The U.S. Bankruptcy Court has struck down the Chapter 9 filing by the San Benito Health Care District (SBHCD), refuting its claims that Hazel Hawkins Memorial Hospital is insolvent. The court also brought into question the methods of the district consultant B. Riley, and highlighted errors in their financial forecasts for the hospital.
According to the ruling, the financials became “a major point of contention” during the trial.
Northern District Judge Stephen L. Johnson sided with the California Nurses Association (CNA) and the National Union of Healthcare Workers (NUHW), which objected to the hospital’s bankruptcy filing, leading to a trial in December 2023.
“[The] court sustains the objections of CNA and NUHW and finds that the District has not met its burden of proving it was eligible to be a debtor under chapter 9. This case is DISMISSED,” reads the March 21 ruling, in part.
The CNA put out a statement the day of the ruling, expressing a sense of vindication after months of waiting on a decision, which was originally expected in January.
“Today’s ruling should make it clear to the public that despite false claims from the district, Hazel Hawkins is not in dire straits,” Ariahnna Sanchez, a registered nurse at the hospital, said in the statement.
For months, the CNA has been pushing back against the district administration’s decision to pursue bankruptcy.
In September 2023, CNA representatives argued during a town hall that the hospital’s finances were in better shape than what the administration was saying. They referenced the $921,900 in executive compensation given out in 2022, and a 3% increase in pay for administration in the last few years. Additionally, they touted as evidence a report commissioned by San Benito County that concluded that the hospital did not need to pursue bankruptcy.
The SBHCD also put out a statement on the day of the ruling, saying that the decision reflects its efforts to keep operations afloat despite its financial situation.
“The court’s conclusion that the District is not insolvent should be seen as a reflection of the District’s concerted effort to ensure that its hospital can continue to serve the San Benito County community in the future,” said the press release. “Hospital administrators are working closely with legal and financial advisors to analyze the procedural and financial impacts of the ruling. This ruling is not a judgment on the hospital’s current solvency, and we are not out of the woods on our financial crisis.”
After initially declaring a fiscal emergency in November 2022, the district moved to file for Chapter 9 bankruptcy in May 2023. The decision was made based on projections by Los Angeles-based consultant B. Riley, which determined that the hospital’s lack of substantial cash-on-hand defined it as insolvent. However, during the December 2023 trial, the court discovered the firm’s impetus for pursuing bankruptcy for its client was based on shaky numbers.
By the numbers
The court considers a business or entity insolvent if it is “unable to pay its debts as they become due” and if “prospective” payments will not be able to be made. B. Riley argued that HHMH met that criteria.
This was based on the firm’s determination that, comparing it to the performance of hospitals of a similar size in California, HHMH needed to have 118 days of cash-on-hand to be solvent. This metric was based on all comparable entities in the state, according to court statements.
However, the court cast doubt on the legitimacy of that metric.
“Taking B. Riley’s suggested figure of 118.3 days of cash-on-hand as the ‘normalized’ level separating insolvent hospital districts from solvent ones, the District has been insolvent every year since 2017,” read the ruling.
The court also pointed to testimony by HHMH CEO Mary Casillas that the district had enough cash on hand to continue operations without a reduction in services through the end of 2023.
Judge Johnson went on to say that there were major discrepancies between the district’s monthly reports and B.Riley’s financial forecasts of cash-on-hand, amounting to a difference of $15,036,591.
Carol Fox, the senior managing director for B. Riley who prepared the cash projections, gave a confusing explanation during the trial as to why the number varied so much
“Some of the testimony at trial was perplexing. Fox testified that ending a reporting period on the Saturday of the last full week of a month accurately reflected cash flow, but she did not explain why or how that is more accurate,” Johnson said.
According to Fox, the projections were “based on historical cash flow and the district’s own projections regarding revenue.” However, the court determined that there were “substantial differences” between B. Riley’s assessment and HHMH’s financial statements.
Some of the testimony on behalf of the district’s case also appeared to be contradictory.
“The District failed to present a coherent theory to show the appropriate number of days of cash on hand for the District. For these reasons, the court does not find the B. Riley Expert Report to be a reliable source of information for determining insolvency and discounts its conclusions accordingly,” the ruling said.
The SBHCD spokesperson Marcus Young said in an email on March 26 that they don’t agree with the ruling and are weighing options.
“The options are to appeal Judge Johnson’s decision, which could take up to 12 months to resolve, or to accept the opinion and move forward outside of Chapter 9. The District does not agree with his decision regardless of the next steps, however,” Young said.
When asked if the district would keep B. Riley. as its financial consultant, he declined to comment.
