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Instead of writing a volume on what I think of the situation, I offer up these other quotes from the court order. Note that the quotes below are not from a plaintiff or defendant throwing out the normal stuff in a court proceeding or moving papers to see what sticks, but from the federal judge.
“The District and its bankruptcy counsel retained B. Riley Advisory Services (“B. Riley”) around November 2022 to provide insolvency analysis and cash management consulting.” [Presented only to establish who B. Riley is and to establish 6 months prior to petitioning the court for bankruptcy, the HHH board was being fooled.]
“The B. Riley Cash Forecast has substantial differences when compared to the District’s audited financial statements and its monthly internal financial statements, and this became a major point of contention during the trial.” [Conflicts in information HHH gave to the court]
“Other than a conclusory declaration from Casillas that she believes every statement in the Statement of Qualifications is true and correct, the District did not provide any evidence to support this blanket statement, identify those trade creditors that have obtained avoidable transfers, or explain why its belief that creditors may attempt to obtain avoidable transfers is reasonable.” [In other words, not credible]
“The District contends that it is insolvent under both tests, and places reliance on the work of retained expert B. Riley for that conclusion.”
“The District argued during trial (and in its closing brief) that it was insolvent on the petition date under § 101(32)(C)(i). It waived that argument by admitting to the contrary”. [HHH contradicted itself]
“Second, the 1.3% figure (even assuming it was the accurate percentage) yields an expense that is far less than $4.05 million for FY 2023. Working in reverse, the District would need a payroll of more than $311.5 million to owe anything like those amounts, especially when the Unions represent only about 80% of employees and the 1.3% is of base pay only. The facts show that in 2023 the District budgeted for $67.7 million in salaries and wages. The audited financial reports show salaries and wages expenses of $56.8 million in 2022 and $51.7 million in 2021.”
“…the District did not provide any evidence to support this blanket statement, identify those trade creditors that have obtained avoidable transfers, or explain why its belief that creditors may attempt to obtain avoidable transfers is reasonable.”
“Fox testified that her firm B. Riley was retained by the District to assist with cash flow problems in late 2022. T2, 9:2-8. Her firm prepared the B. Riley Cash Forecast from the District’s online banking information, as supplemented by the District’s payment records and its estimates of payments it expected to receive for services performed… B. Riley also prepared the San Benito Health Care District dba Hazel Hawkins Memorial Hospital Solvency Analysis as of May 23, 2023 (dated October 30, 2023) (“B. Riley Expert Report”)…The court does not find these two sources are sufficient to meet the District’s burden of proof.”
“B. Riley concludes the District will run out of cash by the end of 2024, and its factual premise is the B. Riley Cash Forecast. However, B. Riley’s customized numbers are far different than the figures in the District’s monthly financial reports.”
Mark Robinson admitted that the cash balances generated by the District’s financial reporting system were reliable, testifying they were “an accurate representation of how much money the District had to pay its bills” in any given month.
“Some of the testimony at trial was perplexing. Fox testified that ending a reporting period on the Saturday of the last full week of a month accurately reflected cash flow, but she did not explain why or how that is more accurate. Hurley testified he was not aware of a methodology that relied on a transaction cut off that varies from zero to six days before the end of the month.”
“The court agrees with Hurley’s testimony that the difference in recording method of a few days may account for some discrepancy, but not the significant differences shown here.”
“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.”
“In sum, the District has not proven that the B. Riley Cash Forecast presents a sound basis for analyzing the District’s cash flow.”
“Although there are a few post petition days included in the month, the point is that the Riley Cash Forecast continues to understate the cash balance whereas the District’s cash flow statement shows continued improvement.”
“The B. Riley Expert Report presented a cash insolvency test. B. Riley admitted that the starting point for its cash insolvency analysis is the B. Riley Cash Forecast, which the court has already found to be unreliable. B. Riley also considered the actuarily determined contributions to the Defined Benefit Plan as contractual obligations to be accounted for in the cash flow analysis, which is legally incorrect as discussed above. The court finds additional problems.”
“An example shows how this analysis has gone wrong. B. Riley added $4,285,714 in expense to the cash flow analysis in 2023 for seismic retrofitting. The District says it requires $30 million to comply with seismic regulations by 2030. The B. Riley Expert Report imagines a “sinking fund” that began in 2018, which would require a cash allocation each year from the budget, which it calculates at $4,285,714 for 2023. This is problematic because no such sinking fund exists; these are purely hypothetical expenses. The District’s financial reports show no accrual for this amount.”
“It is also problematic in view of Hurley’s testimony that large capital projects are usually paid for with debt, charitable contributions, or (lastly) internal funds. No one contradicted his testimony. And the District introduced no evidence to show that the only means of funding this expense is internal funds. In any event, it seems likely that the scope and timeline of the 2030 requirements may change, or extensions may be given. The court does not doubt that paying for the seismic compliance will be a tough task, especially for smaller hospitals with limited resources and funding such as the District, but for the purpose of § 101(32)(C)(ii), the obligation to set aside funds now is not ‘certain’ and does not have an ‘inescapable quality.'” [presented as board members routinely claim this as a reason to sell the hospital]
“B. Riley analyzed the District’s cash holding by measuring “days of cash on hand.” It concluded that the District had a cash shortfall of $36.9 million on the date of the bankruptcy filing and was insolvent. Indeed, B. Riley contends the District’s failure to satisfy this metric, standing alone, requires a finding of insolvency. B. Riley’s methodology is speculative and flatly inconsistent with the District’s historical experience.”
“B. Riley might be right – if the days’ cash on hand figure were iron-clad and reliable. But it is not. First, it bears mention that interim CEO Casillas cited a completely different goal of 222.48 days’ cash on hand in her declaration, based on the median days’ cash on hand for all California critical access hospitals.”
“The District’s analysis on this point is not properly supported. The District has never had anything like 118.3 days’ (let alone 222.48 days’) cash on hand. Taking B. Riley’s suggested figure of 118.3 days as the “normalized” level separating insolvent hospital districts from solvent ones, the District has been insolvent every year since 2017 (the earliest data that was presented at trial). Historically, the District’s days’ cash on hand has been low due to its small size, and its status as a stand-alone health system that cannot provide a full range of services, such as cardiology and neurology.
“Moreover, the source of the 118.3 figure is somewhat hazy. The B. Riley Expert Report indicates that the figure was from analyzing days’ cash on hand “at all California healthcare districts that operate hospitals.” (emphasis added). But in his testimony, Jacobson indicated that the sample size was from twenty California healthcare districts that were “sufficiently similar” to the District. The evidence conflicts as to the data set that was the source for the 118.3 figure; the record does not clarify this point.
“Finally, the District’s independent auditors would have been surprised to know the District had been insolvent every year since 2017. The audited financial statements presented to the court all indicated that ‘[t]he Hospital maintains sufficient cash and cash equivalent balances to pay all short-term liabilities.’ The District failed to present a coherent theory to show the appropriate number of days of cash on hand for the District. For these reasons, the court does not find the B. Riley Expert Report to be a reliable source of information for determining insolvency and discounts its conclusions accordingly.”
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