St. Joseph Health Servs. of R.I., Inc. v. St. Josephs Health Servs. of R.I. Ret. Plan

ST. JOSEPH HEALTH SERVICES OF RHODE ISLAND, INC. v. ST. JOSEPHS HEALTH SERVICES OF RHODE ISLAND RETIREMENT PLAN, as amended

C.A. No. PC-2017-3856

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS PROVIDENCE, SC. SUPERIOR COURT

October 29, 2018

DECISION

STERN, J. Stephen Del Sesto, Permanent Receiver (Receiver) for the St. Josephs Health Services of Rhode Island Retirement Plan (Plan), petitions this Court (Petition) for approval of a proposed settlement agreement (PSA) regarding claims asserted by the Receiver in a federal lawsuit (Federal Court Action), pending in the United States District Court for the District of Rhode Island.¹ The PSA has been executed by and between the Receiver,² several named Plan participants acting individually and on behalf of a class of Plan beneficiaries,³ and various defendants—CharterCARE Community Board (CCCB), St. Joseph Health Services of Rhode Island (SJHSRI), and Roger Williams Hospital (RWH) (collectively, Settling Defendants)—in the subject claims. Granting the Petition would enable the Receiver to petition the federal court for approval of the PSA, which is a prerequisite for settling a class action arising under Rule23(e) of the Federal Rules of Civil Procedure.⁴ The Receiver and counsel for the Plan participants have submitted memoranda in favor of the Petition. Non-settling entities in the Federal Court Action, CharterCARE Foundation (CCF) and the Prospect Entities,⁵ as well as the Attorney General (AG), have objected (collectively, Objectors).

IFacts and Travel

SJHSRI, owner and operator of Our Lady of Fatima Hospital (Fatima), sponsored the Plan as a retirement benefit for its employees. Receiver's Second Interim Report and Req. for Approval of Fees, Costs, and Expenses ¶ 2. After years of financial distress and in the pursuit of operational efficiencies, SJHSRI entered into an affiliation agreement with RWH, a corporation that formerly owned and operated Roger Williams Hospital. Pet. for the Appointment of a Receiver, ¶ 2 n.2, Aug. 18, 2017. Pursuant to the affiliation, RWH and SJHSRI organized into CharterCARE Health Partners ((CCHP) n/k/a CCCB). See id. Even after affiliating, CCHP continued to lose money and solicited bids from potential acquirers. Mem. Supp. of Joint Obj. of Prospect Medical Holdings, Inc. 3-4, Sept. 27, 2018. In 2014, CCHP entered into an Asset Purchase Agreement (2014 Sale) in which it transferred substantially all of its operating assets to a newly-formed entity owned by Prospect Medical Holdings, Inc. (Prospect), known as Prospect CharterCARE, LLC, (PCC), in exchange for a cash payment and a grant to CCCB of a fifteen percent interest in PCC.⁶ See id. To complete the 2014 Sale, SJHSRI, RWH, CCCB, and theProspect Entities (collectively, Transacting Parties) sought approval from the AG and the Rhode Island Department of Health as required under the Hospital Conversions Act (HCA). See G.L. 1956 §§ 23.17.14-1, et seq.⁷ Corrected Obj. of CharterCARE Foundation to Receiver's Pet. for Settlement Instr., Ex. A at 1-2.

To satisfy the AG's conditions for approval, SJHSRI, RWH, and CCF (f/k/a CharterCARE Health Partners Foundation)—a charitable foundation capable of receiving and administering the charitable assets previously under CCHP's control—petitioned this Court for Cy Pres (see C.A. No. KM-2015-0035). Cy Pres, in essence, allows a court to modify the use of certain charitable funds where the previous use is no longer possible and "it appears that the donor . . . had a general charitable intent." See Industrial Nat'l Bank of R.I. v. Glocester Manton Free Pub. Library of Glocester, 107 R.I. 161, 165-66, 265 A.2d 724, 727 (1970). This Court granted the Cy Pres petition on April 20, 2015 (Cy Pres Order), which allowed the transfer of various restricted charitable assets (Foundation Interest)⁸ from the control of SJHSRI/RWH into the hands of CCF; the assets are currently "held, managed, and administered" by the Rhode Island Foundation. Order Preserving Assets Pending Litigation ¶ 1, June 29, 2018 (Cy Pres docket).

On August 18, 2017, this Court entered an order appointing the Receiver to temporarily "take control" of the Plan which, due to its severe undercapitalization, had been placed into receivership. Order Appointing Temporary Receiver ¶¶ 1-3. Soon after appointing the Receiver,this Court entered another order allowing the Receiver's petition to hire the law firm Wistow, Sheehan, & Lovely PC as counsel (Special Counsel) to investigate the circumstances resulting in the Plan's underfunding. Order Approving Receiver's Emergency Pet. to Engage Special Legal Counsel. On October 27, 2017, this Court entered an order converting the Receiver's temporary appointment into a permanent one. Order Appointing Permanent Receiver (Appointment Order). The Appointment Order gave the Receiver broad powers, including the authority to prosecute and compromise claims on the Plan's behalf. Id. ¶ 5. As a result of Special Counsel's investigation, the Receiver filed suit in the Federal Court Action alleging, among other theories, that the 2014 Sale was a "fraudulent transfer" designed to evade the Plan's obligations to pensioners. See Receiver's Pet. for Settlement Instr., Ex. F. Recently, and in relation to the Receiver's ultimate goal to use the Cy Pres funds to satisfy the Plan's liabilities, this Court allowed the Receiver to intervene in the Cy Pres proceeding to present arguments in support of vacating the Cy Pres Order.

On September 4, 2018, the Receiver filed the Petition asking this Court to approve the PSA executed by and between the Receiver and the Settling Defendants. See Receiver's Pet. for Settlement Instr. 1. In particular, the Petition asks this Court to find that the PSA is in the "best interests" of the Plan's estate and authorize the Receiver to proceed in petitioning the federal court for settlement approval pursuant to Federal Rules of Civil Procedure 23(e). See Receiver's Pet. for Settlement Instr. 2. The Objectors contest various terms and assignments contained in the PSA. The PSA contemplates the following pertinent terms:

1. An immediate payment of a lump sum (Lump Sum) of at least $11,150,000, which represents 95% of the Settling Defendants' combined liquid operating assets, up to a maximum of $11,900,000 if the Rhode Island Department of Labor and Training agrees to release, prior to the due date for payment ofthe Lump Sum, the entirety of certain funds held in escrow (approximately $750,000);

2. An assignment of CCCB's rights in CCF⁹;

3. An assignment to the Receiver the beneficial interest in CCCB's interest in PCC,¹⁰ including the right to request CCCB exercise the put option¹¹;

4. An obligation that the Settling Defendants not object to the Plaintiffs' intervention in the Cy Pres proceedings;

5. An admission by the Settling Defendants regarding some of the claims asserted in the Complaint, including an admission that the Plaintiffs' damages are at least $125,000,000;

6. An obligation that the Settling Defendants, upon the Receiver's request, petition the Rhode Island Superior Court for judicial liquidation;

7. A provision providing the Settling Defendants and the Receiver will execute a security agreement and file a UCC-1 financing statement to secure payment of the Lump Sum and the Settling Defendants' other obligations under the PSA. See id. at 6, 7.

This Court will further discuss the PSA as necessary in its subsequent analysis. After a thorough examination, this Court renders the following order.

IIStandard of Review

The Rhode Island Supreme Court has not articulated a standard for reviewing a receiver's recommendation to settle a civil action on an estate's behalf. Our Supreme Court has noted, however, that this Court "look to the Bankruptcy Act for guidance" in receivership proceedings.Reynolds v. E & C Assocs., 693 A.2d 278, 281 (R.I. 1997) (referencing federal law governing priority between secured creditors to assess priority in receivership proceeding); see also Philadelphia Indemnity Ins. Co. v. Providence Community Action Program, Inc., C.A. No. 15-388 S, 2017 WL 354279, at *3 (D.R.I. Jan. 24, 2017) (citing Bankruptcy Code in considering insured-versus-insured exclusion in the receivership context); Patel v. Shivai Nehal Realty LLC, No. KB-2012-0301, 2012 WL 5380060, at *2-3 (R.I. Super. Oct. 26, 2012) (explaining "where state receivership law provides minimal guidance, this Court instead 'looks to the Bankruptcy [Code] and to decisions by the federal courts for guidance"').

Moreover, prior rulings of this Court propose that the Bankruptcy Code is an appropriate lens through which to analyze a receiver's petition to settle a legal action. See, e.g., Brook v. Educ. P'ship, Inc., No. PB 08-4185, 2010 WL 1456787, at *3 (R.I. Super. Apr. 8, 2010). Further, even courts that do not refer to the Bankruptcy Code in considering whether to approve a settlement follow an approach akin to that of the Code, explained more fully below, by inquiring into whether a settlement is in the "best interest" of the receivership estate. See In re Liquidation of American Mut. Liability Ins. Co., 747 N.E.2d 1215, 1217 (Mass. 2001); SEC v. Learn Waterhouse, Inc., Case No. 04-CV-2037, 2008 U.S. Dist. Lexis 45825, at *2 (S.D. Cal. June 11, 2008); Davis v. Lifetime Capital, Inc., Case No. 3:04 CV 0059, 2006 WL 1111960, at *2 (S.D. Ohio Mar. 30, 2006). Therefore, for purposes of our analysis, this Court will look to the federal standard for approving a motion to compromise a claim pursuant to Federal Rules of Bankruptcy Procedure 9019(a), as promulgated by the United States Supreme Court. See 28 U.S.C. § 2075.

In considering a motion to compromise under Rule 9019(a), a bankruptcy judge must '"assess and balance the value of the claim[s] . . . being compromised against the value . . . of thecompromise proposal."' Hick, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 50 (1st Cir. 1998) (quoting Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir. 1995));...