Watsonville (Calif.) Community Hospital's liquidation trustee Jeremy Rosenthal has reportedly filed a lawsuit against three executives of Halsen Healthcare, the company that formerly owned the hospital, accusing them of draining its funds for personal use, improper payments, negligent operations and more, the Santa Cruz Sentinel reported Dec. 19.
Filed in the San Jose division of the United States District Court's Northern District of California, Mr. Rosenthal's complaint argued that the three executives "grossly mismanaged the Hospital and engaged in a series of grossly negligent and/or self-interested actions, and inactions, that caused [the hospital] to be insolvent from the start of their stewardship as sole board members and officers," the Santa Cruz Sentinel reported.
In the complaint, Mr. Rosenthal also said the executives' actions resulted in such strong economic turmoil that it brought on the debtors' commencement of Chapter 11 bankruptcy cases.
Watsonville was acquired by Halsen from Quorum Health in a $30 million deal in September 2019. The pandemic created financial challenges for the hospital, which resulted in Prospect Medical Holdings taking it over from Halsen's executive team. After losing $30 million in 2021, the hospital nearly closed and faced bankruptcy but was saved in 2022 by the Pajaro Valley Healthcare District.
The complaint also alleged $3.9 million in hospital funds was transferred over four years from the Halsen executives to friends and family, but they attempted to make the transfers look like lawful business expenses.
Another accusation suggested Quorum's 2019 acquisition of the hospital from Halsen was financed solely by debt, with Halsen executives then using the hospital's limited funds to justify Halsen-issued notes along with paying themselves consulting fees prior to gaining a working capital line. Following Quorum's acquisition, Watsonville had $7.7 million in cash, $20 million in debt, and $40 million in Medical Properties Trust lease obligation, the claim shared according to the publication.
Mr. Rosenthal also suggested that Halsen hired a cybersecurity company that was owned by one of the executive's friends, and that the company had no knowledge of how to install or maintain full-service information technology management services for Watsonville's network, internet and computer infrastructure.This setback allegedly resulted in unreliable internet and network connection, bandwidth deficiencies, billing errors and more.
Under Halsen's leadership, Mr. Rosenthal said the hospital saw over $1.8 million in unpaid claims; failed to fund the employee pension plan in 2020; and was forced to cash a $741,000 IRS refund check that the executives allegedly knew was issued improperly.