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The California Northern Bankruptcy Court dismissed Hazel Hawkins Memorial Hospital’s Chapter 9 bankruptcy case on March 25, citing a $15 million discrepancy in figures provided by the hospital and its financial advisor B. Riley.
On March 29, the San Benito Health Care District Board of Directors unanimously voted to appeal the court’s ruling.
In its report, the court found a $15 million discrepancy in financial reports in the period between December 2022 and April 2023. Judge Stephen L. Johnson, who presided over the case, wrote that Hazel Hawkins’ monthly financial statements and B. Riley’s financial forecast were unreliable and could not prove the hospital’s insolvency.
“With a difference of over $15 million for those months with actual data, the court is also concerned about the accuracy of the projection and the court has no way to confirm the legitimacy of B. Riley’s figures,” the court report states.
According to the report, the health care district showed expenses totalling $143.3 million in 2022 and $158.1 million in 2023. Using those figures, the hospital spent an average of between $11.9 million to $13.1 million per month on expenses in 2022.
The health care district filed for bankruptcy in May 2023. Johnson presided over a four-day hearing on the hospital’s eligibility for bankruptcy protection in December 2023 after the California Nurses Association and the National Union of Healthcare Workers opposed the bankruptcy filing.
According to the USCourts.gov website, Chapter 9 bankruptcy provides a financially distressed municipality protection from its creditors while it negotiates a plan for adjusting its debts.
Jason Vogelpohl, a bankruptcy attorney who works with Chapter 7 and Chapter 13 cases for small businesses or people who cannot pay their debts, said that although he has never dealt with a case like Hazel Hawkins, he agrees with the court’s conclusion that the district didn’t prove it was insolvent.
“Without having been there for the whole trial, it seems like it was a sound decision made by Judge Johnson,” Vogelpohl told BenitoLink.
According to the court report, B. Riley Senior Managing Director Carol Fox attempted to explain differences between B. Riley’s financial forecast and Hazel Hawkins’ financial reports —specifically ending cash balances which were lower than those of the hospital’s financial reports. Fox said it was because the forecast was not based on a calendar month, but rather based on the last week of the month ending on a Saturday. Fox said the forecast only acknowledged revenue that was earned and expenses paid between those dates, unlike the hospital’s financial reports.
This would mean that an invoice received in May but paid in June was recorded in May by the district and recorded in June for B. Riley’s forecast, the court report states.
Contract terms
B. Riley was hired by San Benito Health Care District in November 2022 to help improve the hospital’s finances by restructuring the business and assisting the district in negotiations. The firm implemented its B. Riley Cash Forecast using the health care district’s online banking information and expected payment estimates for services provided, the court report states.
Health care district consultant Marcus Young told BenitoLink on March 22 the district hired B. Riley because of “their broad success in turning around troubled institutions and their skill set in finding appropriate suitors.”
The health care district’s contract with B. Riley outlines the services it required:
- Identifying and evaluating strategic options available to the hospital in order to restructure the business and capital structure
- Advising and assisting the district in negotiations and communications with customers, lenders, vendors and other stakeholders
- Assisting the district with financial and liquidity projections and reports
- Preparing monthly operating reports
- Assisting in bankruptcy management
According to the contract, B. Riley was retained by the district on Nov. 4, 2022, for hourly rates ranging from $175 to $600 an hour, depending on the amount of staff used and out-of-pocket expenses. In 2023, the hourly rates increased to $275 to $650 an hour.
On March 26, BenitoLink requested the district’s invoices from B. Riley. The invoices totaled $1.3 million from November 2022 to January 2024.
According to B. Riley’s website, the firm has provided advisory services since 2008 to 33 health care agencies including Hillsboro Community Hospital, a Kansas critical access hospital, and Pine Creek Medical Center, a Texas surgical hospital.
The bankruptcy court report showed that B. Riley’s financial report added projected expenses such as $4 million for seismic retrofitting.
“This is problematic because no such sinking fund exists; these are purely hypothetical expenses,” the report states. “The District’s financial report shows no accrual for this amount.”
Vogelpohl said that the judge looked at the case the same way an accountant would look at auditing reports and found that expenses that haven’t happened were included in the expense report.
“They’re saying, ‘I have $1 million in the bank but one day in the future I’ll have this $2 million expense,’” Vogenpohl said. “The answer is ‘no, you don’t have this expense now.’”
Conflicting testimony
The court found that the health care district’s witnesses provided conflicting testimony, calling it “perplexing.”
The court’s report states that the hospital and B. Riley staff differed on which set of financial records best represented the hospital’s status and the cash-on-hand goal.
“But the point here is that the district is relying on B. Riley’s process of calculating cash that produces a result that is substantially and consistently lower than its own financial reports without adequate explanation and without evidence that the former is more accurate,” the report states.
The court found that B. Riley’s financial report was “cherry-picking” which expenses it included and failed to follow the court’s insolvency test procedure, which is used to establish whether the district can pay its current and future debts. Webster dictionary defines cherry-picking as “to select the best or most desirable”.
Vogelpohl said the case is not “clear cut.”
“You’d think it would be easy to prove solvency, but clearly with this, there was so much to consider to present all the evidence,” he said. “And then the evidence isn’t clear, it’s conflicting. Bottom line is, under the bankruptcy code, they haven’t proven their insolvency, unfortunately.”
On March 28, the district’s Board of Directors unanimously voted to appeal the court’s ruling.
Young could not say what the appeal will cost the district. The district will not be able to submit new evidence or testimony, as the appeal can look only at the ruling and argue parts of the ruling that were “reviewed incorrectly,” Young told BenitoLink.
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