Trustee Seeks to Recover Millions From Nursing Home Operators

Highlands’ subsidiary operated Woodland Hills in Little Rock in 2015-16.

Editor’s note: Allegations of wrongdoing against the company were dismissed. An update on the case and its impact is available here.

The trustee for a bankrupt chain of Arkansas nursing homes has accused its out-of-state operators of pulling millions of dollars out of the facilities as unpaid bills piled up in 2015 and 2016.

The operators, R. Denny Barnett of Sarasota, Florida, and Blaine Brint of Mountain Brook, Alabama, received $4.3 million through their management company, which operated the eight skilled nursing homes and an assisted living facility for 11 months in 2015 and 2016, according to a lawsuit filed by the trustee.

Meanwhile, creditors are owed more than $5 million.

“Barnett and Brint consciously disregarded payments owed to landlords and other vendors in favor of lining their own pockets,” said the suit, filed by James Dowden of Little Rock, the bankrupt nursing homes’ trustee. The suit was filed in U.S. Bankruptcy Court in Little Rock in March, where Barnett and Brint sought Chapter 7 liquidation for one of their companies in May 2016.

Barnett and Brint operated two separate companies: Aria Health Group LLC, which managed nursing homes, and Highlands Arkansas Holdings LLC, a parent company that leased the assets of the nine facilities, with each facility having its own LLC.

Only Highlands Arkansas Holdings and its subsidiaries have filed for bankruptcy liquidation. Barnett and Brint made sure Aria’s management fees and its other debts were paid by the nursing homes, according to the suit.

None of the facilities, which had a total of 1,000 beds, were profitable when Barnett and Brint ran them, according to bankruptcy filings. Only after Highlands stopped operating was it discovered that a number of Medicaid-eligible patients weren’t properly enrolled in Medicaid, costing the facilities $3.6 million in reimbursements.

One of Highlands’ largest creditors, Reliant Pro Rehab LLC of Plano, Texas, has a $3.8 million claim.

Dowden has said in a bankruptcy proceeding that the debtors have about $800,000 to distribute to creditors.

In addition to suing Barnett, Brint and Aria, Dowden has sued the landlord of the nursing homes, AdCare Health Systems Inc. of Atlanta, to claw back $4.7 million he claims AdCare was not entitled to collect. AdCare owned the nine Arkansas facilities that Highlands LLCs leased until it sold them to Skyline Healthcare LLC of Wood-Ridge, New Jersey, in 2016 for $55 million. (Skyline now hopes to exit Arkansas. See Facilities’ Owner Seeks to Sell.)

A trustee can pursue money that was paid to certain creditors within 90 days of a company filing for bankruptcy protection. The time frame expands to a year if payments are to company insiders, family members or associates.

The law is meant to keep certain creditors from being favored in the runup to an inevitable Chapter 7 liquidation. A defendant, however, can raise a number of defenses or reach a settlement.

As of Thursday morning, the defendants hadn’t filed an answer in the lawsuits brought by the trustee. A lawyer for AdCare, Laura Ketcham of Miller & Martin in Chattanooga, Tennessee, declined to comment on the case.

More: An update on the case is available here.

Joseph Falasco of the Little Rock firm Quattlebaum Grooms & Tull, who is representing Aria, Barnett and Brint, said he lacked the authority to comment on the lawsuit. He said he would forward a message to Barnett and Brint, but they hadn’t responded by Thursday afternoon.

But court filings and recordings of bankruptcy proceedings reviewed by Arkansas Business provide a window into how Highlands operated and found itself in bankruptcy after less than a year.

Founded in 1988, AdCare Health Systems, through its subsidiaries, owned and operated skilled nursing homes, which offer a high level of medical care, and less intensive assisted living facilities across the country. In mid-2014, AdCare decided to get out of the health care-operating business and into the health care-holding and leasing business, according to the trustee’s lawsuit.

In January 2015, AdCare hired Aria at $110,000 a month to provide consulting services for facilities in Arkansas, mainly skilled nursing homes. Aria described itself as a management company that focuses on the hospice, long-term care and senior housing industries. At the time, Aria was operating six nursing facilities in Arkansas.

Barnett was the owner of Aria, and Brint was its president and CFO.

At the same time Aria was a paid consultant to AdCare, Barnett and Brint were negotiating to take over operations of nine AdCare facilities in Arkansas.

In January 2015, AdCare praised Aria’s work in a news release. “Aria has a very strong management team with a significant operating presence in the state,” Bill McBride, then president and CEO of AdCare, said in the release.

Barnett and Brint created the Highlands LLCs to operate the AdCare facilities, with Barnett owning 75 percent of the Highlands LLCs and Brint owning the rest. The portfolio included Woodland Hills Healthcare & Rehabilitation in Little Rock and Homestead Manor Nursing Home in Stamps.

Brint said in a March 2017 bankruptcy proceeding that “most of the buildings were in operational distress and losing money at the time we took over.”

But conditions didn’t improve.

Management Problems
When Highlands took control of the AdCare facilities, some residents were receiving care that wasn’t being paid for, Brint said in a bankruptcy proceeding. That went unnoticed at the time.

Brint blamed the mistake on AdCare and said some of the residents were admitted just before Highlands took over. Those residents fell under a category known as “Medicaid pending.”

“In the state of Arkansas, Medicaid is slow to approve, so that can take up to four months, sometimes five months,” Brint said. But when a resident is approved for Medicaid, reimbursements are paid retroactively.

The problem of unpaid residents surfaced only after Skyline took over the facilities from Highlands in 2016. Skyline tried to bill Medicaid for the residents, but those invoices “were kicked back” because the residents weren’t in the Medicaid system, Brint said.

He said the lost revenue totaled about $3.6 million, and that Highlands also missed out on $1.7 million in denied claims that received no follow-up.

“I personally wasn’t aware of all the details until we started digging into some of the collection issues,” he said.

Cash flow also was a problem for the Highlands LLCs. Brint said that if a skilled nursing home needed money, another one in the group would transfer cash to it. If no cash was available, Aria would lend Highlands money, he said.

By the end of 2015, more problems were surfacing for Barnett and Brint. The six nursing homes Aria operated before taking over AdCare’s properties were also in distress and were transferred to a new operator in December 2015. By January 2016 it was clear to AdCare that Highlands couldn’t continue operating the facilities without a cash infusion.

The nursing homes “had been chronically late on rent, they had not been paying vendors,” and despite a number of extensions, Highlands had defaulted on loans owed to AdCare, according to the trustee’s lawsuit. Those loans totaled $1.2 million as of Feb. 5, 2016.

AdCare had an option. It could either continue funding Highlands or force it out, the suit said. It chose to terminate the lease agreements with Highlands.

On Feb. 3, 2016, AdCare terminated the leases with Highlands for failing to pay rent. Two days later, AdCare entered into a lease agreement with Skyline Healthcare for the properties, which went into effect April 1, 2016.

At the end of May 2016, the Highland LLCs filed for bankruptcy liquidation.

The trustee’s suit alleges that before and after the bankruptcy filing, the Highlands properties were making a number of repayments of working capital advances and management fees to Aria. In fact, the suit said, the Highlands LLCs transferred nearly $500,000 to Aria on the same day as the bankruptcy filing.

The lawsuit accused Barnett and Brint of breach of fiduciary duty and transfers to insiders within a year of Highlands filing for bankruptcy.

“It is no coincidence that those deciding who the [Highlands subsidiaries] should pay, namely Defendants Barnett and Brint, are the same individuals that benefited from the continued payment of Aria,” Dowden’s lawsuit said.

Highlands Arkansas Holdings LLC’s Facilities

Facilities’ Owner Seeks to Sell

Last month, Skyline Healthcare LLC of Wood-Ridge, New Jersey, entered into a management agreement with Infinity Healthcare Management of Illinois to operate the eight skilled nursing homes and one assisted living facility at the heart of the bankruptcy trustee’s lawsuit. That’s according to Amy Webb, an Arkansas Department of Human Services spokeswoman who was responding to questions from Arkansas Business.

She also said that Skyline plans to sell its Arkansas facilities. A representative of Skyline didn’t return a call for comment.

DHS has been monitoring Skyline “very closely over the last several weeks,” Webb said in the email. “The Office of Long-term Care has heard that vendors were not being paid, but monitoring visits indicated that Skyline facilities in Arkansas were stocked with food and medical supplies and staff were being paid,” she wrote.