published Saturday, January 25th, 2014

Erlanger sues Hutcheson, demands loan repayment

When Hutcheson Medical Center and Erlanger Health System went their separate ways last year, one attorney likened the decision to breaking up but remaining friends.

But Erlanger's decision to file a federal lawsuit against the North Georgia hospital this week has "significantly changed the tenor and nature of the relationship," said the same attorney, Chad Young, who represents Catoosa County, Ga.

Both Catoosa and Walker counties were also named in the lawsuit Erlanger has filed against the Hospital Authority of Walker, Dade and Catoosa counties -- the governing body over Hutcheson -- in an effort to seek repayment for $20.5 million in loans that Erlanger claims Hutcheson officials have "expressly stated it will not pay."

Erlanger made the loans in 2011 when it entered into a management agreement with Hutcheson, then losing approximately $1 million a month. The loans were to be repaid Dec. 1, after the agreement ended, but have not been, the lawsuit states.

"Walker, Catoosa and the Hospital Authority have acted in bad faith, have been stubbornly litigious, and have caused Erlanger unnecessary trouble and expense," one section of Erlanger's 12-page complaint reads.

Both counties backed Hutcheson's promissory note when the loan agreement was drawn up, meaning both are obligated to help repay the millions, Erlanger claims.

The initial suit for $550,000 was filed late Thursday in U.S. District Court in Rome, Ga., and Erlanger officials say a separate suit seeking the additional $20 million will be filed in a matter of days.

The two sums were loaned in separate notes, with separate time lines for demands to be met, said Erlanger's attorney, Jeff Woodard.

Including its loans from Erlanger, the Fort Oglethorpe hospital is more than $60 million in debt. At the end of last year Hutcheson executives announced that the hospital would resort to austerity measures to keep the facility open -- most notably, cutting its labor and delivery services.

Erlanger CEO Kevin Spiegel said the lawsuit was "necessary to protect the assets of Erlanger during [Hutcheson's] difficult time."

"Erlanger's commitment to help the North Georgia community is still a passion of our hospital," he added. "But this has to be the first trigger before we can move forward."

Erlanger, Chattanooga's public hospital, is coping with financial woes of its own as it tries to recover from two years in the red.

Hutcheson administrative officials did not issue a comment, and neither Walker County Sole Commissioner Bebe Heiskell nor the county's attorney, Don Oliver, returned calls Friday.

But Young indicated that the lawsuit was unexpected. As recently as Tuesday, the parties were holding conference calls, setting up meetings and "having what appeared to be meaningful and productive dialogue to attempt to work through any existing disputes in a businesslike manner," Young wrote in an email.

"Suffice it to say that Catoosa County has received the message sent by Erlanger in filing its lawsuit and the lawsuit will be vigorously defended," said Young.

The lawsuit is the latest chapter in the saga of the two public hospitals' once-promising relationship, which began to disintegrate last year.

When the management agreement was struck in 2011, Hutcheson took on Erlanger's name, and it still features Erlanger branding on its signage and its website.

That agreement was poised to become a more serious commitment last year, when Hutcheson announced it would enter a leasing agreement with Erlanger for 10 years.

North Georgia leaders called the move "historic" and "critical" for Hutcheson's success.

But the relationship began to fall apart over the summer, following a study of Hutcheson's financial viability and market share value.

In August, Hutcheson severed the management agreement, with leaders claiming the Chattanooga hospital did not hold up its end of the pact.

The contract required Hutcheson to pay the principal of the loan plus accrued interest by Dec. 1, 2013, Erlanger has claimed in the lawsuit.

When that date passed with no such payment, the obligation to guarantee the loan fell to the counties, the complaint claims. Neither county has made any such payment, Erlanger said.

Dade County, which refused to back promissory notes for Hutcheson, was not named in the suit.

Dade County Executive Ted Rumley said Erlanger's lawsuit is exactly the kind of result county officials feared when they decided not to back the promissory note.

"We couldn't put our taxpayers at risk of something like this happening and it falling on them," he said. "It's a tremendous amount of money to be on the hook for."

Contact staff writer Kate Harrison at kharrison@timesfreepress.com or 423-757-6673.

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