Ex-prospective buyer sues St. Francis Hospital

A Tennessee health care company that had been in discussions with St. Francis to purchase the financially strapped hospital has filed a federal lawsuit seeking to recover more than $5 million invested in a deal that collapsed.

CHSPSC, a subsidiary of Community Health Services of Franklin, Tenn., said St. Francis “has intentionally hidden and lied about material facts regarding the hospital’s problems.”

A motion by CHSPSC to seal the suit was filed Friday in U.S. District Court, Middle District of Georgia. There was no immediate ruling on the request to seal the suit, which has not yet been made public.

Community Health Services is one of three companies with which St. Francis has said it has had purchase discussions since last November, when the hospital’s deep financial crisis became public.

In January, St. Francis announced it was in exclusive discussions with Atlanta-based Piedmont Healthcare, a nonprofit organization like St. Francis. By early March, St. Francis and Piedmont had mutually agreed to open the search process back up.

In early April, St. Francis started “exclusive discussions” with Community Health Systems. The chairman of the St. Francis Board of Trustees said July 29 they were no longer in exclusive discussions with any company.

The next day, St. Francis announced it had signed a letter of intent to be acquired by LifePoint Health, a Brentwood, Tenn., health care company.

“St. Francis will have no comment about a court action filed under seal,” spokeswoman Amy Adams said via email. “St. Francis will deny and rigorously defend itself against any public accusations by CHS.”

The motion to seal the case claims the lawsuit centers on the aborted acquisition of St. Francis.

“For the first seven months of 2015, CHSPSC spent money and time negotiating the proposed acquisition and going through costly due diligence,” according to the filing by Atlanta attorney Edward B. Krugman of Bondurant, Mixson & Elmore LLP.

As part of the agreement, Community Health Services “made a good-faith initial deposit” of $5 million. During the due diligence process after making the deposit, the suit claims Community Health Services found undisclosed issues St. Francis had hidden and misrepresented, according to the filing.

St. Francis “made these misrepresentations intentionally to induce CHSPSC into a deal and specifically into fronting St. Francis the $5 million,” according to the motion. “When CHSPSC confronted the defendant about the misrepresentations and failures of disclosure, St. Francis terminated the transaction without cause and without refunding CHSPSC’s $5 million deposit.”

In addition to the $5 million, Community Health Services is seeking to recover the costs and expenses incurred through the negotiating process, punitive damages and legal fees and expenses. That amount was not disclosed in the motion.

In asking that the suit be sealed for 30 days, Community Health Service’s attorney said it did not believe the case should be sealed, but conceded St. Francis would argue otherwise.

“Accordingly, CHSPSC files this motion out of an abundance of caution to protect the purported confidentiality of the defendant’s information,” according to the motion.

St. Francis is in the early stages of a potential deal with LifePoint. The letter of intent, a non-binding agreement that authorizes St. Francis and LifePoint to move forward with talks, is the first step for the two entities in the process for a potential sale. After due diligence, St. Francis and LifePoint are expected to enter into a definitive agreement, and that deal would then be subject to review by the Georgia attorney general, St. Francis officials said.

St. Francis Hospital’s financial troubles surfaced late last year after the former chief administrator had denied to the Ledger-Enquirer that the hospital was dealing with financial issues. The hospital disclosed in November that it was in a nearly $30 million financial hole.

The hospital was coming off a $150 million expansion of its Manchester Expressway campus when management said it could not account for $29.7 million on its books. Calling it an “accounting error,” the company a few weeks later announced it was looking for a “strategic partner” to help put the organization back on stable footing. At that time, it reported having about 2,800 full- and part-time employees and an annual budget of $295.7 million.

The hospital’s largest creditor is the U.S. Department of Housing and Urban Development, which has a hospital financing arm. St. Francis borrowed money from HUD for the expansion and to consolidate other debt. The hospital currently owes HUD about $220 million. St. Francis representatives are in regular communication with HUD, Richard “Bo” Bradley, chairman of St. Francis’ board of trustees, said in April.

Two of St. Francis’ top executives have left the company since word of the financial crisis became public. President and CEO Robert P. Granger resigned in March. Granger had been with the company for 10 years. Former Chief Financial Officer Matt Moore, who had been with the hospital for nine years and had previously worked with Granger at a South Florida hospital, was suspended Oct. 27 and “permanently relieved of his duties” on Nov. 14.

Granger and the board of trustees had been operating for at least three years with reports that overestimated the hospital’s revenues and underestimated its expenses, Granger said last year.

This story was originally published August 8, 2015 at 6:04 PM with the headline "Ex-prospective buyer sues St. Francis Hospital."