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North Bay Business Journal

Monday, June 25, 2012, 6:58 am

Both sides claim victory in Sutter, Marin General feud

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    GREENBRAE — Both sides in a long-running feud between Marin General Hospital and Sutter Health are claiming victory in last week’s arbitration ruling awarding $21.5 million to the hospital district.

    Judicial Arbitration and Mediation Service arbitrator Rebecca Westerfield, a retired circuit court judge from Kentucky, issued the ruling after 11 weeks of arbitration, which stemmed from a  lawsuit filed by Marin General Hospital about two years ago that said as much as $180 million was illegally removed from the hospital.

    The lawsuit alleged Sutter escalated the amount of transfers after a severance deal was brokered between the two sides in 2006, which ultimately returned the hospital to control of the Marin Healthcare District in late June 2010. An average of $3 million was transferred out of Marin General between 2001 and 2006, but from 2006 to 2010, the suit said, an average of $30 million was transferred out of Marin General. A Marin County Superior Court judge ordered the case to arbitration.

    The district, which now operates the 235-bed hospital, quickly touted the $21.5 million settlement as proof of what it has maintained for nearly three years: that Sutter’s practice of transferring funds out of the hospital was improper and placed it in a precarious financial state.

    “The money is for a willful violation of the standard of care at the hospital during the time that Sutter was there,” said Jim Brosnahan, the attorney who argued the case for Marin General. “Everybody on our side is satisfied with the result and we’re glad to have it. It’s real money that will help the hospital.”

    But Sutter, which has long defended the cash transfers as routine practice for large organizations, was quick to point out that the amount is a “fraction” of the total claim and cited language in the 64-page ruling that says “The MGH board of directors and Sutter met their fiduciary duties. … In addition, ‘transferring funds’ was expressly permitted under the provisions of the [agreement].”

    The judge also wrote that “the act of transferring cash pursuant to the (extra cash transfer program) did not constitute a breach of any fiduciary or contractual duties on the part of Sutter.”

    “We were always confident that we met our fiduciary obligations to Marin General Hospital, invested an appropriate amount of capital and left the hospital in a strong financial position,” said Pat Fry, Sutter Health president and chief executive officer.

    The $21.5 million for Marin General is final and cannot be appealed, Mr. Brosnahan said. “That’s serious business for Sutter,” he said.

    Ultimately, the arbitrator herself didn’t declare a clear victor, instead setting that aside for a hearing in August that will determine who gets reimbursed for legal fees that could total “several millions.”

    “An issue remains as to which is the prevailing party … and thus entitled to be reimbursed its reasonable attorneys fee, cost of suit and arbitration fees,” the judge wrote in her ruling.

    Both Marin General and Sutter said they would seek to recoup those costs. Parties must file by July 20 and a hearing will take place on Aug. 3.

    Bill Gleason, Sutter senior spokesman, said the claim by Marin General totaled close to $300 million, which breaks down as such: equity cash transfers totaling $105 million; lost profitability related to physician recruitment of $104 million; incremental financing costs of $44 million; Sutter weighted average cost of capital charge of $5 million; IT training and conversion costs totaling $2 million; Sutter Health’s pension plan of $21 million and  “Sacramento litigation” settlement payments of $783,000.

    Given the scope of the claim versus the amount of the award, Mr. Fry, the Sutter CEO, said the nonprofit health group was “extremely pleased” with the ruling. He specifically noted that former Sutter-appointed Marin General board members Robert Heller, Ed Berdick and David Bradley were all exonerated in the case. The initial suit filed by the Marin Healthcare District alleged that Sutter had set up a board of directors with a conflict of interest in letting the cash transfers occur.

    The judge did fault Sutter on the pension plan and on physician recruitment, saying that the Sacramento-based health chain improperly transferred $11.3 million of Marin General money into the pension fund.

    The arbitrator “found that Sutter willfully and purposely failed to meet their contractual duties,” Lee Domanico, CEO of Marin General, said in a statement. “This ruling validates our longstanding contention that in the years leading up to the transition, Sutter did not operate Marin General in a manner consistent with the best interests of our community. Instead they diverted funds for the benefit of Sutter and the detriment of the people of Marin.”

    But the health care district was also faulted, with Judge Westerfield ruling that it “interfered with Sutter’s sublease of space in 1350 S. Eliseo in Greenbrae, finding the conduct to be illegal and ordering they immediately cease and desist, denying the district’s attempt to claim property via eminent domain.”

    Marin General is in the process of determining how it will use the $21.5 million, saying its priorities are modernizing the hospital, which includes a $500 million rebuild to make it seismically safe by 2020.

    Mr. Brosnahan, the attorney for Marin General, said that regardless of what happens in August with the legal fees, Marin General is poised for positive growth in the future now that the issue is nearly resolved.

    “I think it’s a very exciting time for health care in Marin County,” he said.

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