SUNY presses to keep control of LICH, tells judge, ‘You can’t unscramble the omelet’
LICH supporters push for an evidentiary hearing
In a filled-to-capacity hearing in Downtown Brooklyn, attorneys representing SUNY Downstate Medical Center continued to press their case Tuesday afternoon that state Supreme Court Justice Carolyn Demarest has no basis to reconsider her 2011 order transferring Long Island College Hospital (LICH) in Cobble Hill to SUNY Downstate.
“This transaction has been consummated and can’t be undone,” argued attorney for SUNY David Dunn, adding, “you can’t unscramble the omelet.”
Attorney Jim Walden, representing Public Advocate Bill de Blasio and six community groups fighting to keep LICH open, told Justice Demarest that had she known all the facts before the LICH transfer, she likely would not have approved it. “There is a compelling case that the information provided to your honor was defective,” he said, echoing the same point Justice Demarest herself had made in August.
“All of [SUNY’s] arguments are premised on ‘you can’t unscramble the egg’ – but this is a sausage and they don’t want you to see what’s in it,” Walden said.
In 2011, Justice Demarest granted a petition allowing LICH to transfer its assets to SUNY on the condition that SUNY would keep LICH a functioning hospital. Earlier this year, SUNY announced its plans to close LICH and began shutting down operations, prompting Demarest to revisit her 2011 order.
After a challenge by SUNY, Justice Demarest later vacated this sua sponte decision (taken on her own accord).
“We are pleased that Justice Demarest decided to vacate her August 20, 2013 sua sponte decision and order,” SUNY spokesman David Doyle told the Brooklyn Eagle.
Her action to vacate the order made little difference, however, as LICH supporters brought an identical action. “SUNY challenged her decision on the premise that nobody asked for it,” said a spokesperson for Public Advocate de Blasio. “As a result, we asked for it. We called their bluff.”
While SUNY maintains that the contract was fully consummated, Justice Demarest pointed out that “pieces are still outstanding.” A liability fund worth from $10 – 15 million, for example, remains in the hands of LICH. “LICH is still alive; it’s not a done deal,” she said.
SUNY lawyers cited a state Controller’s audit as backing their claim that LICH represented a financial strain on SUNY Downstate.
Walden, however, pointed to SUNY Downstate’s failure to disclose its precarious financial condition prior to the LICH transfer, and SUNY’s subsequent failure to reveal that it’s own reckless actions had created an operating deficit at LICH.
Shockingly, Walden said, “For about a year, from May 2011, SUNY was not billing [for doctors’ services] at all. They were paying Continuum two million a month [for billing and IT services] but the bills did not go out at all or were going out in dribs or drabs.”
Walden said that SUNY had failed to do the appropriate “credentialing” paperwork required by insurance companies to pay the claims, leading to the loss of millions of dollars.
An attorney for SUNY initially told the court, “I have no idea what they’re talking about,” but then did allow there may have been “a management screw up” in the credentialing process. He called the lapse “normal.”
Walden also spoke of SUNY’s continuous disregard of court orders forbidding downsizing at LICH, saying that extended WARN notices were recently sent to LICH employees and that an announcement of a “massive layoff” was made to members of 1199 Health Care and New York State Nurses Association (NYSNA).
Asserting that SUNY had moved files, equipment and LICH archive material out of the hospital, Walden asked Justice Demarest for a “constructive trust” over all LICH assets conveyed to SUNY. He said he wanted “someone accountable to the court inside the hospital” to oversee SUNY’s actions regarding documents and protect them from shredding.
Dunn, saying that none of the motions before the court addressed hospital records, declared, “This is sandbagging. Give us some notice.”
“I recall in some prior affidavit or response this concern being voiced about the records,” Justice Demarest responded, adding that though she wasn’t going to pursue it at the moment, the issue was a “very serious” one.
“Many orders have been made directing maintenance of the facility and protection of the assets from diversion,” she said.
In one of several rapid-fire back-and-forth exchanges, Dunn denied that information about SUNY’s disastrous financial condition was withheld from Justice Demarest in 2011, when the transfer was being considered. “We made no representation at all about SUNY’s financial condition,” he asserted.
“The representation was that SUNY could absorb the loss and continue the operation of LICH,” Justice Demarest countered.
“No ma’am,” Dunn replied. “The representation was that SUNY believed it was in a position to operate the hospital. There was no fraud.” The failure of the takeover was “unforeseeable,” he claimed.
Dunn denied that SUNY had schemed to acquire LICH’s valuable Brownstone Brooklyn real estate – estimated to be worth from $500 million to a billion dollars – in order to sell it off for SUNY Downstate’s benefit.
“The value of the property was not a consideration, there’s no evidence” of that, he said. “There was never any intention except to operate the hospital for an indefinite time.” He then hedged a bit, saying, “We made no commitment to operate it for a specific time.”
Dunn said that if SUNY’s idea was “to liquidate the real estate,” as LICH supporters claim, “we wouldn’t have refinanced the debt.”
“The refinancing was at the expense of the taxpayers,” Justice Demarest pointed out. “PIT bonds are general obligation bonds backed by the people of New York.”
Undaunted, Dunn replied, “We can’t sell the underlying property without jeopardizing the bonds.”
While SUNY lawyers repeatedly called Walden’s claims of malfeasance “red herrings,” LICH supporters are pushing for an evidentiary hearing where they say they can produce evidence of these misdeeds.
The Othmer connection
Paula Gellman, representing the Charities Bureau in the New York Attorney General’s Office, backed SUNY’s contention that Downstate had no “ulterior motives” when it took over LICH.
Gellman, speaking in a voice so low that many in the courtroom strained to hear her, pointed to SUNY’s agreement to replenish amounts borrowed by LICH from the Othmer endowment fund as a sign of SUNY’s good faith. “It would not make sense for SUNY to assume this significant obligation in the absence of a genuine intent to operate” LICH, she theorized. Gellman suggested that cash-strapped SUNY might be able to replenish the Othmer funds “through the sale of LICH’s assets to a new purchaser.”
Brooklyn Heights residents Dr. Donald and Mildred Othmer, who made a fortune by investing in Berkshire Hathaway stock, bequeathed roughly $140 million to LICH upon their deaths in 1995 and 1998 to be held “in perpetuity” with the income used for LICH.
In 2000, 2006 and 2011, however, Ms. Gellman, as representative of the Attorney General’s Office Charities Bureau, allowed LICH to drain the Othmer endowment. By law, this money must be replenished.
Justice Demarest asked Gellman, “LICH and SUNY are arguing for no further hearing or inquiry. Is that your position?”
“The allegations do not provide sufficient evidence to hold an evidentiary hearing,” Gellman said. “SUNY’s financial condition was worse than realized, in 20-20 hindsight . . . but there si no evidence of fraud or deceptive intent.”
“Very often fraud is inferred even though it can’t be alleged initially,” Demarest commented.
‘We would have been slammed’
Attorney Gregg Mashberg, representing LICH as an entity, asserted that LICH’s board should not be blamed for overlooking SUNY’s financial difficulties before the takeover. “It was not realistic to say, ‘Let’s look at SUNY’s finances.’ We would have been slammed,” he said, adding that the state Controller and Attorney General both approved the controversial contract with Continuum to provide billing services for LICH. “We pushed to end [Continuum’s contract] as soon as possible,” he said. “It was a major issue.”
An attorney for SUNY said it was to SUNY’s advantage to have Continuum handle the billing for LICH “as long as possible” because “it’s not so easy to turn the key on the IT system.” He did not address the issue of Continuum failing to collect bill payments.
Lawyers for SUNY claimed at various times that “no one” was interested in acquiring LICH. When countered on this point by Justice Demarest, they moved on to say that the court proceedings themselves had a negative impact on interested parties.
SUNY continued to refuse to reveal the identities of the respondents to a Request for Proposals (RFP) it issued earlier this year, though it has said in the past that at least seven parties expressed interest in acquiring LICH.
“SUNY was supposed to divulge the outcome of the RFP process on October 15,” Justice Demarest said, asking SUNY lawyers if they had complied. When Dunn replied in the negative, Demarest said merely, “LICH will continue to operate.”
After the hearing attorney Walden told the Brooklyn Eagle, “It is clear there is desperation on their side. Desperation about discovery, desperation about a hearing. They don’t want anyone seeing the sausage being made.” That being said, “My clients are thrilled to have their day in court. The judge was prepared, she clearly read the material and asked great questions. A day in coming in the next few weeks when we will put SUNY on the stand to reveal how the fraud took place.”
Many members of the New York State Nurses Association (NYSNA) were present at the hearing. Julie Semente, a long-time nurse at LICH and a NYSNA leader, told the Eagle, “Justice Demarest, in her initial order, reserved the right to come back and see if conditions were adhered to. Obviously, she found they were not.” She added, “If there is an evidentiary hearing, we are prepared to provide evidence.”
Jeff Strabone, on the board of the Cobble Hill Association, said he was “disappointed that the Attorney General’s Office was clearly on SUNY’s side. Nothing that SUNY said surprised me,” he added. “They’ve operated like gangsters all along.” Strabone disputed SUNY’s contention that the state Controller’s audit indicated that LICH was the cause of SUNY’s dire financial condition. “The audit found that even without LICH, SUNY was $100 million in debt,” he said.
Other issues covered during the hearing included SUNY’s disagreement that the LICH case was similar to a previous case, “Noble Drew”; and questions about why the top three people at SUNY who advocated for SUNY’s takeover of LICH were discharged shortly after the takeover;
Justice Demarest questioned LICH attorney Mashberg at length about the transfer of ownership of LICH, when it was an independent community hospital, to Continuum Health Partners sometime between 1998 – 2002, and the constitution of LICH’s board, which shrank from 40 community members to just one entity, Continuum, as a result of that transfer.
Mashberg invoked the legal concept of “Copperweld,” which, he said, “says the shareholder in a conglomerate can be a single entity for anti-trust purposes.”
Attorney Jim Walden of Gibson, Dunn & Crutcher represents the six community groups and the Public Advocate, working to keep LICH open. The firms Abrams Fensterman in Brooklyn and Hogan Lovells in Manhattan represent SUNY, which seeks to close LICH. Proskauer Rose represents the entity LICH.
Updated 10/28/13 with discussion of Justice Demarest’s sua sponte decision.
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