket in a dry well.
Hutcheson filed for Chapter 11 protection under the federal Bankruptcy Code in November 2014. At the time, court filings show, Hutcheson held $30 million in assets. Since then, the hospital's lawyers have sold its main campus to a company in Atlanta and its nursing home to a company in New York. Regions Bank, meanwhile, has the legal right to seize Hutcheson's ambulatory surgery and cancer center on Battlefield Parkway.
What's left are scraps — and a promise from Catoosa and Walker county officials that each county would contribute about $8.5 million.
"The real challenge (for Erlanger) in this action is not so much getting the judgment," said Chad Young, an attorney for Catoosa County. "It's collecting the judgment. They have to find assets somewhere — if there are any."
In addition to awarding the $36.4 million to Erlanger this week, U.S. District Court Judge Harold Murphy removed the teeth from Hutcheson's counter lawsuit against Erlanger. Murphy ruled that Hutcheson's attorneys failed to prove their claims that Erlanger committed fraud against them, costing Hutcheson millions in potential profits.
"It doesn't look like it's very favorable for us," said Tom Weldon, an attorney for the Hospital Authority of Catoosa, Dade and Walker counties — the board that controls Hutcheson.
Weldon said he doesn't yet know what the hospital will do next. He needs to meet with the board to come up with a plan.
The roots of this ruling date back to October 2010, when representatives from Erlanger and Hutcheson tentatively agreed to form a partnership. At the time, Hutcheson had lost $22 million in its previous two fiscal years. Its leaders wanted help from an outside hospital.
For six months, the two sides hammered out a management agreement, which they finally signed in April 2011. As part of the deal, Erlanger loaned Hutcheson $20 million. In the agreement, the Hospital Authority gave Erlanger the right to ask the Catoosa and Walker county governments for the money back at some point in the future. As part of a separate agreement, the elected leaders from those counties told the Hutcheson board they would be good for the $20 million, if needed.
The management agreement lasted until September 2013, after Hutcheson's board voted to end the partnership. Erlanger then filed a lawsuit in U.S. District Court in February 2014 demanding its $20 million back. In June 2014, Hutcheson's lawyers filed a counter lawsuit, claiming Erlanger intentionally mismanaged their hospital.
Hutcheson's lawsuit does not specify how much they think Erlanger owed — just something in excess of $20 million. (In a recent Walker County audit, accountants wrote that this lawsuit could be north of $100 million.)
Both lawsuits hit a speed bump in November 2014, when Hutcheson filed for bankruptcy. In October 2015, Hutcheson reached a tentative agreement with Maybrook Healthcare to buy Hutcheson's nursing home for $7.2 million. In December 2015, Hutcheson also reached an agreement with ApolloMD to buy Hutcheson's main campus in Fort Oglethorpe for $4.2 million.
Both those deals still required months of legal maneuvers before they could be finalized. But the nursing home sale became official Friday. And, court filings show, the sale of the main campus is expected to be done in the coming weeks.
As those deals were going through, a judge ruled earlier this year that Hutcheson and Erlanger could resume their lawsuits. On Wednesday, after considering Erlanger's motion for partial summary judgment, Murphy awarded Erlanger the money and dismissed the bulk of Hutcheson's claims.
Murphy awarded Erlanger $20 million for the loan it gave Hutcheson. He also said Erlanger should get $4 million for interest on that loan and $12.4 million for "late fees."
The legal arguments
In their counter lawsuit, Hutcheson's lawyers argued Erlanger's mismanagement cost them millions of dollars in profits. In particular, Hutcheson complained Erlanger never completed a "community needs assessment" as required for tax-exempt hospitals, never released a strategic plan and treated Hutcheson as a "filter hospital," sending the patients from Fort Oglethorpe to Erlanger's Chattanooga campus.
Murphy said this argument didn't hold weight. From 2009-10, Hutcheson lost $22 million, according to audited statements. In 2011, the hospital lost another $23 million — though Erlanger was only in charge for five of those months. In 2012, Erlanger's first full year in charge, the hospital lost $12 million.
"Erlanger presented evidence indicating that Hutcheson had significant operating losses during the years prior to this lawsuit," Murphy wrote. "The Hospital Authority presented absolutely no contradictory evidence."
Hutcheson also argued that Erlanger committed fraud. Corky Jewell, a member of Hutcheson's board who was on the "transition team" that represented the hospital in its 2010-11 negotiations with Erlanger, said outside forces prevented him from keeping tabs on the step-by-step developments of the negotiations.
Jewell said he never received written notice when the ins and outs of the deal would change. He could look at the drafts of the management agreement during the "transition team" meetings, but he had to turn the copies back in at the end of the meeting. He could also look at the drafts at any time by going to Hutcheson, but he had to sit in a small room with a hospital employee.
Murphy, however, ruled that none of this constituted fraud. It just showed that the policies made Jewell's life inconvenient. And what's more, Murphy said, these were Hutcheson policies — not Erlanger policies.
"Mr. Jewell's Declaration does not indicate that Erlanger itself played any part in making his review of the revisions difficult," Murphy wrote.
It's unclear how Erlanger will get $36.4 million out of a hospital that has already sold off its most valuable assets. Karen Bragman, an attorney representing the hospital, did not respond to an email asking what Erlanger's next step will be.
Asked a similar question, spokeswoman Jennifer Homa wrote, "Erlanger has been and remains committed to exhausting any and all remedies available to it in order to collect on this $36,000,000 judgment."
If nothing else, Erlanger will try to get money from the local governments in Catoosa and Walker counties. Elected leaders in those counties agreed to each guarantee half of Erlanger's $20 million loan to Hutcheson. Since then, each of their debts has shrunk to $8.5 million because the counties received "credit" last year when Hutcheson sold its nursing home and main campus.
Catoosa County's attorneys say they are currently negotiating a settlement with Erlanger. Walker County's attorneys, meanwhile, are fighting Erlanger with another federal lawsuit.
Stuart James, a lawyer representing Walker County, said Erlanger has no legal right to demand money because the county is protected in the Georgia constitution by sovereign immunity. He also said the contract itself might not be valid.
In 2011, Erlanger and Hutcheson signed a management agreement. As part of that, Hutcheson told Erlanger it could pursue its $20 million from the counties. At the same time, the elected leaders of Catoosa and Walker counties signed an "intergovernmental agreement" with Hutcheson, promising to pay that $20 million if necessary.
But Walker County's lawyers argued that none of this matters, in part, because Hutcheson never "assigned" Erlanger the legal right to make a demand for the money. This is a legal technicality, one that Walker County sees as a big deal. Erlanger doesn't.
On April 15, James said, Erlanger attorney Edward Marshall emailed Weldon, Hutcheson's attorney. Discussing this lawsuit between Hutcheson and Erlanger, Marshall said that Hutcheson's board members could face paying that $36 million if they don't agree to Erlanger's settlement terms.
It's unclear what those specific settlement terms are. Weldon and another Erlanger lawyer said they could not go into details. Weldon also said he didn't know how Walker County lawyers got Marshall's email.
But multiple sources on the board, speaking on the condition of anonymity because their fellow board members ordered them not to discuss the case publicly, told the Times Free Press that Erlanger wants the board to sign a written demand for Walker County. This "demand," a legal document, would formally ask Walker County to make its payment to Erlanger instead of fighting the Chattanooga hospital in court.
"(Walker County is) not going to be intimidated by what 'might' happen," James wrote in a news release. "We are going to move forward thoughtfully and purposefully."
Bragman, the attorney for Erlanger, wrote in an email that James had exposed just a portion of negotiations — which the lawyers believed should be confidential.
"Erlanger made significant efforts to settle with the Hospital Authority prior to the entry of judgment," she wrote in an email to the Times Free Press. "All of those efforts were rebuffed. Now, however, the Court has determined that the Hospital Authority owes Erlanger more than $36 million. As we've made clear in the past, Erlanger plans to take all reasonable and necessary legal steps to collect on the judgment."
Contact Staff Writer Tyler Jett at firstname.lastname@example.org or at 423-757-6476.