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Quapaw House Insolvent, Former Receiver Says

6 min read

Quapaw House Inc., the troubled Hot Springs drug and alcohol treatment provider, has no employees, no open locations and no receiver nowadays, a lawyer for the company says, though it does have more than $13 million in debt.

The attorney, G. Spence Fricke of the Barber Law Firm in Little Rock, described the company as being “in a state of limbo.”

He said he didn’t know what’s next for Quapaw House, but filing for bankruptcy has been considered.

Last month, the Levi Hospital System of Hot Springs asked the Garland County Circuit Court to be relieved of its duties as receiver because Quapaw House was insolvent and had “grossly understated” its debts to Malvern National Bank.

MNB had requested that Levi be appointed the receiver in April after the bank accused Quapaw House of misrepresenting its financial condition in order to get loans last year, and demanded the immediate repayment of $1.5 million in loans.

On June 24, the Garland County Circuit judge released Levi from its duties as receiver, leaving no one in charge of the nonprofit organization, Fricke said.

“Quapaw would like to have someone in there and overall in charge of it,” he said. “It’s a real difficult position, but then again, there are no employees. And it’s hard to say what Quapaw is right now, frankly.”

Levi’s 26-page receiver’s report provides some details into the collapse of Quapaw House, which was founded in 1980. The report alleges mismanagement and more than $13 million in debt, including about $2 million owed to the IRS for payroll taxes.

“Anytime a company has to stop paying their federal withholding taxes in order to stay afloat, they are in severe financial distress,” said Adrienne Baker, an attorney at Wright Lindsey Jennings, who is representing Malvern National Bank. “Because you end up with a huge debt and then the interest and penalties compound quickly and make the debt just explode into something that’s never payable.”

Pat Parker, Quapaw’s board president, is named as a defendant in Malvern National’s lawsuit, and he is also being represented by Fricke. Parker said in court filings that portions of the report are “incorrect and misleading.” Parker also disputed the amount Quapaw House owes to MNB and other creditors, but his filings don’t include a correct amount. Parker also denies any allegations of wrongdoing.

Still, Parker wanted Levi to remain as a receiver. He said in court filings that if there wasn’t a receiver, no one could wind down the company.

Casey Bright, the former CEO of Quapaw House, is also named as a defendant in Malvern’s lawsuit. He hasn’t filed a response to the case and did not return a call or text message from Arkansas Business.

Receiver’s Report

Quapaw House’s problems appear to have started after it acquired the Arkansas assets of scandal-plagued Preferred Family Healthcare in October 2018, after multiple PFH executives — including Rusty Cranford of Rogers — were convicted of embezzlement and corruption.

The PFH acquisition was a big revenue boost for Quapaw House but didn’t help the bottom line.

Quapaw House paid PFH $500,000 and owed an additional $533,000 for the purchase of the assets. Quapaw also leased 21 facilities at a cost of $140,000 a month.

Soon after the purchase, Quapaw House defaulted on its promissory note to PFH and missed the majority of the rent payments, according to the receiver’s report.

In June 2019, Quapaw House entered into a new promissory note with PFH for the debt, which totaled $1.8 million, according to the receiver’s report.

But Quapaw House needed more money and sought loans from Malvern National Bank in 2019. The receiver said Quapaw House didn’t reveal the debt owed to PFH when it applied for loans.

In October, Quapaw borrowed $890,000 from Malvern National Bank and also received a $1 million revolving line of credit, according to the bank’s amended complaint, filed in Garland County Circuit Court on April 17.

The infusion of money, however, didn’t do much to ease the financial stress at Quapaw House.

Unreliable Financials

In January of this year, the outlook for Quapaw House, at least on paper, appeared rosy. Its board approved a budget for the fiscal year, which was half over at that point, projecting $23.9 million in revenue and $7.3 million in net income, which was 54% and 37,800%, respectively, higher than its June 30, 2019, audited statement, Levi said. “However, there is no financial evidence supporting those projections,” Levi said.

Malvern National Bank said in court filings that it wasn’t until late January that Bright, Quapaw’s CEO, told the bank for the first time that Quapaw owed the IRS money for payroll taxes.

On Feb. 24, the bank declared Quapaw to be in default under the terms of the loans and said a balance of $1.5 million was due. That month, Quapaw House began closing clinics.

Quapaw House sued Malvern National Bank in March, saying it disclosed its debts, including the payroll taxes owed to the IRS, at the time it signed for the loans. The bank denied the allegations and filed a counterclaim against Quapaw House. In April, Quapaw dismissed its case against the bank.

MNB asked Garland County Circuit Judge Marcia Hearnsberger to appoint the Levi Hospital System as a receiver in April, and she and Quapaw House agreed.

Levi said that when it took over Quapaw’s operations on April 29, it thought Quapaw had stopped all health care operations and had a small staff.

But 41 employees remained even though the services had been reduced, leaving just the residential program and outpatient behavioral health program in Hot Springs. It had about 25 patients in the residential program.

Levi also learned that $85,000 for payroll was due the next day and if the employees weren’t paid, they would all quit, leaving no one to serve the patients. “QHI had no plan for transition of these patients’ care,” Levi said.

Levi said it made the payroll payments, even though it wasn’t required to do so.

Levi also discovered the messy condition of Quapaw’s books.

Levi quizzed the employees about Quapaw House’s finances, but the employees were unable to provide any reliable budget information about Quapaw’s operation.

“In review of the information maintained by QHI, it became evident that the financials of QHI were wholly unreliable,” Levi told the court. “The QHI accounting records had not been reconciled in over six months. Additionally, upon the direction of Mr. Bright, QHI discontinued posting payments at some point in 2019 resulting in an overstated accounts receivable.”

In addition, “multiple employees” had Quapaw corporate credit cards, Levi said. It appeared that numerous charges were for personal items such as “multiple stays in hotels” in Little Rock and Hot Springs, gym memberships and regular expenses to restaurants in the Hot Springs area, Levi said. Levi also found charges in the Toledo, Ohio, area in April.

Levi said “it became rapidly clear” that Quapaw didn’t have the revenue stream needed to pay Malvern National Bank, “much less employees, vendors, landlords, or the more than $13 million in outstanding debt QHI had accrued.”

About a week after being named receiver, Levi told the Arkansas Department of Human Services, which regulated Quapaw House, that plans to move the patients “needed to be made immediately due to the financial uncertainty” of Quapaw House.

By May 12, all of Quapaw’s patients had been moved to other providers, and all remaining employees were laid off.

Fricke, the attorney for Quapaw House, said Quapaw’s services still are needed.

“It’s a crucial facility,” Fricke said. “It’s basically a shell now, and I don’t know the future of it.”

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