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St. Joseph Health Services of Rhode Island, Inc. v. St. Josephs Health Services of Rhode Island Retirement Plan

Superior Court of Rhode Island

October 29, 2018


          Providence County Superior Court

          For Plaintiff: ATTACHED LIST.

          For Defendant: SEE ATTACHED LIST.


          STERN, J.

         Stephen 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.[1] The PSA has been executed by and between the Receiver, [2] several named Plan participants acting individually and on behalf of a class of Plan beneficiaries, [3] and 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.[4] 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, [5] as well as the Attorney General (AG), have objected (collectively, Objectors).

         I Facts and Travel

         SJHSRI, 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.[6] 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.[7] Corrected Obj. of CharterCARE Foundation to Receiver's Pet. for Settlement Instr., Ex. A at 1-2.

         To 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)[8] 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).

         On 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.

         On 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[9];
3. An assignment to the Receiver the beneficial interest in CCCB's interest in PCC, [10] including the right to request CCCB exercise the put option[11];
4. An obligation that the Settling Defendants not object to the Plaintiffs' intervention in the Cy Pres proceedings;
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.

         This Court will further discuss the PSA as necessary in its subsequent analysis. After a thorough examination, this Court renders the following order.

         II Standard of Review

         The 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"').

         Moreover, 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.

         In 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"].

         In 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.

         III Analysis

         A Whether the Receiver Acted Within his Authority

         Before 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.

         To 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 *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. . . .").

         The 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 ...

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