St. Francis Healthcare System of Hawaii has taken the gloves off in a fight over the bankruptcy reorganization plan filed by the 2007 buyer of its two namesake hospitals.

In an objection filed in U.S. Bankruptcy Court in Honolulu, St. Francis blasts the buyer, Hawaii Medical Center LLC, alleging the for-profit hospital operation has been failing because of poor management and financing and that HMC's reorganization plan doesn't provide enough information.

The objection shows a widening divide between St. Francis, a healthcare system founded by Franciscan Sisters, and Hawaii Medical Center LLC, the buyer group whose majority owners are Cardiovascular Hospitals of America, or CHA, of Wichita, Kan., and 130 local doctors. HMC filed for bankruptcy last August, some 20 months after buying a 240-bed hospital in Liliha and a 102-bed hospital in 'Ewa.

LAWSUIT CONSIDERED

St. Francis officials said they have waited patiently for repayment of loans they made to HMC to buy the two hospitals. They also criticized HMC's plan to possibly sue St. Francis to help pay for the reorganization. St. Francis alleges that HMC is claiming the hospitals were overvalued and that it might file a "fraudulent transfer" lawsuit to lower the sales price retroactively.

"CHA, as the sophisticated hospital operator from Kansas, and its team of experienced advisers, now excuse their breaches of the sale agreement, their absentee-landlord management, and their inability to provide the promised capital to pay for the upkeep, maintenance and capital expenditures that the hospitals needed so badly, by complaining that they were hoodwinked by a cabal of Franciscan sisters," the court filing says.

Salim Hasham, HMC chief operations and restructuring officer, responded yesterday by saying HMC was surprised by the nature of St. Francis' response.

"When we took over St. Francis' two medical facilities, they were suffering from massive losses," Hasham said in a statement. "We have worked hard over the last two years to reorganize the facilities into smaller, more efficient hospitals that can sustain themselves."

HARSH CRITICISM

St. Francis, which has focused on providing community healthcare services since selling the two hospitals, issued a statement on the filing of its objection, and said it is asking permission for others to file their own reorganization plans.

"Rather than blaming their failure on the Sisters of St. Francis, it is time for Hawaii Medical Center to admit that it has failed," said Sister Agnelle Ching, St. Francis Healthcare System chief executive officer, in the statement.

The new owners acquired the former St. Francis Medical Centers in January 2007. The buyers' group said then that its plan to make the hospitals profitable included improving treatment to reduce the amount of time patients were hospitalized so more people could be treated, improving billing and collections, and getting more patient referrals.

CONTINUED LOSSES

At the time, HMC chairman Badr Idbeis said the for-profit company planned to pump at least $32 million into improvements and set new standards for patient care in Hawai'i.

Hasham said operational and capital improvements have been made, including the addition of a new imaging center. And, he said, there has been progress with finances.

But HMC was forced to file for bankruptcy reorganization because of continued losses and the possibility that its revolving loan agreement with Siemens Financial Services might not be extended.

At the end of March, HMC filed a reorganization plan that called for paying at least $18 million — about 70 cents on the dollar — to unsecured creditors, repaying Siemens in full and filing a lawsuit to contest what it owes St. Francis. The plan also calls for converting the Liliha hospital into a nonprofit operation while leaving the 'Ewa facility as a for-profit.

SELLER FINANCING

St. Francis' criticism of HMC's reorganization disclosure statement alleges the company has apparently failed to line up financing for its plan and that HMC's woes have affected St. Francis' healthcare ministries.

The healthcare system said the buyers failed to obtain financing to close the purchase, resulting in St. Francis stepping in to provide seller financing that included a five-year $40.2 million term loan, an $8.9 million working capital loan and $1-million-a-year leases for 25 years.

It also noted the new owners failed to make $30 million in capital improvements that were a major factor in St. Francis deciding to select them as the buyer. St. Francis said HMC has missed principal and interest payments totaling $6.8 million.

The unsecured creditors committee, the International Longshore and Warehouse Union and Hawaii Residency Programs have also filed objections to HMC's reorganization plan.

"As we stated earlier when we started the reorganization process, we fully expected that stakeholders would be reviewing our reorganization plan and offering their own ideas for restructuring," Hasham said.

"The plan is subject to negotiation and we welcome any input that will help ensure the success of our hospitals and help us emerge from bankruptcy."