Court denies UMB receivership request for bond-financed clinics

UMB Bank, N.A. lost its bid to have an emergency manager take over an Indiana-based, bond-financed healthcare project after a judge ruled the bond trustee failed to prove the financial condition is dire enough to require receivership.

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The ruling comes ahead of a hearing next Wednesday on a motion to dismiss by the borrower, Crossroads Health Management LLC. Crossroads argues that UMB offers only “speculative, conclusory assertions and allegations” in its quest to protect bondholders and wrest control of the two struggling addiction centers at the center of the lawsuit.

UMB in March sued Wisconsin’s Public Finance Authority and borrower Crossroads and related companies over what the trustee called the “collapse” of the Indiana-based facilities financed with $117 million of tax-exempt senior and subordinate bonds. It accused the manager of, among other things, diverting revenue backing senior bonds.

The PFA, which issued the bonds as conduit and owns the center as part of its asset ownership program, said at the time it supported receivership. In later filings, the issuer has tried to remain neutral by saying it lacks “sufficient independent knowledge to admit or deny” UMB’s allegations.

Crossroads, in court filings and a hearing over the receivership question, accused the bond trustee of exaggerating the facilities’ problems, and warned receivership would devalue the bonds and endanger the patients being served in the programs.

Marion County Superior Court Judge Christina Klineman, in a June 25 order rejecting UMB’s request, sided with Crossroads while adding she does not yet have a position on the merits of UMB’s claims that the manager has improperly managed the finances of the facilities.

But “the evidence that has been offered fails to demonstrate to the court that there is the requisite risk of irreparable damage necessary to justify the appointment of a receiver,” Klineman said. “It is clearly in the best interests of all parties involved—including those who are being treated at the facilities—that the facilities continue to operate without interruptions in their services.”

Meanwhile, UMB, in its brief in opposition to Crossroads’ motion to dismiss, said the borrower is attempting to paint the case as one of “buyer’s remorse by ‘some’ bondholders disappointed that ‘projected profits’ did not materialize.”

That’s not the case, the trustee said.

“This case is about a manager that disregarded the revenue-control structure designed to protect the bondholders’ collateral; commingled pledged revenues with its own cash; claimed facility cash as its own contribution; either inexplicably allowed receivables to swell past $6 million or misappropriated them while reporting uncollected income as cash; refused to produce the records needed to trace the money; and all the while delayed the opening of [another addiction facility] and refused to comply with other terms of the management agreement as leverage for seeking forbearance from the trustee,” UMB said.

Issued less than four years ago, the debt includes $85.6 million of senior tax-exempt bonds and $32.3 million of subordinate bonds. PFA used most of the bond proceeds to acquire the facilities from then-manager Crossroads Health Management LLC, and then kept Crossroads on as manager under a management agreement that is the subject of the trustee’s lawsuit.

Crossroads CEO Moshe Orlinsky owns more than 20% of the senior bonds and an interest in the subordinate bonds issued for the project.

In addition to PFA, the defendants are Crossroads Health Management, LLC; Hickory House Recovery LLC; and Wintersong Recovery, LLC, d/b/a Hickory Treatment Center at Knox.

The senior bonds have not traded since they were issued at par in July 2023, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website. The debt matures through 2058 and features coupons ranging from 7% in 2033 to 8.125% in 2058.