As Southern Inyo Attempts to Leave HCCA, Search Warrant Served

The Southern Inyo Healthcare District has asked a bankruptcy court to allow it to exit its contract with Healthcare Conglomerate Associates after alleged financial mismanagement and unauthorized use of the district’s bank accounts.

Additionally, an attorney for the district claims the district was served with a search warrant Tuesday morning by the Tulare County District Attorney’s office.

The Southern Inyo Healthcare District owns the Southern Inyo Hospital, based in Lone Pine, Calif, and previously hired HCCA to oversee day-to-day operations of its hospital and assist in its bankruptcy case.

Its board voted on October 11 to seek the immediate termination and rejection of its contract with HCCA learning of the alleged financial mismanagement.

The Southern Inyo contract is largely similar to Tulare’s, with key differences in employment — all employees of the hospital are still Southern Inyo’s — and other, more favorable terms, including a lower termination fee and shorter contract period.

Although the hospitals are some four hours apart by road, they’re joined closely by similar allegations: officials in Southern Inyo claim that HCCA won’t show them their full financial records. They’re also claiming that the ones they have seen point to major problems.

In a legal filing, attorneys for the Southern Inyo district state that after the Tulare Local Healthcare District filed bankruptcy, the Southern Inyo district’s officials took a look at their own bank records. They claim that HCCA had engaged in “eerily similar misconduct” in Tulare.

While preparing for an upcoming bond measure, officials with the district requested copies of those records from HCCA. The Southern Inyo district claims that HCCA “failed to produce the requested information and documentation,” and further claims that upon analysis of certain bank accounts, unauthorized transactions were found, including transactions to Tulare.

The Warrant

A search warrant from the Tulare County District Attorney’s Office was served on the Southern Inyo district, the courtt was told Tuesday.

Ashley M. McDow, a bankruptcy attorney with BakerHostetler, represented the Southern Inyo district in court and claimed that “[…] five representatives of the District Attorney’s office in Tulare, and two sheriff’s deputies from the County of Tulare” served the warrant.

“They had a very specific list of things they were looking for — property they think has been there,” McDow said.

McDow claimed that the “checkboxes” on the warrant included “that the property was stolen or embezzled,” “things were used for the means of committing a felony,” and “that these things are things that can be seized.”

She told the judge in the case, Hon. Fredrick E. Clement, what the warrant entailed.

“It is large hospital equipment such as beds, gurneys, X-ray and surgical equipment, IV pumps, kitchen or food services equipment, such as microwave ovens and refrigerators,” McDow said.

“Search shall include but not be limited to all hard copy files or electronically stored computer files for the purpose of locating any and all invoices, receipts, billing and payment slips, purchase orders, equipment and supply transfer and receiving slips,” she continued, reading from the warrant.

In discussion with “those people that were conducting the search,” McDow states, “they believe that a number of things have been transferred — equipment, medications — that those things have been transferred from Tulare to Inyo.”

McDow told the court that the district had complied with the warrant as much as possible, and that Tulare County officials ultimately left with nothing other than “a couple of thumbdrives full of files.”

$3m In The Air

In the filing, the district claims that “HCCA appears to have facilitated the transfer of funds by and between the District and Tulare in an amount exceeding $3,000,000.00, including a significant transfer from the District to Tulare in late 2016 of approximately $700,000.”

“I noted numerous transfers by and between the District and Tulare, which is another California local healthcare district managed by HCCA,” McDow wrote. “The Bank Records lack any indication of the reason(s) for the transfers.”

McDow states she was not aware of any approvals made by the board for such transfers to be made.

The district claims that Tulare “may owe the [Southern Inyo] District in excess of $418,000.00,” and further claims HCCA “has attempted to conceal these transactions” by calling them repayments of “fictitious loans from HCCA to the District.”

Additionally, the Southern Inyo district claims that loans that HCCA extended to the district were purely fictitious.

“The bank statements, however, demonstrate that the ‘loans’ were, by and large, ficitious and, moreover, that the alleged repayments were in fact payments on account of HCCA’s management fees — not the repayment of any advances on the line of credit which HCCA purported to extend, which directly contradicts the repeated representations of HCCA,” the district’s motion claims.

She told the judge in the case that she believed “millions” were transferred back and forth between Tulare and Southern Inyo.

“It did not appear to be the focus — I asked that specifically – of the DA or the sheriff’s investigation today,” she added.

$0 for $700,000

The Southern Inyo district claims that bank records showed in late 2016, HCCA transferred $700,000 of its money to Tulare, claiming the payment was to repay a line of credit extended by the company to the Southern Inyo district.

The records, it states, demonstrate that the line of credit had a zero balance at that time, and were instead “transferred to Tulare on behalf of HCCA for the purpose of satisfying a portion of the then outstanding management fee of HCCA.”

Intergovernmental Transfers Botched

Intergovernmental transfers are payments from healthcare districts to the state, which end up providing a large return to the healthcare district. Indeed, Southern Inyo’s attorneys state that it generates upwards of $1m per year of revenue from the IGT payments it makes to the State of California.

But HCCA failed to make the Southern Inyo district’s September payment.

“The District also discovered that HCCA failed to fund a recent intergovernmental transfer or IGT payment, which resulted in the District losing hundreds of thousands of dollars in critical funding,” the filing states.

The district states that, as a result, it’s had to draw funds from a line of credit that it signed with Vi Healthcare Financing, a finance company owned and operated by Dr. Benny Benzeevi. Benzeevi is also the CEO and sole owner of HCCA.

According to Jaque Hickman, Secretary for the Southern Inyo board, the district anticipates to “retain new management and replace HCCA as its chief [restructuring] officer within sixty (60) days.”

New Ruler in the Roost

A new CFO could be secured from the City of Tehachapi, McDow told the court Tuesday.

“We have an interested party as far as CFO,” McDow said, “who we think, as long as we can commit to two or three years, he is willing to come in. I think the figure is $200,000 for the whole year.”

McDow noted that amount was much lower than HCCA’s management fee, which is upwards of $65,000 per month, subject to a formula similar to the Tulare hospital’s management fee.

“[The Southern Inyo district was] comfortable that we have enough [accounts receivable] sequestered now to fund payroll for the next two weeks,” she added.

The judge in the case allowed the Inyo district to remove the signature authority of HCCA from its bank accounts, and continued the hearing to November 8 at the Eastern District of California Bankruptcy Court at 510 19th Street, Bakersfield, at 11:00am.