February 24, 2000
Supreme Court Hears Challenge to Managed Care
The Supreme Court justices heard arguments yesterday in the
case of Pegram v. Herdrich and questioned how to determine when
the cost-cutting measures of managed care plans go too far, CQ Daily
Monitor reported. Cynthia Herdrich's appendix burst after her
doctor failed to schedule her for emergency treatment and instead
ordered less expensive tests. Herdrich sued when she learned that the
doctor was an investor in the health plan and was entitled to incentive
bonuses at year-end if the plan's medical costs were lower than
expected. Herdrich's attorney argued that the doctor was acting as a
fiduciary, and thus violated a provision of the Employee Retirement
Income Security Act of 1974 (ERISA) that requires fiduciaries to protect
the 'interest of the participants.' Attorneys for the health plan argued
that permitting this type of suit would jeopardize all cost-containment
incentives, the core of managed care. Questions from several of the
justices seemed to indicate skepticism about the plaintiff's argument.
Justice Stephen G. Breyer noted that Congress passed legislation shortly
before it enacted ERISA that encouraged the growth of HMOs and said that
it was 'hard for me to believe that the same Congress...wanted to gut
its own HMO legislation' by outlawing cost-cutting measures. Justice
Sandra Day O'Connor cautioned about embarking on a 'slippery slope' and
asked why the courts would want to get involved in the 'messy business'
of determining which incentives are unlawful. An attorney for the health
plan also argued that complaints against health plans should be governed
by state law, not the preemptive federal ERISA law. Justice Breyer did
ask the health plan's attorney how Dr. Pegram had at no time been acting
in a fiduciary capacity. A decision is expected by the end of this term
in early summer.
PA Attorney General, Tenet Health System File Suit Against
AHERF Officials
Pennsylvania Attorney General Mike Fisher and Tenet Health
System Philadelphia filed a complaint in bankruptcy court in Pittsburgh
yesterday against three Allegheny Health, Education and Research
Foundation (AHERF) officers and five AHERF board members; they are
seeking the return of nearly $80 million in charitable assets that the
attorney general contends was improperly used to keep the ailing AHERF
afloat. Fisher said, 'These AHERF officials had a legal obligation to
ensure that charitable endowments, which are gifts given by individuals,
families or corporations, were protected and used for their intended
purposes. However, they violated that obligation when they siphoned off
these assets to pay creditors and prop up a failing health system.' Last
September, Fisher filed a claim in bankruptcy court that detailed the
distribution of $78.5 million from individual restricted endowments. He
said an investigation by his office showed that the charitable assets
had been transferred from restricted endowments, which are charitable
gifts given to the hospital system for specific purposes. Fisher
maintains that hospital officials needed Orphans Court approval for
spending the money in ways other than its intended purpose. In October
1998, Tenet purchased AHERF's Philadelphia-area hospitals during a
proceeding in bankruptcy court.
Michael Bolton Loses in Bid for Ronald Isley's Estate
Bankruptcy Judge Kathleen March (C.D. Calif.) yesterday
accepted a $4.8 million bid for R&B legend Ronald Isley's assets
from Structured Assets Corp., a firm owner by financier David Pullman,
The Washington Post reported today. Singer Michael Bolton, who
lost a 1994 lawsuit on copyright infringement for 'Love Is a Wonderful
Thing,' had offered $5.3 million for the estate, including the right to
receive Isley's royalties from Isley Brothers' classics such as 'Shout,'
'Who's That Lady,' and 'Twist & Shout.' Bolton was seeking Ron
Isley's portion of the jury award for the 1994 lawsuit and is still
appealing that judgment; he claims that he and his co-writer never heard
the Isleys' song. One of Isley's former record companies, EMI, gave its
blessing for Structured Assets' bid. Pullman plans to sell 15- and
20-year bonds backed by Ronald Isley's share of royalty income. Isley
had sought bankruptcy and is in the process of liquidating his assets to
pay creditors nearly $5 million in debts. The largest creditor is the
Internal Revenue Service, which said Isley owes back taxes of $5
million, but Isley's attorneys have disputed about half of that amount.
Judge March ruled that the winning bid was superior, although it was
less money, because Bolton's bid was still contingent on raising
financing and was legally problematic. Attorney Debra
Grassgreen of Pachulski Stang Ziehl Young & Jones, Los
Angeles, who represented the bankruptcy trustee, said that Judge March
'couldn't force parties not before her to participate in a settlement
with Bolton.' Lee Bogdanoff an attorney for Pullman, compared Bolton to
a guest who shows up at wedding offering to marry the bride. 'The
parties in this case made numerous concessions to each other. He
[Bolton] was not part of that,' Bogdanoff said.
Gary Player Direct Executes General Assignment for the
Benefit of Creditors
Gary Player Direct Inc. announced that the company executed a
general assignment for the benefit of creditors on Feb. 21; the assignee
is the Hammer Group of Sherman Oaks, Calif., according to a newswire
report. The company has been conducting operations as Gary Player Direct
since last April, following the merger of Golf One Industries Inc. d/b/a
Gary Player Direct with and into Grafix Corp. Since inception, the
company's cash requirements have exceeded its cash flow, and as of Dec.
31, the company reported liabilities of about $18.6 million and losses
for the nine months ended Dec. 31, 1999, in excess of $9.5 million. In
recent weeks, the company's bank accounts have been levied upon by
creditors, making continued operations very difficult. The company has
attempted to find a strategic partner or a merger candidate to alleviate
the financial problems, but so far as not been successful. It also was
unsuccessful in finalizing an asset purchase agreement that had
previously been negotiated. Gary Player Direct considered filing chapter
11, but it believes that executing a general assignment for the benefit
of creditors would be more effective and allow for a greater potential
recovery to the creditors. California law provides for an orderly
liquidation of assets by an independent assignee.
Orthodontic Centers Negotiate with Apple Orthodontix
Orthodontic Centers of America Inc. announced yesterday that it
has entered into discussions with Apple Orthodontix Inc. to affiliate
with up to 47 practices presently affiliated with Apple, according to a
newswire report. Apple, which provides practice management services to
orthodontic practices in North America, filed for chapter 11 protection
in late January. Apple's senior secured creditors and the bankruptcy
court must accept the agreement for the two parties to move ahead.
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RTIN Holdings Pays for Assets of Defunct Tanners Restaurant
Group
RTIN Holdings, Longview, Texas, has paid $325,000 in cash and
an additional $125,000 in indemnity for certain officers and directors
of the now defunct Tanners Restaurant Group Inc., according to a
newswire report. The $450,000 represents full payment for virtually all
the assets of all subsidiaries of Tanner's Restaurant Group as approved
by the bankruptcy court in Atlanta.
LifeOne Announces Signing of Non-biding letter of Intent for
Reverse Merger
LifeOne Inc. announced that it has signed a non-biding letter
of intent to complete a reverse merger with Communicata Ltd., a
Scotland-based e-business incubator and developer of e-business
solutions, according to a newswire report. The letter of intent
contemplates that Communicata would merge with and into LifeOne, or a
wholly owned subsidiary of LifeOne, and that Communicate shareholders
will own 90 percent of the post-merger shares. LifeOne, formerly
National Affiliated Corp., filed chapter 11 in the District of Maryland
on Dec. 3. On that date, the Executive Office for U.S. Trustees
appointed Charles R. Goldstein of PENTA Advisory
Services LLC as chapter 11 trustee of the company. The letter of intent
is subject to several contingencies, including court approval.
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New Mexico Man Pleads Guilty to Wire Fraud Related to Chapter
7 Case
Gaylen Hinkeldey, currently residing in Palm Springs, Calif.,
pleaded guilty this week in New Mexico to one count of wire fraud in
connection with his 1992 chapter 7 bankruptcy case, U.S. Trustee
Brenda Moody-Whinery announced. 'Hinkeldey attempted to
use wire communications to hide more than $55,000 from his creditors.
The bankruptcy laws make it clear that all property must be disclosed to
the court, the bankruptcy trustee and creditors,' Whinery said. When
Hinkeldey filed chapter 7 in 1992, he did not disclose his entitlement
to the proceeds of a real estate contract that provided for a balloon
payment of $55,165 to be made in March 1996, according to Whinery.
Hinkeldey subsequently learned he would receive the balloon payment
early in July 1994, but he did not tell the trustee; instead he
concealed receipt of the payment by withdrawing about $33,000 of the
payment from one account and redepositing most of this money in $3,000
increments to bank accounts in his name. The Albuquerque Office of the
U.S. Trustee assisted the U.S. Attorney in investigating the case.
Whinery is the U.S trustee for Arizona and New Mexico.
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