Three upcoming November and December hearings in U.S. Bankruptcy Court in Columbus, Ohio, may provide an idea of what is likely to happen to the assets of the bankrupt and scandal-plagued National Century Financial Enterprises.
At the hearings, creditors will get a chance to comment and vote on what is known as a "disclosure statement" for NCFE, a Dublin, Ohio-based financing company that filed for Chapter 11 bankruptcy protection in November 2002. The company advanced hospitals and healthcare providers funds at high interest rates against their accounts receivable, which were then packaged and sold as bond issues.
Last year NCFE filed for bankruptcy protection from creditors, and the holders of those bond funds lost nearly $3 billion. The FBI raided its offices, and its chairman and co-founder, Lance Poulsen, subsequently resigned along with other board members. The bankruptcy catapulted more than 270 healthcare providers, including a dozen hospitals, into bankruptcies of their own.
New York-based crisis management company Alvarez & Marsal, hired to oversee the company the day after Poulsen's resignation, filed the disclosure statement last month. In the document, NCFE describes its plan to liquidate assets and distribute proceeds to hundreds of creditors. The final date for filing additions to the disclosure statement is Nov. 3, with a Nov. 17 deadline for objections and a Dec. 1 hearing on the statement.
The disclosure statement provides a concise history of the final days of NCFE, chronicles events from the bankruptcy and lists debtors. It noted, for example, that tiny 36-bed Lincoln Hospital Medical Center in Los Angeles owes more than $251 million to NCFE, an amount that astounded Alvarez & Marsal Managing Director David Coles, who was named NCFE president and chief executive officer. Coles, who has supervised the company's wind-down and collection process during the bankruptcy, said the previous management continued funding to financially troubled providers without regard to the adequacy of collateral.
"Lincoln and other healthcare providers weren't motivated to fix their businesses to make them profitable," said Coles, who added he couldn't explain precisely how the providers lost as much as they did. Coles theorized that the money was squandered in operating losses.
Late last year depositions in the bankruptcy case revealed that NCFE advanced millions of dollars in loans to healthcare providers based on future as well as current accounts receivable, along with art and real estate owned by the providers.
Scottsdale, Ariz.-based Doctors Community Healthcare Corp., a privately held, five-hospital system that received financing from NCFE (which owns an 11% stake in Doctors Community) also filed for bankruptcy in November 2002, owing more than $600 million to the financing company. Doctors Community has filed claims for $300 million from NCFE, alleging contractual breaches and improper conduct.
Because Doctors Community is in bankruptcy, it must sell its remaining four hospitals to satisfy creditors. But in a strange twist of fate, Doctors Community Chairman and founder Paul Tuft said he is bidding this month in the auction to repurchase the hospitals from the bankruptcy estate. Tuft and NCFE partner Erich Mounce have formed a new company to buy and operate the hospitals, which they are currently managing under debtor-in-possession bankruptcy provisions. Tuft said he is working to obtain financing from an undisclosed source to purchase the hospitals.
"I'm not sure how much impact the NCFE disclosure will have on Doctors Community," said Cain Bros. investment banker Thomas Barry, who represents Doctors Community. Barry said by Nov. 24 the winning bids should be identified and Doctors Community's bankruptcy could be completed by Dec. 12, pending possible litigation.
The disclosure statement, if approved by the bankruptcy court, would outline the Chapter 11 process for closure. The plan is to create separate liquidation and litigation trusts to dispose of the remaining NCFE assets and pursue lawsuits seeking recoveries from its founders, board members and officers, as well as trustees of the bond funds. Coles said the disclosure statement is a routine step and will not likely affect providers who had received financing from NCFE.
"It doesn't impact them. This is merely a way of announcing that NCFE is ceasing to exist and is becoming two trusts set up to recover assets to distribute out to people who own a right to those proceeds," Coles said. "It will be invisible to providers. They will continue to deal with the people they've dealt with in the past."
He said the financing company has aggressively pursued collections from those who owe money, negotiating recoveries from frozen assets and settling with creditors. And he said NCFE has hired Houston law firm Gibbs & Bruns as the litigation trustee to spearhead any legal action and seek recoveries from third parties, such as former officers and fund trustees.
"They will pursue claims on a contingent fee basis," he said. "They are motivated because of compensation structure to go after those who have done wrong and have the ability to pay."
Those could include NCFE officers, board members and the bond fund trustees and their attorneys, as well as providers who may not have honestly disclosed their financial status to the company and borrowed from NCFE much more than they were legally entitled.
If the disclosure statement is approved by creditors Dec. 1, Coles said, it could open the door to a vote on resolution of the bankruptcy case in early 2004 and the distribution of liquidation trust assets by year-end. He said the litigation trust could take one to five years to complete its recoveries and settlements.
A lawyer working on the bankruptcy case who asked not to be identified said complicating the financial morass is that the NCFE clients are both its creditors and debtors. The company loaned money to the providers, but in some cases also failed to pay back accounts receivable it possessed that were transferred each week into an NCFE-controlled account.
The bankruptcy froze that money, leaving many providers without cash flow and pushing them into bankruptcy. Complicating the matter further, NCFE founders and board members held ownership stakes in a number of those now-bankrupt companies that were NCFE customers.
"We have the concept of dueling bankruptcies because most of the biggest healthcare providers are also in bankruptcy now, pitting one financial basket case against another," he said.
The lawyer characterized many of the providers who borrowed money from NCFE as "financial sinkholes."
"This is a remarkable story. Those claims didn't just happen overnight," he said. "The money went somewhere. And that's the real story."