Bankruptcy and Winona and Health Care & Life Sciences

Winona Hospital litigation fizzles

January 1, 2007

A court-appointed trustee in charge of Winona Memorial Hospital's bankruptcy says he believes former owners fleeced it for more than $4 million. But he has little to show from his two-year quest to recover money for creditors and now is winding down the case.

Trustee Paul Gresk said he hopes to conclude the bulk of his work soon by distributing $150,000 among the hospital's 160 employees, who didn't receive their final paycheck when Winona closed in 2004.

"It's time to give people money, I guess that's the bottom line," he said. "We've been fighting this. We're in the 12th round, and people are kind of exhausted. They want the reward."

The hospital, 3232 N. Meridian St., struggled in the competitive Indianapolis market partly because it drew from poor neighborhoods filled with residents on Medicaid or Medicare, which provide lower reimbursements than private insurance.

But Gresk charges that a former owner and the hospital's former CEO made matters far worse by draining more than $4 million from Winona, helping to propel it into bankruptcy.

Trouble is, the former owner--Texas-based Leland Medical Centers Inc.--its CEO, and Winona's former CEO also have filed for bankruptcy protection over the past two years.

As a result, Gresk said, collecting the $4 million is "a pipe dream."

Selling real estate

Winona's largest creditor, New York-based lender CIT Group Inc., is owed $5 million, but that's just a slice of the hospital's debt. Other creditors, such as suppliers, also are owed significant amounts, though a precise figure was not available.

As a secured creditor, CIT is in line to receive all the proceeds from the sale of Winona's largest remaining asset, the empty hospital.

A sale may be near, said Gus Miller, a principal with the Indianapolis real estate firm NAI Olympia Partners, which is marketing the property for CIT. He said an out-of-state firm has made an offer, and a local suitor also appears interested.

"We're talking to two different parties, and it feels like the heat of the moment," said Miller, who declined to elaborate. "Hopefully this won't be like a hot flash."

CIT became embroiled in Winona's woes by buying New Jersey-based Healthcare Business Credit Corp., which had provided a steady stream of loans to the hospital to keep it afloat. Miller said CIT is "highly motivated" to make a first-quarter sale.

He traded offers earlier this year with a Chicago group that wanted to buy the hospital, but that fell through. A plan to convert Winona into a long-term treatment center for drug and alcohol abuse also fizzled.

The property originally went on the block for $8 million. Now it has no price attached to it, and the offer is "significantly less" than the $5 million CIT is owed, Miller said.

Even so, he said, it's worth considering.

"CIT feels like the property has been fully and adequately exposed to the market, and right now it's a matter of price," he said.

Another major hospital creditor, Walther Cancer Institute, in June sold an office building and 325-space parking garage adjacent to private investor Gary Aletto.

The Carmel resident, who declined to comment on the sale price, said he bought the building because it seemed like a good investment, and he has no long-term plans to tear it down.

Asked if he was interested in buying the hospital as well, Aletto replied, "I have no idea. How's that for a vague answer?"

An array of problems

The 48-year-old hospital closed in September 2004 after creditors filed an involuntary petition for Chapter 7 bankruptcy against it. The hospital once housed 450 beds, but had about 25 patients when it closed.

It struggled for years because of a lack of capital investment and a bad location, among other factors. Gresk also said the hospital was "grossly mismanaged."

Leland Medical Centers, which owned a chain of small Texas hospitals, bought Winona in 2002 and then sold it to a doctor-led group of investors a few months before it closed.

Under Leland's watch, $3.6 million was transferred from the hospital to the parent company with no services given to Winona in return, Gresk said. He also questions $865,000 transferred to former Winona CEO Patrick Feyen.

In 2005, the trustee sued Leland; its CEO, Charles Simons; and Feyen, accusing them of fraudulently transferring the money. The defendants filed a response denying doing anything improper. Last week, Feyen could not be reached, and an attorney for Simons said his client denies "wrongful conduct."

Gresk said they may only recover less than $100,000 from that claim.

"Simons, Feyen, no one has any of the money for this," he said.

The trustee's other efforts to recover money for creditors have had some success. A 2005 auction of hospital equipment brought in $1.1 million, for example.

Gresk also is optimistic he'll be able to collect smaller sums from an array of vendors and others the hospital paid after it became insolvent.

For instance, he filed a complaint in August to recover $105,000 from Meridian Emergency Physicians, which ran Winona's emergency room.

The trustee also will get $3,000 from Dr. Robert Mehl, a former hospital board chairman and one of the physician investors. Winona paid Mehl nearly $6,000 two days before he told employees the hospital would close.

Overdue payments

Gresk said he hopes to make employee payments by late January or early February, once he receives the $150,000, which comes from some lingering payments collected for hospital services.

"I hope so, too, because we could certainly use the money," said Annette Marchand, a critical care nurse who worked for more than 20 years at Winona. "I'd like to retire."

Marchand, 67, said Winona owes her $7,145, counting salary, vacation pay and money missing from her 401(k) retirement account.

The hospital withheld more than $50,000 in employee 401(k) contributions, according to bankruptcy court records. Feyen said in 2004 Leland used it for Winona operating expenses and planned to repay it.

Marchand said her 401(k) was short $1,774, but Leland repaid just $1,000.

She said she had savings to fall back on when her final paycheck failed to arrive, and she found another job at Clarian West Medical Center in Avon. But aides she worked with at Winona weren't so lucky.

"That devastated them when they didn't get their last couple weeks of earnings because they had bills to pay," she said.

After the payments to employees, Gresk said, remaining money would go to the hospital's other creditors. But they shouldn't except a windfall.

"Obviously, I don't have a pot of gold," he said.

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