CHARLESTON – Rural Community Hospitals of America is suing Rural Hospital Group for breaching its contract.
L. Arthur Enterprises Inc.; Larry Arthur; Dennis Davis; Trent Skaggs; Darrel Morris; Billy May; Val Schott; and James Shaffer were also named as defendants in the suit.
Rural Community Hospitals of America and Health Acquisition Company filed the lawsuit on March 5 in Kanawha Circuit Court.
In 2011, HMC sought protection under Chapter 11 of the Federal Bankruptcy code when it was unable to meet its operating and debt commitments. HMC remained under bankruptcy protection until December 2012, according to the suit.
The plaintiffs claim HMC’s Chapter 11 exit strategy included the sale of the management rights of each hospital entity that HMC owned, plus the sale of all HMC home office/other equipment to raise at least $4 million which, at the time, was most of the amount represented as necessary for the entity to emerge from bankruptcy as a going concern capable of supporting its activities and operations.
The plaintiffs claim on Jan. 17, 2013, it entered into management agreements with 12 individual hospitals owned by HMC and the agreements gave RCHA full authority to manage each of the hospitals.
RCHA hired HMC’s home office staff, including the employee defendants and the Chief Executive Officer of each HMC hospital and acquired all of HMC’s management assets, including equipment, office space and supplies.
When HMC emerged from bankruptcy, there was no reorganization of the entity nor change in its ownership and the senior management team, including the employee defendants, remained intact, but then became employees of RCHA, according to the suit.
RCHA claims it did not know then that HMC and the hospitals it either leased, owned, managed or operated were only able to keep the doors open during the Chapter 11 bankruptcy process with no additional cash because it was overpaid by Medicare approximately $8 million in the cost periods HMC was under Chapter 11 protection.
The defendants either knew or should have known about the over payment and did not disclose it to the representatives of RCHA, according to the suit.
RCHA claims it would not have paid $4 million for the management rights of the 12 HMC hospitals if RCHA’s representatives had known or been told by any of the defendants of the $8 million Medicare overpayment.
“The defendants knew or should have known about the overpayment and should have made these disclosures to RCHA,” the complaint states.
The employee defendants violated RCHA’s personnel policies by failing to act in the best interest of RCHA over the course of several years, including the misappropriation of resources and interference with the management agreements between RCHA and the hospitals, according to the suit.
The employee defendants also gave themselves raises without confirmation from RCHA, charges expenses to RCHA that shouldn’t have, among other things, according to the suit.
RCHA claims the defendants breached their implied contract and violated their employee duty of loyalty.
The plaintiffs are seeking compensatory and punitive damages. They are being represented by Shawn P. George of George & Lorensen.
Kanawha Circuit Court case number: 18-C-225
