Nelson Mullins Bankruptcy Team Guides Hospice Reorganization with Litigation Victory

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In the aftermath of 2017’s Hurricane Irma, wide swaths of Florida lost power. At The Rehabilitation Center at Hollywood Hills, 12 elderly patients succumbed to the heat when the skilled nursing facility’s air conditioning system failed following the electrical outage. In response, Florida’s legislature passed a law requiring all nursing homes and assisted living facilities to have backup generators capable of maintaining cool temperatures.

When a Florida in-patient hospice facility sold its operations to a large, national hospice provider, the buyer questioned whether the onsite back-up generator complied with the post-Hurricane Irma generator law. It was a question that ended up being an issue of first impression requiring a full virtual trial.

The Debtor, Friends of Citrus and the Nature Coast, Inc. f/k/a Hospice of Citrus County, Inc. filed for Chapter 11 bankruptcy after selling its hospice operations to VITAS Healthcare corporation in an effort to fend off an overpayment liability due to a questionable Zone Program Integrity Contractors (ZPIC) audit in 2015 and reorganize and continue its charitable mission of providing grief counseling for people of all ages and stages of life.. At the time of the sale, the Debtor represented that it was not in violation of any federal, state, or local law or regulation, regulating the hospice facility except for the Corporate Integrity Agreement that settled the ZPIC audit and DOJ inquiry. The Debtor escrowed $1.3 million to secure its indemnification obligations under the sale documents, which included breaches of any representation or warranty. After closing the transaction, VITAS claimed that the Debtor breached its representations and warranties because the facility’s 80Kw generator was not in compliance with all relevant state and federal laws and regulations.

In In re: Friends of Citrus and the Nature Coast, Inc., filed in the Bankruptcy Court in the Middle District of Florida, the Debtor filed a motion for turnover of the escrow funds and objected to Vitas Healthcare’s proof of claim which asserted an entitlement to the escrowed funds.

After a multi-day virtual trial, the Court found that the Florida “generator law” specifically pertained to long-term residency facilities. In comparison, the average stay at the Debtor’s hospice facility was approximately 5.3 days. Furthermore, the Court found that the hospice had complied with Florida’s law requiring an emergency preparedness plan as it had a sufficient emergency “patient relocation strategy.” The Court also agreed with Debtor that its onsite 80kW generator’s ability to operate emergency lighting, refrigeration and food service-related equipment, and provide electricity to each of the 16 patient rooms allowing for operation of in-window air condition units, was aligned with its emergency plans to relocate patients. The Court agreed that the Debtor had not breached its warranty that it was in compliance with federal law 42 C.F.R. §418.113(b)(6)(iii)(B) [requiring an alternate source of energy] and Florida Administrative Rule 59A-38.018 [implementation of an emergency plan].

In reaching it ruling, the Court differentiated between long-term resident healthcare facilities—to which the generator law applied—and hospices, which the Court found provided inherently different care to which the generator law did not apply. Ultimately, the Court ruled that both the existing 80kW generator and the pre-existing hospice emergency plan were sufficient for Debtor to meet its representations and warranties of the sale. As a result, the Court sustained Debtor’s objection to Vitas’ Proof of Claim and granted Debtor’s motion for turnover of the escrowed funds.

The Debtor also successfully confirmed its Chapter 11 plan of reorganization by reaching a settlement with the DOJ, which has allowed the Debtor to continue its charitable mission of providing grief support for anyone who has experienced loss and loneliness. The turnover of the escrowed funds will enable the Debtor to bolster its charitable mission with the return of the escrow funds.

Nicolette Corso Vilmos of Nelson Mullins’ Orlando office and Frank P. Terzo of Nelson Mullins’ Fort Lauderdale office represented the Debtor.

By Nicolette Corso VilmosFrank P. Terzo

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