Nine months after buying Retirement Care Associates, long-term-care chain Sun Healthcare Group is suing two former RCA executives for breach of contract and misuse of company funds.
Those same executives are facing criminal charges filed by a Florida state attorney for Medicaid fraud and elder abuse at a Gainesville, Fla., nursing home.
Filed March 12 in Fulton County (Ga.) Superior Court, the suit claims Chris Brogdon and Darrell Tucker misused RCA funds to benefit themselves and the company they founded and now run, Atlanta-based NewCare Health Corp. Brogdon was RCA's chairman and chief executive officer; Tucker was its treasurer.
The suit's defendants include several other former executives of RCA, as well as NewCare and several senior-care companies owned by individual defendants.
The suit asks for $30 million in compensatory damages, including $17 million Sun claims it is owed under a management agreement predating the RCA acquisition.
Sun acquired RCA and a sister company in June 1998 in a stock swap and assumption of debt valued at $320 million.
Phil Rees, NewCare's general counsel, had no comment about the litigation but said the company is considering a counterclaim. Rees, formerly RCA's general counsel, is a defendant in the suit.
This isn't the first time RCA has spelled trouble for Sun.
"It's been a thorn in their side since the beginning," said Charles Lynch, a New York-based analyst for Schroder & Co.
The RCA acquisition took more than a year to complete, and Sun twice reduced its offer. Sun also provided management and ancillary services under contract to some RCA facilities.
After the acquisition, Sun had expected to have six months to ready the 74 skilled-nursing facilities for Medicare's new prospective payment system. But an unexpected HCFA ruling in late July of last year retroactively placed the RCA facilities on PPS as of July 1, 1998.
That meant Sun had to scramble to cut staff and reduce the use of ancillary services at those facilities.
Meanwhile, Sun's financial troubles continue to mount. Last week the Albuquerque-based chain said it was out of compliance with its bank covenants as of December 1998 and was seeking new terms from its lenders.
Sun officials have said the company expects to report steep operating losses and a write-down of impaired goodwill for 1998.
A Sun spokeswoman said that despite the company's financial problems, it will continue to operate and doesn't plan to file for bankruptcy.
Sun operates 421 nursing homes and other long-term-care facilities in 29 states.