ST. JOSEPH HEALTH SERVICES OF RHODE ISLAND, INC.
ST. JOSEPHS HEALTH SERVICES OF RHODE ISLAND RETIREMENT PLAN, as amended
Providence County Superior Court
Plaintiff: ATTACHED LIST.
Defendant: SEE ATTACHED LIST.
Del Sesto, Permanent Receiver (Receiver) for the St. Josephs
Health Services of Rhode Island Retirement Plan (Plan),
petitions this Court (Petition) for approval of a proposed
settlement agreement (PSA) regarding claims asserted by the
Receiver in a federal lawsuit (Federal Court Action), pending
in the United States District Court for the District of Rhode
Island. The PSA has been executed by and between
the Receiver,  several named Plan participants acting
individually and on behalf of a class of Plan beneficiaries,
various defendants-CharterCARE Community Board (CCCB), St.
Joseph Health Services of Rhode Island (SJHSRI), and Roger
Williams Hospital (RWH) (collectively, Settling
Defendants)-in the subject claims. Granting the Petition
would enable the Receiver to petition the federal court for
approval of the PSA, which is a prerequisite for settling a
class action arising under Rule 23(e) of the Federal Rules of
Civil Procedure. The Receiver and counsel for the Plan
participants have submitted memoranda in favor of the
Petition. Non-settling entities in the Federal Court Action,
CharterCARE Foundation (CCF) and the Prospect Entities,
well as the Attorney General (AG), have objected
Facts and Travel
owner and operator of Our Lady of Fatima Hospital (Fatima),
sponsored the Plan as a retirement benefit for its employees.
Receiver's Second Interim Report and Req. for Approval of
Fees, Costs, and Expenses ¶ 2. After years of financial
distress and in the pursuit of operational efficiencies,
SJHSRI entered into an affiliation agreement with RWH, a
corporation that formerly owned and operated Roger Williams
Hospital. Pet. for the Appointment of a Receiver, ¶ 2
n.2, Aug. 18, 2017. Pursuant to the affiliation, RWH and
SJHSRI organized into CharterCARE Health Partners ((CCHP)
n/k/a CCCB). See id. Even after affiliating, CCHP
continued to lose money and solicited bids from potential
acquirers. Mem. Supp. of Joint Obj. of Prospect Medical
Holdings, Inc. 3-4, Sept. 27, 2018. In 2014, CCHP entered
into an Asset Purchase Agreement (2014 Sale) in which it
transferred substantially all of its operating assets to a
newly-formed entity owned by Prospect Medical Holdings, Inc.
(Prospect), known as Prospect CharterCARE, LLC, (PCC), in
exchange for a cash payment and a grant to CCCB of a fifteen
percent interest in PCC. See id. To complete the 2014
Sale, SJHSRI, RWH, CCCB, and the Prospect Entities
(collectively, Transacting Parties) sought approval from the
AG and the Rhode Island Department of Health as required
under the Hospital Conversions Act (HCA). See G.L.
1956 §§ 23.17.14-1, et seq. Corrected Obj. of
CharterCARE Foundation to Receiver's Pet. for Settlement
Instr., Ex. A at 1-2.
satisfy the AG's conditions for approval, SJHSRI, RWH,
and CCF (f/k/a CharterCARE Health Partners Foundation)-a
charitable foundation capable of receiving and administering
the charitable assets previously under CCHP's
control-petitioned this Court for Cy Pres
(see C.A. No. KM-2015-0035). Cy Pres, in
essence, allows a court to modify the use of certain
charitable funds where the previous use is no longer possible
and "it appears that the donor . . . had a general
charitable intent." See Industrial Nat'l Bank of
R.I. v. Glocester Manton Free Pub. Library of Glocester,
107 R.I. 161, 165-66, 265 A.2d 724, 727 (1970). This Court
granted the Cy Pres petition on April 20, 2015
(Cy Pres Order), which allowed the transfer of
various restricted charitable assets (Foundation
Interest) from the control of SJHSRI/RWH into the
hands of CCF; the assets are currently "held, managed,
and administered" by the Rhode Island Foundation. Order
Preserving Assets Pending Litigation ¶ 1, June 29, 2018
(Cy Pres docket).
August 18, 2017, this Court entered an order appointing the
Receiver to temporarily "take control" of the Plan
which, due to its severe undercapitalization, had been placed
into receivership. Order Appointing Temporary Receiver
¶¶ 1-3. Soon after appointing the Receiver, this
Court entered another order allowing the Receiver's
petition to hire the law firm Wistow, Sheehan, & Lovely
PC as counsel (Special Counsel) to investigate the
circumstances resulting in the Plan's underfunding. Order
Approving Receiver's Emergency Pet. to Engage Special
Legal Counsel. On October 27, 2017, this Court entered an
order converting the Receiver's temporary appointment
into a permanent one. Order Appointing Permanent Receiver
(Appointment Order). The Appointment Order gave the Receiver
broad powers, including the authority to prosecute and
compromise claims on the Plan's behalf. Id.
¶ 5. As a result of Special Counsel's investigation,
the Receiver filed suit in the Federal Court Action alleging,
among other theories, that the 2014 Sale was a
"fraudulent transfer" designed to evade the
Plan's obligations to pensioners. See
Receiver's Pet. for Settlement Instr., Ex. F. Recently,
and in relation to the Receiver's ultimate goal to use
the Cy Pres funds to satisfy the Plan's
liabilities, this Court allowed the Receiver to intervene in
the Cy Pres proceeding to present arguments in
support of vacating the Cy Pres Order.
September 4, 2018, the Receiver filed the Petition asking
this Court to approve the PSA executed by and between the
Receiver and the Settling Defendants. See
Receiver's Pet. for Settlement Instr. 1. In particular,
the Petition asks this Court to find that the PSA is in the
"best interests" of the Plan's estate and
authorize the Receiver to proceed in petitioning the federal
court for settlement approval pursuant to Federal Rules of
Civil Procedure 23(e). See Receiver's Pet. for
Settlement Instr. 2. The Objectors contest various terms and
assignments contained in the PSA. The PSA contemplates the
following pertinent terms:
1. An immediate payment of a lump sum (Lump Sum) of at least
$11, 150, 000, which represents 95% of the Settling
Defendants' combined liquid operating assets, up to a
maximum of $11, 900, 000 if the Rhode Island Department of
Labor and Training agrees to release, prior to the due date
for payment of the Lump Sum, the entirety of certain funds
held in escrow (approximately $750, 000);
2. An assignment of CCCB's rights in CCF;
3. An assignment to the Receiver the beneficial interest in
CCCB's interest in PCC,  including the right to request
CCCB exercise the put option;
4. An obligation that the Settling Defendants not object to
the Plaintiffs' intervention in the Cy Pres
5. An admission by the Settling Defendants regarding some of
the claims asserted in the Complaint, including an admission
that the Plaintiffs' damages are at least $125, 000, 000;
6. An obligation that the Settling Defendants, upon the
Receiver's request, petition the Rhode Island Superior
Court for judicial liquidation;
7. A provision providing the Settling Defendants and the
Receiver will execute a security agreement and file a UCC-1
financing statement to secure payment of the Lump Sum and the
Settling Defendants' other obligations under the PSA.
See id. at 6, 7.
Court will further discuss the PSA as necessary in its
subsequent analysis. After a thorough examination, this Court
renders the following order.
Standard of Review
Rhode Island Supreme Court has not articulated a standard for
reviewing a receiver's recommendation to settle a civil
action on an estate's behalf. Our Supreme Court has
noted, however, that this Court "look to the Bankruptcy
Act for guidance" in receivership proceedings.
Reynolds v. E & C Assocs., 693 A.2d 278, 281
(R.I. 1997) (referencing federal law governing priority
between secured creditors to assess priority in receivership
proceeding); see also Philadelphia Indemnity Ins. Co. v.
Providence Community Action Program, Inc., C.A. No.
15-388 S, 2017 WL 354279, at *3 (D.R.I. Jan. 24, 2017)
(citing Bankruptcy Code in considering insured-versus-insured
exclusion in the receivership context); Patel v. Shivai
Nehal Realty LLC, No. KB-2012-0301, 2012 WL 5380060, at
*2-3 (R.I. Super. Oct. 26, 2012) (explaining "where
state receivership law provides minimal guidance, this Court
instead 'looks to the Bankruptcy [Code] and to decisions
by the federal courts for guidance"').
prior rulings of this Court propose that the Bankruptcy Code
is an appropriate lens through which to analyze a
receiver's petition to settle a legal action. See,
e.g., Brook v. Educ. P'ship, Inc., No. PB
08-4185, 2010 WL 1456787, at *3 (R.I. Super. Apr. 8, 2010).
Further, even courts that do not refer to the Bankruptcy Code
in considering whether to approve a settlement follow an
approach akin to that of the Code, explained more fully
below, by inquiring into whether a settlement is in the
"best interest" of the receivership estate. See
In re Liquidation of American Mut. Liability Ins. Co.,
747 N.E.2d 1215, 1217 (Mass. 2001); SEC v. Learn
Waterhouse, Inc., Case No. 04-CV-2037, 2008 U.S. Dist.
Lexis 45825, at *2 (S.D. Cal. June 11, 2008); Davis v.
Lifetime Capital, Inc., Case No. 3:04 CV 0059, 2006 WL
1111960, at *2 (S.D. Ohio Mar. 30, 2006). Therefore, for
purposes of our analysis, this Court will look to the federal
standard for approving a motion to compromise a claim
pursuant to Federal Rules of Bankruptcy Procedure 9019(a), as
promulgated by the United States Supreme Court. See
28 U.S.C. § 2075.
considering a motion to compromise under Rule 9019(a), a
bankruptcy judge must '"assess and balance the value
of the claim[s] . . . being compromised against the value . .
. of the compromise proposal."' Hick, Muse &
Co. v. Brandt (In re Healthco Int'l, Inc.),
136 F.3d 45, 50 (1st Cir. 1998) (quoting Jeffrey v.
Desmond, 70 F.3d 183, 185 (1st Cir. 1995)); In re
Anolik, 107 B.R. 426, 429 (Bankr. D. Mass. 1989). A
bankruptcy judge must consider the following factors:
"(i) the probability of success in the litigation being
compromised; (ii) the difficulties, if any, to be encountered
in the matter of collection; (iii) the complexity of the
litigation involved, and the expense, inconvenience and delay
attending it; and, (iv) the paramount interest of the
creditors and a proper deference to their reasonable views in
the premise." See In re Yacovi, 411 Fed.Appx.
342, 346 (1st Cir. 2011) (citing Jeffrey, 70, F.3d
at 185) [hereinafter "Jeffrey Factors"].
analyzing the Jeffrey Factors, a bankruptcy judge
should "accord deference to a trustee's judgment by
reviewing that judgment only for abuse of discretion."
In Re Whispering Pines Estates, Inc., 370 B.R. 452,
460 (1st Cir. BAP 2007); see also In re Moorhead
Corp., 208 B.R. 87, 89 (1st Cir. BAP 1997). "The
court's consideration of [the Jeffrey Factors]
should demonstrate whether the compromise is fair and
equitable, and whether the claim the debtor is giving up is
outweighed by the advantage to the debtor's estate."
Jeremiah v. Richardson, 148 F.3d 17, 23 (1st Cir.
1998). The bankruptcy judge need not decide contested legal
or factual issues in passing on a settlement's fairness;
rather, the reviewing court must "canvass the
issues" to assess whether the settlement "fall[s]
below the lowest point in the range of reasonableness."
In re Healthco Int'l, Inc., 136 F.3d at 51.
Whether the Receiver Acted Within his Authority
considering the merits of the Petition, this Court must
determine whether the Receiver exceeded the scope of his
authority by (i) entering into a contingent agreement or (ii)
filing a Uniform Commercial Code-1 (UCC) financing statement,
prior to petitioning this Court for approval. The Prospect
Entities argue it was inappropriate for the Receiver to
"consummate and implement a settlement" and file a
UCC-1 effectuating the settlement before interested
parties could object. Mem. Supp. of Joint Obj. of Prospect
Medical Holdings, Inc. 2. The Receiver responds that he acted
within the confines of the Appointment Order and that the
Prospect Entities, if given the chance to object in advance,
would have stalled negotiations and impaired any meaningful
progress toward settlement.
determine whether the Receiver exceeded his authority, this
Court must consider the concept of receivership generally.
The use of receivers originated in the English chancery court
and was considered an important inherent power of the equity
courts. See Ralph Ewing Clark, A Treatise on the
Law and Practice of Receivers §§ 10, 283 (3d.
ed. 1959). Receiverships serve to protect property during an
equitable proceeding in favor of those "ultimately
entitled to possess it." See Peck v. Jonathan
Michael Builders, Inc., C.A. No. KM 06-0236, 2006 WL
3059981, at *5 (R.I. Super. Oct. 27, 2006). This Court
retains the power to appoint a receiver in long-term
wind-downs (such as the present) falling outside the scope of
the Rhode Island Business Corporations Act because the
Act's grounds for appointing a receiver "are not
exclusive." See id.at *6 (explaining the Rhode
Island Business Corporation Act merely supplements, rather
than supplants, the superior court's equitable power);
Cambio v. G-7 Corp., No. 96-0705, 1998 WL 1472896,
at *4 (R.I. Super. Feb. 11, 1998). Possessing permission to
appoint a receiver, this Court has broad authority to define
the receiver's duties. Cf. G.L. 1956 §
7-1.2-1323 ("[T]he superior court has full power to
appoint a receiver, with any powers and duties that the
court, from time to time, directs. . . .").
Appointment Order, which controls the Receiver's duties
in this case, gives the Receiver broad authority to prosecute
and compromise claims on the Plan's behalf: "said
Receiver . . . is authorized, empowered, and directed to . .
. collect and receive the debts, property and other assets
and effects of said Respondent (the Plan), with full power to
prosecute, defend, adjust and compromise all claims and suits
of, by, against or on behalf of said Respondent. . . ."
In fact, the Appointment Order does not expressly dictate the
Receiver needs to seek this Court's approval prior to
compromising a claim on the Plan's behalf. Though
petitioning this Court for approval is certainly the prudent
approach-particularly because ...