A settlement in a closely watched lawsuit over who is accountable when not-for-profit hospitals fail could be good news for stewards of troubled facilities.
Last week, a Los Angeles bankruptcy court judge approved the $1.5 million settlement agreement with the former directors and officers of the now-defunct Granada Hills (Calif.) Community Hospital.
The settlement, to be paid by the hospitals liability insurer, Beta Healthcare Group, is part of a wider trend of director-friendly court decisions in a climate of increased bankruptcy filings, some experts said.
Directors are going to feel more comfortable without too much fear of being sued, said Michael Peregrine, a partner at the law firm McDermott Will & Emery in Chicago.
The case stemmed from the financial collapse of the 139-bed hospital in the San Fernando Valley in 2002. After filing for Chapter 11 bankruptcy protection, the hospitals board of directors hired Healthcare Resource Specialists, a fledgling Tampa, Fla.-based turnaround firm, which no longer exists.
The firm installed two of its principals as Granada Hills chief executive officer and chief financial officer. While the firm continued to collect its fees, the hospital stopped paying payroll taxes and other bills. The hospital liquidated more than $24 million in debt in 2003.
In a move that brought national attention to the hospital closure, David Gottlieb, the bankruptcy trustee, filed a lawsuit in June 2004 alleging that Granada Hills six directors breached their fiduciary duty by hiring an inexperienced turnaround firm and failing to supervise it.
Gottlieb also sought to hold accountable the law firm overseeing the bankruptcy, Coudert Bros., for allegedly not reading mandated monthly financial statements that showed payroll taxes and other bills were going unpaid. But in January, a U.S. District Court judge in Los Angeles ruled the former directors and officers had immunity under Californias business judgment rule, which protects not-for-profits from personal liability if duties are done in good faith.
The $1.5 million settlement is fair and equitable, wrote Judge Geraldine Mund of the U.S. Bankruptcy Court in Woodland Hills, Calif., in her ruling. She agreed with Gottliebs reasons for seeking closure, namely the complexities and expense of litigating the case.
Cary Miller, a partner in the San Diego office of Hooper, Lundy & Bookman, and a lawyer for the former directors, disagreed that the case has national impact. In my opinion, this was a unique case due to the insolvency and bankruptcy of Granada Hills that does not indicate a trend among not-for-profit hospitals, he said.