Legal Issues and Bankruptcy and Winona and Hospitals and Law and Real Estate & Retail

Winona trustee still fighting hospital creditors, ex-owner

February 11, 2008

Paul Gresk, the bankruptcy trustee overseeing the liquidation of Winona Memorial Hospital, has a reputation for being aggressive.

But in this case, he's been downright feisty. Gresk is pushing for a showdown in court to prove his claims that Winona's former owner, Leland Medical Centers Inc., illegally transferred more than $4 million out of Winona.

Gresk, 56, will get his chance next month at a critical hearing in a Texas bankruptcy court.

But for the first time, Texas-based Leland is actively fighting back, claiming its records show Leland loaned Winona $3.3 million that was never repaid.

These big numbers might be moot for both sides. With both Winona and Leland in bankruptcy, neither side has nearly enough assets to pay off the other's claim.

In fact, even if Gresk wins his claim, at best Winona might recover $30,000, according to an estimate by an accountant working for Gresk.

"We don't have a big pot we're chasing," Gresk admitted.

As the hearing nears, the two sides are scrapping at each other with the ferocity of a schoolyard rumble. They're even disputing whether or not Leland recently made a settlement offer, which Gresk says would have required him to retract accusations he and his accountant, Rod Hall, made against Leland in IBJ.

Gresk and Hall told IBJ in February 2006 that Leland dipped into Winona coffers 50 times over 20 months, even as the hospital struggled to pay bills and missed a payment to its employees' 401(k) plans.

Winona, 3232 N. Meridian St., was Indianapolis' first for-profit hospital when it opened in 1956. Leland owned Winona for two years until selling it in May 2004 to a group of Winona doctors. Creditors dragged Winona into bankruptcy court later that year, prompting the doctors to close the hospital in September 2004.

Even as Winona closed its doors, employees accused Leland of sucking money out of the 317-bed hospital. After Gresk got hold of a consultant's report that had examined Winona's finances two months before Leland sold the hospital, he attacked.

The report claimed that Leland had withdrawn "management fees and loans" from Winona that, combined with the $3 million Winona had lost in the three years before Leland bought it, had put the hospital on the brink of failure.

Winona's largest creditor, Healthcare Business Credit Corp., hired Cleveland-based Philip + Co. to produce the report. The credit corporation has since been acquired by New York-based CIT Group Inc.

Gresk sued Leland in April 2005, demanding it return the money. Leland, a hospital design and management firm, once operated a string of Texas hospitals.

Leland attorney Howard Marc Spector says Leland's purchase of Winona entitled it to a monthly management fee ranging from $75,000 to $125,000. He said Winona rarely paid those fees.

He cited a Leland ledger that shows that money flowed back and forth between Leland and Winona. Ultimately, however, Leland loaned more to Winona than Winona loaned to Leland--$3.3 million more, he said.

"Absolutely, there is money coming out of Winona to Leland. And there are loans from Leland to Winona," Spector said. "Yeah, they paid it back, but we loaned more."

If Leland can prove that it did not illegally take money from Winona, Gresk said he's willing to back off. But, he added, he just received the first batch of documents from Leland and Spector the week of Feb. 4.

"I've been chasing him for four years," Gresk said.

Within the last two months, Gresk said, Spector told attorneys working for Gresk in Texas that Leland would approve his claim if Gresk "retracted" his assertions as published in IBJ. Gresk called the offer "inappropriate." He's not budging.

"The claim is either real, or it's not real," Gresk said. "I'm sticking by that story," he said, adding, "Leland basically raped the hospital."

Spector denies such an offer, and said he hasn't talked to Gresk in two years.

Gresk's doggedness is no surprise to Indianapolis bankruptcy attorney Henry Efroymson. He said he's worked with Gresk on many of the thousands of bankruptcy liquidations Gresk has handled in his 20 years as a trustee.

"Paul is no pushover," Efroymson said. "Not only is he an experienced bankruptcy trustee, but also he is experienced in complex litigation. I think Leland should take his claim very seriously."

Of course, Efroymson has his own reasons for saying that. He represents Winona's second-largest secured creditor, the Walther Cancer Institute. Winona owed Walther $2 million when the hospital entered bankruptcy in August 2004. The debts owed to Walther and CIT Group are secured by Winona's real estate.

So far, no sale of that property has materialized. The property broker, Gus Miller of NAI Olympia Partners, did not return phone calls seeking comment.

The property was first listed for $8 million. In December 2006, Miller told IBJ there was a deal pending for considerably less than $5 million. But even that one fell through. Efroymson blamed the age of the buildings and their highly specialized use.

Leland filed bankruptcy in October 2005 claiming nearly $10 million in liabilities and about $12,000 in assets. Whether Winona's claim against Leland yields any money hinges on another lawsuit Leland has against its former treasurer. He allegedly took confidential architectural plans and other work from Leland and gave it to a Texas company called Huffman Builders.

Hall, the Indianapolis accountant working for Gresk, estimated that even if Winona wins against Leland and Leland wins against Huffman, Winona might only walk away with $30,000. And it might take another year or two to get it.

Gresk also has pressed his $4 million claim against Simons and Winona's former CEO, Patrick Feyen. However, both of them have been in personal bankruptcy since Leland sold Winona to the group of doctors.

A Texas bankruptcy judge dismissed claims against Simons. A trial against Feyen is scheduled later this spring.

Attorneys for Simons and Feyen declined to comment.

Gresk hasn't worked the Winona case for free. Court records show he or his firm, Gresk & Singleton, had been paid $160,000 as of Oct. 31.

But Gresk insists he's trying to save money and wrap up the case soon. He recently canceled a deposition of Simons and one other witness in order to save costs. He said he's just focused on paying to send Hall to Texas to testify against Leland.

"Look, I want my day in court," Gresk said. Spector, however, said the same.

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