Third in a series
[Editor’s Note: See Part 2, “Brotman Financial Turnaround Is Underway, According to CEO,” April 28.]
Bankrupt Brotman Medical Center and its most obvious suitor, who also doubles as its banker, Prime Healthcare Services of Victorville, are due back in a 14th floor courtroom in downtown Los Angeles on Tuesday morning.
Presently in dispute is whether Brotman owes another $8 million that would be piled atop its undisputed $19 million debt.
Stan Otake, Brotman’s CEO since last autumn when the hospital filed Chapter 11 bankruptcy, has devoted a huge chunk of time trying to gain “a decent understanding of what is happening on this playing field.”
“There are three factions involved.
“We have an Unsecured Creditors Committee, the group of vendors, business associates of the hospital to whom the hospital, prior to filing for bankruptcy, owed a lot of money.
“There is the lender, Prime Healthcare Services, and the debtor, Brotman Medical Center.
“There is a loan that was put out by CapitalSource of Chevy Chase, MD, that was purchased by Prime Healthcare Services in early April.
Inner Workings
“The unknown in that loan is what I like to term ‘junk fees,’ default penalties and defaults of covenant, since our money is controlled by our lender. Our cash is collected here at the hospital, swept daily by our lender. We cannot default on a loan payment. That is offset against our credit facility.
“That credit facility included our pre-bankruptcy debt to CapitalSource, and then carried forward. We have a ceiling, similar to a credit card maximum, as to what we can spend.
“That ceiling never has been exceeded in operating nearly 6 months under bankruptcy. We’ve also never gotten an increase in it, despite the exorbitant expenses involved in the bankruptcy process. We have stayed within budget.”
Question: Prime Healthcare seems primed to step in as the next owner of Brotman.
“No. I believe Prime said it correctly in court, and I take them at face value. Through their attorneys, Prime said that they felt this was a no-lose proposition. They can make money as a lender, or if the borrower defaults, they are in good position to at least credit bid as part of the sales process. It wouldn’t be automatic they would get the hospital.
“But in a court-sanctioned sales process, they would have at least a bid in there, which is the loan amount.”
Question: Would Prime, with its credit bid, hold an unmatchable edge over rival bidders?
“Not necessarily. Other operators felt that the assets would be… Prime could credit-bid what the loan is now. What is in contention in court is the so-called junk fees, and I am trying to get to that.
“Post-bankruptcy, we developed a budget that was approved, based on what we believed would be a 155-daily patient census. With the support we have been able to generate, with our medical staff and marketplace opportunities and the hard work of our employees, we have been able to increase our business.
“Defaults would trigger if we spent more money on salaries because we had 180 patients, or if we spent more money on supplies because we had more patients than we had anticipated.
“This has been discussed at the court level. Our judge, who is very fair, who is in tune with healthcare, has quoted this as ‘happy default,’ as in, ‘Aren’t they doing well, lender, in that they are seeing a higher number of patients?’ And these are not indigent patients. They are patients with the means to pay, and the hospital has worked hard to secure them.
A Prime Lesson
“The first time we went to court (last month) with Prime, and they were admonished by the judge, they had to admit they are not a lender. This is their first lender involvement. The judge forced them down a path that I feel puts them in a precarious position as relates to the funding request we put out, which they had issues with.
“Prime’s position with Brotman is very similar to the lender of your mortgage. They can’t tell you what color you can paint your house or how often to mow the front lawn.
“Once they start meddling in the borrower’s business, it is called lender’s liability. The judge gave them a discussion on lender-liability, and a scarier term, equitable subordination, in which the liens are taken off their loan. They are not a secured lender anymore. They are an unsecured lender.
“Since that time, the interaction with Prime has been purely related to our financial issues and discussions regarding our borrowing base.
“We are performing nicely, as I have said. If we weren’t, we would have exceeded our $19.6 million. We wouldn’t have money to pay for supplies.
“We are a functioning hospital. I have been able to recruit professionals who are committed to our goal, our mission, providing world-class healthcare for the community.
“It just seems as if…
“The progress we make is sometimes…
“If this were not a bankrupt hospital, this processing issue would not be news.”
(To be continued)
