Robert Lewis saw warning signs during his short time as a director of Quapaw House Inc., the Hot Springs nonprofit organization that acquired the assets of scandal-plagued Preferred Family Healthcare a year and a half ago.
“I’ve been on some really good boards and what I saw there just felt like a train wreck, so I immediately resigned,” said Lewis, a former pastor at Fellowship Bible Church in Little Rock.
“We didn’t get a lot of answers to our questions, and probably the biggest concern for me was, financially, we were always in the dark.”
Lewis’ board tenure ended in late 2018 or early 2019, shortly after Quapaw House acquired Preferred Family Healthcare’s Arkansas assets. PFH, of Springfield, Missouri, was Arkansas’ largest provider of counseling services for troubled youths and adults before a string of federal corruption cases. One of its executives, lobbyist Milton “Rusty” Cranford of Rogers, was the domino that toppled a half-dozen Arkansas legislators linked to the bribery and fraud scandal.
In recent weeks:
► Quapaw House revealed in late January that it owed $1.9 million to the IRS for payroll taxes withheld in 2019.
► Malvern National Bank accused Quapaw House of fraud for misrepresenting its financial condition in order to get loans last year and demanded the immediate repayment of $1.5 million. MNB asked the Garland County Circuit Court to appoint a receiver to run the nonprofit organization, a motion that was pending as of Thursday.
► A midlevel manager filed a federal lawsuit seeking class-action status for about 200 employees who haven’t been paid since February. Amanda Schatz, a program director for Quapaw’s center in Bentonville, also claimed that employees had money taken out of their paychecks for nonexistent health insurance.
Quapaw House didn’t return calls for comment, and it’s not clear who is running the business. Casey Bright, the CEO who was named as a defendant by both Malvern National Bank and Schatz, said in a text message to Arkansas Business last week that he is no longer with Quapaw House. “So I apologize for not being able to comment about any QHI business,” he wrote.
But Schatz’s lawsuit, filed April 16 by George Rozzell IV of Miller Butler Schneider Pawlik & Rozzell of Fayetteville, said Bright resigned on March 18 to run a management company that was then hired by Quapaw House. As of Thursday morning, Quapaw House hadn’t filed a response to Schatz’s complaint.
In its court filings with Malvern National Bank, however, Quapaw House said it disclosed its debts, including the payroll taxes owed to the IRS, at the time it signed for the loans.
On April 8, attorney Karen Sharp Halbert of the Roberts Law Firm of Little Rock asked the Garland County Circuit Court for permission to be removed as counsel for QHI. Halbert said in the filing that QHI hasn’t paid her firm for its services, and “there has been a breakdown in communication” between the firm and QHI.
Garland County Circuit Judge Marcia Hearnsberger granted Halbert’s request.
Quapaw recently hired attorney Jim Smith of the Barber Law Firm in Little Rock. His practice area includes bankruptcy. He could not be reached for comment Thursday morning.
‘Sold a Bill of Goods’
James Bell had served on Quapaw’s board from 2013 until 2019. But he, like former board member Robert Lewis, had concerns about Bright’s management.
Bright “sold the board a bill of goods” in connection with the purchase of Preferred Family, “and the board believed him,” Bell told Arkansas Business last week.
He said that Bright told the board that 85 school districts in northwest Arkansas were under contract with PFH and that Quapaw would assume those contracts, which would make the transaction profitable in northwest Arkansas.
But it turned out that there were “zero contracts with those school districts,” Bell said. “So that immediately made that place unprofitable.”
Bell also said that he “went to the board and said, ‘Folks, we need to do something different. We need to get our executive director out of the way. He’s not capable of handling this.’”
But instead of removing Bright, Bell — who was vice president of the board at time — was kicked off the board, he said.
The board’s president, Pat Parker, didn’t reply to messages left on his cellphone last week.
Preferred Family Acquisition
Preferred Family Healthcare was the nexus of federal corruption investigations by the U.S. attorneys for the Western District of Missouri and the Eastern and Western Districts of Arkansas. Beginning in January 2017, six former Arkansas legislators were convicted of corruption involving PFH, mainly through Rusty Cranford, who was sentenced in November to seven years in federal prison. Other PFH executives were also convicted of corruption and embezzlement in Missouri.
On Oct. 4, 2018, Bright announced Quapaw House’s acquisition of Preferred Family Healthcare’s assets in Arkansas. The financial terms of the arrangement weren’t disclosed.
“As you can imagine, an acquisition of this size will take time to work through,” Bright said in a news release at the time. “We are analyzing every facet of their existing operation, taking equipment and facilities inventory, reviewing personnel and most importantly working to help transition the client base to QHI if they choose to do so.”
The PFH acquisition was a big revenue boost for Quapaw House, which was formed in 1980, but didn’t help the bottom line. For the fiscal year that ended June 30, 2018, according to the Form 990 filed with the IRS, it reported $7.1 million in revenue and a loss of $29,157. That fiscal year, Bright’s total compensation was $156,196.
For the year that ended in mid-2019, Quapaw’s revenue more than doubled to $15.6 million, according to an audited statement filed as an exhibit in Malvern’s lawsuit. But its net income was just $19,345.
Bright and Quapaw House didn’t use that audited financial statement to borrow money from Malvern National Bank. Instead, they used an unaudited one that showed a much rosier financial picture. And that would lead to lawsuits.
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 bank is represented by attorneys Charles Coleman and Adrienne Baker of Wright Lindsey & Jennings of Little Rock.
To apply for the loans, Quapaw House used an unaudited financial statement for its fiscal year that ended June 30, 2019. The audited statement wasn’t completed at the time.
The unaudited statement showed total accounts receivable of $6.8 million and net income of $2.8 million, according to the lawsuit, and the balance sheet showed no outstanding bills for payroll taxes. The bank said it learned later that Quapaw House owed about $700,000 in federal payroll taxes for the second quarter of 2019.
A credit officer for the bank “specifically asked Casey Bright whether there would be any surprises when Quapaw House’s audited financial statements were provided to MNB, and Bright said there would be no surprises,” according to the lawsuit.
But there was a surprise. By the time the loans closed in October, Quapaw House also owed payroll taxes for the third quarter of 2019, bringing the total amount due to more than $1 million. And after receiving the loans, Quapaw House failed to remit payroll taxes withheld in the fourth quarter of 2019 and the first quarter of this year, the lawsuit said.
Malvern National Bank said it wasn’t until late January that Bright told the bank that Quapaw owed payroll taxes.
Quapaw House also revealed that the IRS, in a notice dated Jan. 6, had threatened to seize Quapaw’s assets if $700,000 owed for the second quarter of 2019 wasn’t paid by Feb. 5. Those assets were used to secure Quapaw’s loan with the bank.
At a meeting with bank officers in January, Bright said Quapaw House didn’t have the money to pay the IRS and continue to pay for normal operating expenses. It was then that MNB received the audited financial statement showing net income of less than $20,000 for the fiscal year that ended on June 30.
On Feb. 24, the bank declared Quapaw to be in default under the terms of the loans and said the balance of $1.5 million was due. The bank said it had the right to sweep Quapaw’s accounts to apply to the bank’s debt, which it did in February.
That caused Quapaw House paychecks to be returned for insufficient funds. In a Feb. 28 letter obtained by Arkansas Business, Quapaw’s board apologized to the staff for the nonprofit’s failure to pay them.
The board said Quapaw House encountered a “‘perfect storm’ when two banks that we work with changed procedures in the middle of last week, without notifying QHI.” The board assured employees that Quapaw House “is financially sound, but we have funding problems.
“We have confidence in our management team led by Mr. Bright and we are very optimistic that QHI will remain the best treatment center in the state!” the board said.
The letter didn’t name the banks, nor did it mention the unpaid payroll taxes.