GREENBRAE – The Marin General Hospital Corp. today filed suit against Sutter Health in its attempt to reclaim more than $120 million that was transferred out of the 235-bed hospital between 2006 and present day.

The suit claims Sutter disproportionately transferred funds out of Marin General after 2006, when the Marin Healthcare District and Sutter agreed on a controversial severance agreement that ended Sutter’s lease of the hospital five years early. Prior to 2006, the suit alleges, Sutter made “cash sweeps” of less than $3 million a year. After 2006, Sutter transferred out more than $30 million a year, the suit says.

Read the complaint

Marin General Hospital lawsuit - Marin Co. Superior Court case No. 1004539 (PDF)Extensive coverage of the equity transfers

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Sutter was able to accomplish the transfers of more than $120 million by setting up a hospital board “with a clear conflict of interest,” the suit says. The board of the hospital under Sutter’s control consisted of Sutter employees who “had detailed knowledge of the huge sums of cash taken by Sutter and the effect the removal of this money had on Marin General’s finances," according to the suit.

Sutter operated Marin General from 1996 to June 29 of this year. Between 2002 and 2008, Sutter transferred nearly $160 million out of Marin General to its corporate headquarters. Healthcare district officials have said they expect another $20 million to be transferred out of the hospital and have alleged that Sutter’s transfers have hindered operations at the acute-care hospital, which is the only trauma center in the county.

The 2006 agreement, a “divorce” that began when Sutter sought to end its 20-year management contract, included a provision that said equity transfers could occur, but that Sutter would pay depreciation at Marin General. The healthcare district said Sutter has refused to pay such depreciation, which they say violates the terms of the agreement. Coupled with the $120 million in transfers, Sutter’s alleged practices severely undermined the hospital, a spokesman said.

“The agreement said that equity transfers can occur. The question is what does that mean and what did it mean?” said Pete Hillan, spokesman for Marin General Hospital Corp. “In 2006, Sutter stopped paying depreciation and took those funds. Our position is that Sutter and the then-board failed to perform its fiduciary responsibilities. If Marin General knew that Sutter wasn’t going to pay depreciation and that Sutter was going to do cash sweeps, why would you agree to that? That allows them to have their cake and eat it too, and that’s what they have.”

Sutter said it would “vigorously defend itself” and has long asserted that the cash transfers, known as equity transfers, are perfectly legal and a routine practice for hospital organizations.

“We can say that is indeed regrettable that the Marin Healthcare District has elected to pursue legal action as there is no basis whatsoever for any such action,” Sutter spokeswoman Kathie Graham said in a statement. Sutter cannot comment specifically on the claims of the suit because it has not reviewed the complaint yet, she said.

“Sutter Health complied in all respects with the legal agreements governing the transfer of Marin General,” Ms. Graham said.

“We have responded to the district’s concerns throughout the transition and have explained our financial policies to the satisfaction of the regulatory agencies that govern nonprofit health care entities,” she added.

From 2003 to 2006, Sutter transferred a total of roughly $23 million out of Marin General. Between 2007 and 2008, Sutter transferred nearly $88 million, according to audited financial data examined by the Business Journal from the Office of State Health Planning and Development.