2012-03-23 / Front Page

Final Act In PHC Drama?

By Howard Schwach

On Wednesday, the situation of Peninsula Hospital Center worsened with the news that the court-appointed trustee, Lori Lapin Jones, had ordered the layoffs of an additional 100 workers and all 78 residents now working in the hospital as a costcutting measure, a move that, they say, will jeopardize their medical education. The residents have asked their governing body to lift the hospital’s accreditation, allowing them to go elsewhere, but devastating the reputation of the local hospital. On Wednesday afternoon, The Wave was told that an official had pulled the program from the hospital and that all the residents would be reassigned.

On Tuesday, an insider, who asked not to be identified because he has no permission to speak with the press, said that “the hospital is running out of money, has no money to complete the new clinical lab and is going under.”

Local Attorney Joe Mure, a member of the operating committee, however, said on Wednesday that he saw “some hope” in the situation.

“The new lab is almost complete, and we have sent the corrective measure to the Department of Health for review,” he said. “We hope that they will be down here early next week to review the new lab, reopen it and take us off diversion.”

“We have been working around the clock on the lab, and we believe it will pass muster,” he concluded.

On February 23, the state’s Department of Health closed the hospital’s clinical laboratory for a period of up to 30 days in the wake of an inspection that found at least seven pages of discrepancies. That 30-day period is up today, March 23.

At the same time the lab was closed, an internal hospital report was leaked to the press that showed that hospital officials knew of the problems in the lab and withheld them from its operating board. In addition, few of the problems noted in the December report were resolved in the interim period before the DOH inspection.

That closure sparked the Federal Bankruptcy Court for the Eastern District of New York to replace the hospital’s CEO, Todd Miller, with Chapter 11 Trustee Jones, an attorney with 25 years of experience in bankruptcy procedure.

Jones was appointed on March 6 and immediately began her duties. The United States Code (USC) is clear on the appointment of Chapter 11 Trustees.

Their appointment is a rarity, and occurs only in cases of “fraud, dishonesty, incompetence or gross mismanagement.”

The judge in the bankruptcy proceeding pointed to the problems with the clinical laboratory as “gross mismanagement” and ordered that Jones be appointed as trustee. The judge additionally noted the “apparent conflict of interest between the management of PHC and Revival.

In addition, trustees are appointed when the “parties in control of the debtor [PHC] participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor’s financial reporting.”

There had been questions from the beginning about the governance of the hospital ever since the lender, Revival, demanded the appointment of Miller as the hospital’s CEO. While the operating committee approved the appointment, sources say it had no choice because the Revival money to save the hospital was only available if Miller was the CEO.

According to the USC, 1104 (b), Jones is responsible for “the management of the property of the estate, operation of the debtor’s business and, if appropriate, the filing of a plan of reorganization.”

Insiders say that her fiduciary duty is to the creditors and not to the community, that she was not put in place to “save the hospital,” but to insure that the creditors get their fair share of money back. Jones had taken over at a critical time in the bankruptcy process.

Late last month, the hospital’s operating committee and its unsecured creditors worked out a financing deal and a plan to exit bankruptcy in May.

Those deals are now in doubt.

The financing package with Revival has a default provision that’s activated in case a trustee is appointed – as was done on March 6.

Under that provision, Revival is free to withdraw its deal with PHC.

Insiders at the hospital say that such a withdrawal would likely mean closure and liquidation.

Should Jones agree to keep Miller on, however, a new deal might well be worked out, those insiders say.

Earlier this week, Jones expressed doubts that the problems in the laboratory could be fixed quickly and blamed former management for “failing to meet its obligations,” according to a published report in Crain’s New York Business.

The shutdown of the PHC emergency room is having an adverse impact on the peninsula, EMS officials say. Twice in the last two weeks the St. John’s Episcopal Hospital ER was put in diversion because it was so overcrowded that it could take no more patients. Emergency patients were transported to either Jamaica Hospital or Brookdale Hospital, officials said.

Jones declined to comment for this story, as did officials of the hospital and Revival.

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