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January 5, 2021 – Community Intervention Services, Inc. and three affiliated Debtors (“CIS” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Massachusetts, lead case number 21-40002. The Debtors, formed for the purpose of providing community based behavioral health services, are represented by Michael J. Goldberg of Casner & Edwards, LLP. Further board-authorized engagements include (i) Getzler Henrich & Associates LLC as financial advisor and turnaround consultant and (ii) Duff & Phelps Securities, LLC as investment banker.
The Debtors’ lead petition notes between 1 and 49 creditors; estimated assets between [$50.0mn and $100.0mn]; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Benefit Street Partners ($30,616,650.12), (ii) OFS Capital Management ($13,121,421.48) and (iii) Capital One, National Association ($9,208,644.51).
The Debtors cite "a multitude of operational and regulatory challenges" that drove them into bankruptcy, most notably including a Qui Tam lawsuit that alleges that the South Bay Debtor "had engaged in inadequate training and supervision of certain of its clinical employees." As a result, the complaint alleges "South Bay’s claims for payment failed to meet the regulatory requirements applicable under Massachusetts’s Medicaid program and constituted overpayments recoverable under federal and state False Claims Acts."
The final blow, the Debtors state, came with the onset of the COVID-19 pandemic, the effect of which "on the Debtors’ operations left the Debtors close to running out of cash and being forced to cease operations."
Goals of the Chapter 11 Filings
According to the Calkins Declaration, the Debtors "have filed motions (the 'Sale Motions') seeking authority to sell substantially all of the assets of South Bay (together with selected assets of CIS), and to sell substantially all of the assets of Futures. The purchaser identified in each of these motions is The Mentor Network ('Mentor'), which has formed separate entities to close the transactions. Although not requesting such relief on an emergency basis, the Debtors are seeking, through the Sale Motions and accompanying motions seeking approval of the Debtors’ proposed procedures for soliciting higher and better offers (the 'Sale Procedures Motions'), this Court’s approval of the two asset sales on a relatively expedited basis."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Calkins Declaration”), Andrew Calkins, the Debtors’ Chief Executive Officer, detailed the events leading to CIS's Chapter 11 filing. The Calkins Declaration provides: “CIS’s business plan has encountered significant implementation issues for a number of years. Starting in 2016, the Debtors were besieged with a multitude of operational and regulatory challenges. Extensive clinical employee turnover at South Bay and CIS subsidiaries (other than Futures) greatly impacted the ability of the Debtors to generate revenues sufficient to cover operating expenses and debt service requirements. As new clinicians were hired, they took longer to train and generate a full panel of clients. In fact, the recruitment and retention of clinicians continues to be an ongoing challenge.
Changes in the service reimbursement landscape posed additional challenges for the Debtors, including financial pressure resulting from increased expenses unmatched by corresponding increases in payor reimbursement rates. Compounding matters further, the Debtors struggled to obtain reliable, timely financial reporting and analysis to help them manage through the increasing financial pressures, due to the fact that the multiple operating companies all maintained separate and inconsistent finance and accounting practices. These financial management issues were ultimately addressed in 2017 by centralizing all accounting and financial reporting resources under CIS and by opening a shared service center in Massachusetts, but the previous inattention to these issues had already affected the Debtors’ financial condition.
Expansion of the West Boylston Futures location in 2018 created further financial challenges for the Debtors. CIS invested more than $1 million in the build-out of the West Boylston location, and another $1 million in the cost of ramping up its operation. Due in part to the COVID-19 health crisis, the West Boylston location has been slow to grow census count and has yet to achieve profitability.
Qui Tam Litigation
Although the changes described above led to improvement in the Debtors’ operating performance, their turnaround was impaired, and ultimately derailed, by the commencement in 2015 of the ongoing litigation entitled United States ex rel. Martino-Fleming v. South Bay Mental Health Center Inc. et al., Civ. Action No. 1:15-cv-13065-PBS (D. Mass.) (the 'Qui Tam Litigation'). A qui tam lawsuit commenced by a former South Bay employee, the Qui Tam Litigation asserted that South Bay had engaged in inadequate training and supervision of certain of its clinical employees. As a result, according to the complaint filed in the Qui Tam Litigation, South Bay’s claims for payment failed to meet the regulatory requirements applicable under Massachusetts’s Medicaid program and constituted overpayments recoverable under federal and state False Claims Acts, 31 U.S.C. §3729 et seq. (the 'Federal Claims'); M.G.L. c. 12, §5A et seq. and M.G.L. c. 118E, §§40, 44 (the 'State Law Claims').
Both the Commonwealth of Massachusetts and the United States were entitled to intervene in the Qui Tam Litigation and pursue on their own behalf the State Law Claims and the Federal Claims, respectively. After the Commonwealth of Massachusetts intervened in the Qui Tam Litigation, the Debtors South Bay and CIS were able to obtain a consensual resolution of the State Law Claims. Pursuant to a Settlement Agreement and Release signed in February 2018 (the 'Massachusetts Settlement Agreement'), South Bay, CIS and Holdings agreed to pay the Executive Office of Health and Human Services of Massachusetts ('EOHHS') a total of $4,000,000 through a series of payments commencing upon settlement and continuing through December 2022. As of the Petition Date, the balance due to EOHHS under the Massachusetts Settlement Agreement is approximately $1,820,000.
The Federal Claims were not resolved by the Massachusetts Settlement Agreement, and the United States has thus far not elected to intervene in the litigation of those claims. Thus, the Federal Claims remain under the control of the original plaintiff in the Qui Tam Litigation. Efforts to settle the Federal Claims with the original plaintiff have thus far been unsuccessful. Recently, in response to the trial judge’s urging, the parties to the Qui Tam Litigation have agreed once again to mediate their disputes.
The multi-year defense of the Qui Tam Litigation has been both expensive and time-consuming and has had a deleterious effect on the Debtors’ business and finances. The Qui Tam Litigation has made it impossible for the Debtors to obtain financing for their operations and has made the assets of South Bay unmarketable outside of bankruptcy. Ultimately, the Qui Tam Litigation has prevented the execution of CIS’s strategy of building a regional, or possibly national, provider of behavior health services and rendering fatally inefficient the corporate infrastructure that was intentionally built to deliver those services in a cost-effective manner.
The Debtors’ precarious financial position left them extremely vulnerable to the shock of COVID-19 and the attendant disruption of the Debtors’ business operations and revenues. In early spring 2020, the pandemic’s effect on the Debtors’ operations left the Debtors close to running out of cash and being forced to cease operations. As a result of the pandemic and governmental 'lockdown' orders, South Bay professionals could no longer offer in-person counseling or other services. A rapid conversion to tele-health was able, after a number of months, to restore revenue from outpatient counseling to their former levels, but revenue from other services, which require in-patient assistance, have continued to lag; in fact, total South Bay revenue is currently running at approximately 69 percent of its pre-COVID level."
The Calkins Declaration continues, "the pandemic created equally difficult pressures for Futures operations. Futures was required by the Massachusetts Department of Early Education and Care ('EEC') to close its two facilities for approximately four months and gradually thereafter re-open to clients. Futures’ revenue is currently performing at 65 percent of pre-pandemic levels, hindered by the capacity guidelines set by the EEC and by ongoing compliance with safety guidelines of the Centers for Disease Control and other agencies for operating both locations during the pandemic.
Fortunately, South Bay during spring of 2020 was able to obtain emergency funding totaling $7.8 million from the Commonwealth of Massachusetts, funding that the Commonwealth provided and which the Debtors have been advised must be repaid in six installments (each in the amount of $1.3 million) commencing in January, 2021. This funding not only permitted the Debtors to maintain ongoing business operations — including importantly South Bay’s essential role in delivering much-needed behavioral health services to Commonwealth residents — it served to lengthen the runway for the Debtors’ pursuit of a sales transactions intended to place their businesses in stronger financial hands.
Marketing Efforts and Sale of South Bay, CIS and Futures to Mentor
The Calkins Declaration states, "Recognizing the importance of the services provided by South Bay and Futures, the Debtors, faced with a deteriorating financial situation, determined to sell the assets of both, in order to facilitate the continued provision of their services by a better-capitalized buyer able to continue those services without interruption. The Debtors believe that the proposed sale of South Bay’s and Futures’ businesses is therefore in the best interests not only of their creditors, but — even more important — the vulnerable client population that the Debtors serve. It will also preserve the jobs of South Bay’s and Futures’ approximately 1,000 employees and contract clinicians. To effect these important sales, the Debtors have filed the Chapter 11 case.
In October 2018, CIS retained the services of Duff & Phelps Securities, LLC ('D&P'), a well-known investment banking firm with substantial experience in the healthcare industry, to explore possible sale options for various of CIS’s operating subsidiaries. Upon its engagement, D&P began marketing the assets of CIS subsidiaries AFS, FBR, AERI, NPS and Futures. A 2019 transaction for AFS and NPS failed just short of a closing. D&P’s commencement of a new sale process ultimately led to the sale of FBR, AERI and AFS on October 1, 2020. NPS, unable to be sold, ceased operations in November 2020.
Beginning in January, 2020, D&P launched a full sales process for the Futures business primarily focused on strategic buyers and private-equity backed portfolio companies. D&P contacted 38 potential buyers, 24 of which signed an NDA and received preliminary marketing materials that included a detailed overview of the facilities, programs, insurance payors and financial profile. The closing of the Futures facility due to the COVID-19 pandemic substantially complicated the marketing process. Four letters of intent were ultimately received, and one was selected as presenting the best proposal. However, the risk of additional facility shutdowns, the COVID-19 impact on operations and changes to regulatory guidelines affecting available capacity led to the initial offeror withdrawing from the transaction and to D&P’s engagement in a second marketing process.
In April 2020, CIS expanded D&P’s engagement to include the prospective sale of South Bay. In light of South Bay’s historical performance and the pending Qui Tam Litigation, South Bay’s management determined that a sale free and clear of liens, claims and interests under Section 363 of the Bankruptcy Code would be necessary to effectuate a sale. Accordingly, South Bay and D&P concluded that firming up a stalking horse offer with a definitive agreement, to be followed by solicitation of competing bids through a Section 363 sale process, would be the best way to market the South Bay business enterprise to potential purchasers. Beginning on May 11, 2020, D&P began a full sales process for the South Bay business focused on broad list of strategic buyers, private-equity backed portfolio companies and financial buyers. D&P contacted 197 potential buyers. A total of 31 potential buyers signed a non-disclosure agreement and were provided D&P’s preliminary marketing materials.
At the conclusion of these marketing efforts, South Bay negotiated a letter of intent with Mentor, executed on September 1, 2020, pursuant to which Mentor indicated its intent to acquire South Bay’s assets and willingness to serve as a stalking horse bidder for a Section 363 sale. Mentor is a national leader of behavioral health services. Being reputable and well-respected in the industry, the Debtors believe Mentor to be an ideal buyer for South Bay. During due diligence, Mentor determined that it desired to acquire certain assets of CIS that is viewed as integral to the smooth transition of business operations. In addition, Mentor, having become aware of the Futures acquisition opportunity, decided to make an offer for Futures’ assets, and the Debtors quickly reached agreement with Mentor regarding that transaction as well. Given the timing of the two transactions, and the relationships among the entities to be acquired, the Debtors and Mentor agreed that the assets of Futures would also be acquired through a sale under Section 363 of the Bankruptcy Code under a separate asset purchase agreement. The consummation of the sale transactions involving CIS, South Bay and Futures will substantially conclude the winding up of the business operations of all of CIS’s subsidiaries. Once the two sales are consummated, CIS will wind up its own affairs."
The Debtors' lead petition notes that Mentor has agreed to pay $32.0mn for the South Bay Mental Health Facility, Inc. assets and $7.5mn for the Futures assets, which both Asset Purchase Agreements being subject to Court approval.
CIS financed its acquisitions and its subsidiaries’ operations with secured financing provided by institutional and private lenders. The Debtors’ largest creditors are the Capital One, National Association ('Capital One') and Fifth Third Bank ('Fifth Third' and, together with Capital One, the 'Senior Lenders'), who made available to the Debtors a $55 million credit facility. As of the Petition Date, the total aggregate amount due to the Senior Lenders was at least $48,708,644.51 (including principal, interest and certain fees, costs and expenses but excluding prepetition professional fees, including attorneys’ fees incurred on or after December 30, 2020) (the 'Senior Secured Claim'). Capital One, as agent, on behalf of itself and the Senior Lenders, holds a first priority security interest in substantially all assets of the Debtors to secure the Senior Secured Claim.
The Debtors (together with the Non-Debtor Entities) also obtained subordinated secured financing pursuant to a Credit Agreement dated July 16, 2015, as amended, with Triangle Mezzanine Fund LLLP ('Triangle'), acting for itself and as agent for certain other lenders ('Mezzanine Agent'), pursuant to which they borrowed approximately $25,250,000 secured by a second-priority security interest in the assets of the Debtors and the Non-Debtor Entities (the 'Mezzanine Loan Facility;' the documents evidencing, governing and/or securing the Mezzanine Loan Facility are referred to herein as the 'Mezzanine Loan Documents'). Triangle subsequently assigned its rights under the Mezzanine Loan Documents to BSP Agency, LLC (together with OFS SBIC I, LLP, the 'Mezzanine Lenders'). Pursuant to the Mezzanine Loan Documents and the Subordination Agreement dated July 16, 2015, the Mezzanine Lenders hold a security interest in substantially all assets of the Debtors that is junior in priority to the security interest held by the Senior Lenders.
Aside from their substantial obligations to their secured creditors, the Debtor South Bay is obligated to pay $1,820,000 to the Commonwealth of Massachusetts arising out of a 2018 settlement of the Qui Tam Litigation and $7.8 million in advance payments made in spring 2020 to support the Debtors’ operations during the COVID-19 pandemic.
Other significant liabilities include the Debtors’ obligations under leases of real property at which they conduct their business operations; South Bay is a tenant under 22 leases, Futures is a tenant under two leases, and CIS is a tenant under one lease. As of the Petition Date, the Debtors were current in the payment of their lease obligations. The Debtors expect that most if not all of these leases will be assumed and assigned to Mentor (or other purchaser) pursuant to Section 365 of the Bankruptcy Code as part of the proposed asset sales and that there will be minimal if any cure costs associated with such assumption and assignment.
The Debtors' lead petition lists Community Intervention Services Holdings, Inc. and H.I.G. Growth Partners-CIS, LLC as holders of more than 10% of the Debtors' equity interests.
About the Debtors
According to the Debtors: “Community Intervention Services (CIS) was formed in April of 2012 for the express purpose of building a clinically focused, national provider of community based behavioral health and substance abuse services. A key component to our business strategy is the community based services market is highly fragmented and dominated by small, unsophisticated operators. It is a market that is ideal for consolidation. By implementing this consolidation strategy and acquiring 'platform' companies, CIS will become a national company exclusively focused on the services provided to the consumer in their 'natural' environment.
CIS’s business development strategy is focused on strong organic growth once an acquisition is completed. This will be driven by (1) investing additional resources in technology (eg. EHR & information systems) (2) human capital (improved recruiting and retention initiatives); (3) expanding current geographic reach (e.g. new geographic area & new clinic sites) and (4) developing clinical programs, cross-fertilizing current programs among our existing companies."
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