Health Care and Insurance and Real Estate & Retail

Ex-Winona owner under fire: Leland Medical Centers CEO faces fraud accusations, questions about his own bankruptcy

February 13, 2006

Accusations of fraud and other misconduct are piling up against the former owner of Winona Memorial Hospital.

Two companies recently joined Winona's creditors in questioning money transfers made by Texasbased Leland Medical Centers Inc., which owned the nowdefunct Indianapolis hospital from 2002 until a short time before it closed in 2004.

Meanwhile, lawyers sorting through the liquidation of Winona still have no explanation for why Leland took $3.6 million from the struggling Indianapolis hospital before it slid into bankruptcy and closed.

Leland's latest legal woes stem from its own bankruptcy filing and that of its CEO, Charles L. Simons. Both Simons and Leland sought protection from creditors last fall.

Two of those creditors, Texasbased Sterling Bank and California's Meridian Commercial Healthcare Finance, accuse Leland officials of setting up a parallel health care company just before the bankruptcies and transferring money to it to avoid paying creditors, according to lawsuits filed late last month against Simons in U.S. Bankruptcy Court in Texas.

The Winona estate, with its $3.6 million claim, is among the largest unsecured creditors listed in both the Simons and Leland bankruptcy filings.

The Meridian complaint accuses Leland of diverting business opportunities to the new company, Crown Hospital Partners Inc., and using Leland money to pay Crown bills.

"Crown, by burdening Leland with all the expenses, has achieved a perfect profit margin," the complaint states.

The company's Web site, which is still under construction, proclaims that Crown wants to become a leader in designing, building and managing short-stay hospitals. It lists Simons and another Leland executive, Michael Vaughn, as senior management.

Leland provides hospital management. It also used to own a handful of hospitals in Texas, in addition to Winona.

The Meridian complaint states that both Leland and Crown Hospital Partners have the same address, a home in McKinney, Texas.

The lawsuits also claim Leland never informed the bankruptcy court of the new business.

"A penny can't go out of the bankrupt estate without 1) bankruptcy court approval, or 2) permission from the secured creditors," said Sterling Bank attorney David Woods.

Neither Simons nor his attorney returned calls seeking comment, but the Meridian complaint states they claim to have started Crown to secure lower unemployment and health insurance rates on Leland's three employees.

Both lawsuits ask the bankruptcy court to deny Simons protection from creditors.

If the court complies, Simons will remain on the hook for all his debts, and Winona's bankruptcy trustee could proceed with his own litigation, which seeks an explanation for the money transfers and to recover as much money as possible for the hospital's creditors.

Troubling transfers

Leland leaned so heavily on Winona for financial support that the Texas company violated Indiana business law, according to Paul Gresk, the court-appointed bankruptcy trustee supervising Winona's liquidation.

Gresk filed a lawsuit last April against Leland, Simons and former Winona CEO Patrick Feyen. It accuses the Texas company of fraudulently transferring money from the hospital without providing a comparable value in return.

Leland dipped into Winona coffers to grab money about 50 times over a 20-month period, even though the hospital struggled to pay bills the entire time, according to Rod Hall, an Indianapolis accountant who reviewed the hospital's records for Gresk.

Leland took a total of $3.6 million from Winona, mostly through transfers a few times a month between hospital and Leland bank accounts in Texas. Sometimes, Leland took as little as $10,000. Other times, it transferred six-figure totals.

For instance, Winona records show three transfers totaling $550,000 in November 2002, shortly after Leland bought Winona from California-based Tenet Healthcare Corp., Hall said.

They show another $200,000 transferred in January 2003.

Most transfers coincided with the deposit of Medicaid or Medicare money in Winona accounts, Hall said. Hospital records offer no detail on why the money was then transferred to Leland.

"I think it was either corporate or another hospital needs $100,000, and Winona has it right now," Hall said.

An attorney representing Leland has said some of the money transferred to Texas did go toward fixing the hospital's problems. In addition, Leland sometimes waived the $75,000 monthly hospital management fee it was entitled to collect.

However, Hall said the Texas company always took more than it gave.

The transfers continued up until May 2004, when Leland sold the hospital to a physician-led group of investors.

The hospital also paid Feyen $30,000 a month, covered his weekly commute from his Texas home, and picked up the tab on his car rental, apartment and meal expenses, Hall said.

Meanwhile, Winona struggled to pay its bills and slid toward insolvency. Hall said many suppliers demanded cash on delivery for equipment. He saw examples in the records of controllers writing checks to pay bills and then holding them until funds filled the necessary account.

During Leland's tenure, doctors complained about steady supply problems.

"By July and August '03, the fact that they're taking any money out ... . I mean, the hospital is dying and they're grabbing $50,000," Hall said. "That would nearly make a payroll."

Indiana's civil limited liability company law prevents an entity from withdrawing money from an insolvent company. Both Gresk and Hall say Leland violated that law.

"They can't be withdrawing funds and, in effect, paying themselves at the expense of other creditors," Hall said. "There can be no preference toward them. They're a creditor along with everyone else."

Picking up the pieces

Winona survived only three months after the doctor-led investor group took over in May 2004.

Hall said closing documents he reviewed showed the investors were supposed to contribute more than $1 million in the deal but ultimately put in just $500,000 to $600,000.

"[Winona] needed funding at that point, significant funding, and it just didn't happen," Hall said, adding that he's not accusing the investors of wrongdoing.

Dr. Robert Mehl, who led the investor group, could not be reached for comment. Robert J. Hicks, an attorney who represented the investors during that sale, has insisted the money was invested properly.

Gresk has spent more than a year trying to find money to pay off creditors, including hospital employees, who are still awaiting their final paychecks.

"A lot of people from the top up got a lot of money," Gresk said. "A lot of the people on the bottom, including the employees, are looking for money."

The trustee has a daunting IOU list. Winona's biggest secured creditors are New Jersey-based Healthcare Business Credit Corp., which is owed more than $5 million, and Indianapolis-based Walther Cancer Institute, owed more than $2 million.

In an effort to raise cash, Winona's main creditors have agreed to hire a real estate broker to shop the empty hospital to potential purchasers. If that fails, they may sell the hospital through a sheriff's auction.
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