Borrego Community Health Foundation – Further to DHCS Settlement and Impending Resolution of CMS Objection, Court Approves $50mn Sale to Stalking Horse Desert AIDS Project

Register, or to view the article

March 13, 2023 – The Court hearing the Borrego Community Health Foundation case issued an order approving the sale of substantially all of the Debtor’s asset ($50.0mn purchase price) to stalking horse Desert AIDS Project d/b/a DAP Health [Docket No. 559].

Previously on February 15, 2023, Further to the Court’s December 19th bidding procedures order [Docket No. 321], the Debtor notified the Court that it had selected Desert AIDS as the successful bidder. On February 28th, the Court “tentatively” approved the sale subject to resolution of objections relating to the “characterization of certain assets, the allocation of Sale proceeds, or the extent of Borrego’s assets (an argument that particular property is not an asset of the estate).”

At a March 1st sale hearing, those objections were largely resolved, with one, that of the Centers of Medicare & Medicaid Services (“CMS”), still being negotiated, but not otherwise precluding the Court from issuing its sale order. That order provides: "Except as to the objection of the Centers of Medicare & Medicaid Services ('CMS') filed by HHS [Docket No. 206, 458, 491] (the 'CMS Objection'), all objections…are overruled on the merits with prejudice. 

The DHCS objection is resolved by the terms of the settlement set forth on the record at the Sale Hearing [see "Settlement" below] approved by a separate 9019 motion and order thereon [Docket Nos. 510, 544].

As set forth on the record at the Sale Hearing, the Debtor and HHS are negotiating a resolution to the CMS Objection. Notwithstanding the foregoing and subsequent language in this Order, the CMS Objection remains until resolved by the parties or by the Court. On or before March 20, 2023, the Debtor will provide HHS with its proposed settlement of the CMS Objection. The Court will conduct a status conference on the CMS Objection on March 29, 2023, at 3:00 p.m. Pacific Standard Time (the 'CMS Objection Hearing'). At the CMS Objection Hearing, the Debtor and HHS will inform the Court whether the CMS Objection has been resolved. If the Debtor and HHS are unable to resolve the CMS Objection, the Court may schedule further briefing and additional deadlines."

Case Status

On September 12, 2022, Borrego Community Health Foundation (“Borrego” or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn. At filing, the Debtor, a non-profit health care provider serving California’s San Diego and Riverside Counties, cited the discovery of “significant fraud…which involved filing false claims for dental services provided by contract dentists…[which resulted in] a temporary suspension of payments for Medi-Cal services.”

On February 15, 2023, the Debtor notified the Court that it had selected stalking horse Desert AIDS Project d/b/a DAP Health (the “DAP,” $50.0mn cash bid) as the successful bidder in respect of a sale of substantially all of the Debtor's assets. On February 28th, the Court "tentatively" approved the sale subject to resolution of objections relating to the "characterization of certain assets, the allocation of Sale proceeds, or the extent of Borrego's assets (an argument that particular property is not an asset of the estate)."

Committee/DHCS Settlement

On March 7th, the Court approved a settlement among the Debtor, the Official Committee of Unsecured Creditors (the “Committee”), and the California Department of Health Care Services (“DHCS,” and together with the Debtor and the Committee, the “Parties”) [Docket No. 544]. As detailed in the Debtors' requesting motion [Docket No. 510 which attaches a term sheet]: "The Settlement resolves major, overarching issues in the Case and the related Adversary Proceeding and paves the way for the sale to Desert Aids Project d/b/a DAP Health (the 'Buyer') without protracted litigation, which will ensure the Debtor’s patients continue to receive high quality, culturally competent care without disruption. As a result of DHCS’ agreement to subordinate part of its claim, the Settlement also allows for general unsecured creditors to be paid in full….the principal terms of the Settlement provide as follows:

  1. DHCS will receive an allowed general unsecured claim in the total amount of approximately $112,000,000 (the 'DHCS Allowed Claim'), subject to upward and downward adjustments and the filing of supplemental proofs of claims (the “Allowed Offset Amount”), with the Debtor and Committee agreeing to apply to this Court to extend the government claims bar date to December 29, 2023, for DHCS to submit its further proofs of claim;
  2. DHCS shall retain the Allowed Offset Amount, and shall receive the Sale Proceeds Recovery, and the Litigation Recoveries, as defined in the Term Sheet, which shall be applied by DHCS in reduction of the DHCS Allowed Claim, and the remaining balance shall be subordinated to other general unsecured claims;
  3. The Debtor agrees and DHCS consents to the transfer of the Medi-Cal provider agreements to the Buyer of the Debtor’s assets pursuant to section 365 of the Bankruptcy Code;
  4. An independent monitor to remain in place as provided in the Term Sheet;
  5. HCS agrees to resume paying for in-house dental services effective as of the date the Buyer of Debtor’s assets assumes Financial Control;
  6. DHCS agrees to certain releases for the Debtor and related parties; and
  7. the Adversary Proceeding and related appeal shall be dismissed."

Sale Background

On February 2, 2023, the Debtor designated AAP as the stalking horse bidder [Docket No. 418] as it headed into a scheduled February 6th auction. 

On February 6th, however, the Debtor adjourned the auction, notifying the Court [Docket No. 438] that: "On February 6, 2023, the Debtor, the Qualified Bidders, the Department of Health Care Services, the Official Committee of Unsecured Creditors (the 'Committee'), and other stakeholders and their respective representatives met at the offices of Dentons US LLP….Pursuant to the Bid Procedures and prior to the commencement of the Auction, the Debtor and the Committee had discussions with the Stalking-Horse Bidder and the Qualified Bidders with respect to the terms and conditions of the Qualified Bids. The Debtor and Committee also met with DHCS and other interested parties. Based on the information received from the foregoing parties, the Debtor determined, in consultation with the Committee, that it was necessary to receive further instructions from the Debtor’s Board of Trustees (the 'Board') to best promote the goals of the bidding process. Accordingly, the Debtor commenced the Auction to notify all parties present at Dentons and those participating via Zoom regarding the foregoing and adjourned the Auction until further notice.

PLEASE TAKE FURTHER NOTICE that the Debtor requested final highest and best bids by February 10, 2023, at 12:00 p.m. PST. After review of the final bids, the Board will select the Winning Bidder and the Back-Up Bidder. The Debtor will file a notice of the Winning Bidder in accordance with the Bidding Procedures Order."

Application requesting status conference [Docket No. 453] provides, “Given that the notice of auction results had not yet been filed, on February 10, 2023, the Court entered its Order Vacating Deadline for Objections to Sale [Docket No. 443] vacating the deadline set by the Bidding Procedures Order to file objections to the Sale due to the adjourned Auction.”

Bidding Procedure Motion

The Debtor's requesting motion [Docket No. 161] states, “The Debtor and its advisors have responded to inquiries from certain potential interested parties and advised those parties that there will be a sale of the Purchased Assets. The Debtor has assembled a data room which will be made available to potential interested parties after the filing of this Motion and upon the execution of an appropriate confidentiality agreement. The Debtor and its advisors will continue to market the Purchased Assets to any interested party through the Bid Deadline…in order to conduct a full and fair bidding process for the purpose of maximizing the consideration to be received by the Debtor’s estate for the Purchased Assets, the Debtor respectfully requests that the Court grant the Motion.

Importantly, the Debtor notes that this proposed sale is contingent on approval by the Health Resources & Services Administration (‘HRSA’) which must determine whether the Winning Bidder (as defined below) is Federally Qualified Health Center. This approval process may take up to six months following the Court’s approval of the sale. The Debtor has taken into consideration this delay caused by the HRSA approval process in its proposed bid procedures and sale timeline.”

Petition Date Perspective

Events Leading to the Chapter 11 Filings

The Debtor's declaration in support of first day filings [Docket No' 7] provides: "In 2020, the Debtor’s Board of Trustees became aware that members of the Debtor’s leadership, certain landlords/contractors, and community dentists orchestrated what appears to be significant fraud for their own personal enrichment which involved filing false claims for dental services provided by contract dentists. In November 2020, the California Department of Health Care Services ('DHCS') issued a temporary suspension of payments for Medi-Cal services because of an ongoing fraud investigation into the outside, contract dental program. There were no accusations of any fraudulent acts associated with the in-house dental program or medical services. During the pendency of the suspension by DHCS, the Debtor provided thousands of services without compensation.

Following the participation in a formal administrative meet and confer process, on February 26, 2021, the Debtor entered into a settlement agreement with the DHCS, pursuant to which DHCS agreed to lift the temporary suspension as it pertained to the reimbursement of Medi-Cal medical services. The temporary payment suspension remains in place with respect to dental services."

Drilling down on the alleged dental fraud: "The Debtor initiated an internal investigation to identify wrongdoing by former associates, which led to the filing of pending litigation against the former trustees, officers, and contract dentists…..The schemes included selling useless assets to Debtor at inflated prices, entering into one-sided agreements with Debtor to its detriment, committing and/or covering up healthcare fraud though improper billing of dental services, entering into leases with Debtor that were many times fair market rates and terms, paying themselves above-market salaries and benefits, and hiring friends and family members to work for Debtor and paying them above-market salaries."

According to an article published by Becker's Hospital Review, "For the second time in two years, California health officials are suspending all Medicaid payments to federally qualified health center Borrego Health for 'continued and unresolved inappropriate billings,' the San Diego Union-Tribune reported Aug. 30.

The California Department of Health Care Services' decision comes after state and federal authorities launched a criminal investigation into millions of dollars of alleged improper billings, excessive salaries and above-market rent payments at Borrego Spring-based Borrego Health, according to the report. It also comes after Borrego Community Healthcare Foundation sued several past board members, executives and contractors over allegations of racketeering, fraud, nepotism, excessive compensation and self-dealing.

Borrego Health's Medicaid reimbursements were first suspended in December 2020 after state and federal agents raided Borrego Health locations, seizing computers, taking medical records and interviewing employees. 

Regulators agreed to reinstate Medicaid reimbursements for medical services in early 2021, but not for dental work, which remains the focus of the criminal investigation, according to the report. The reinstatement came after Borrego Health agreed to an independent monitor and other conditions. 

In an Aug. 19 letter obtained by the San Diego Union-Tribune, state health officials said they would withdraw all Medicaid reimbursements by Sept. 29 because of Borrego Health's alleged failure to meet its settlement obligations."


The Complaint filed by the now-Debtor on July 29, 2022 in the U.S. District Court for the Southern District of California [Docket No. 1 in Case No. 3:22-cv-01056] explains, "While Borrego Health was attempting to complete its mission of providing healthcare to underserved communities, certain individuals and entities, both inside and outside of Borrego Health, siphoned off money from Borrego Health that should have benefitted to the community it serves. The schemes of those various individuals and entities are set forth in detail below.

The schemes include selling useless assets to Borrego Health at inflated prices, entering into one-sided agreements with Borrego Health to its detriment, committing and/or covering up healthcare fraud though improper billing of dental services, entering into leases with Borrego Health that were many times fair market rates and terms, paying themselves above-market salaries and benefits, hiring friends and family members to work for Borrego Health and paying them above-market salaries and attempting to use Borrego Health to purchase a country club.

Those same individuals and entities worked tirelessly to cover up their misdeeds, and, until recently, were successful is doing so. The insiders were motivated by various forms of personal benefit. First, they used the excessive revenue generated by the schemes to set over-market salaries for themselves and create other forms of compensation, such as automotive benefits, retirement benefits and free healthcare goods and services from Borrego Health.

Second, they used the excessive services and attendant revenue from MediCal to justify employing friends and family members at Borrego Health, also at inflated salaries. Third, on information and belief, the insiders allowed the outsiders to participate in the fleecing of Borrego Health in exchange for kickbacks and/or other benefits to the insiders.

The false and fraudulent billing of dental services has resulted in Borrego Health’s suspension by California’s Medicaid Program, Medi-Cal. The state and federal government are also investigating Borrego Health for tax issues, its non-profit status, among many other things, due to these schemes.

Fortunately, Borrego Health, through a newly constituted Board of Trustees, has spent considerable time and effort trying to discover and unravel the prior bad conduct to rehabilitate Borrego Health and ensure Borrego Health’s viability and compliance going forward. However, Borrego Health has been severely damaged and this action seeks to illuminate the various schemes, to seek financial compensation to recoup funds wrongly siphoned away from Borrego Health, and to hold the wrongdoers responsible for their actions."

About the Debtor

According to the Debtor: “Borrego Health, recognized as a Patient-Centered Medical Home, provides high-quality, comprehensive, compassionate primary health care to the people in our communities, regardless of their ability to pay. We serve these communities and adjoining regions with respect, dignity and cultural sensitivity as a medical home and safety net for essential health care and social services. Borrego Health is a non-profit 501(c)(3) Federally Qualified Health Center (FQHC) and a Federal Tort Claims Act Deemed (FTCA) facility.”

Read more Bankruptcy News