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April 19 , 2021 – Connections Community Support Programs, Inc. (“CCSP” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, case number 21-10723. The Debtor, a Delaware-based not-for-profit providing a "comprehensive array of health care, housing, and employment opportunities," is represented by Mark L. Desgrosseilliers of Chipman Brown Cicero & Cole LLP. Further board-authorized engagements include (i) SSG Advisors, LLC as investment bankers, (ii) Robert D. Katz of Eisner Amper, LLP as Chief Restructuring Officer (the “CRO”) and (iii) Omni Agent Solutions as claims agent.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) TD Bank, N.A. ($12.0mn PPP loan claim)), (ii) Wilmington Savings Fund Society FSB ($8.9mn bank loan, of which an unspecified portion is unsecured) and (iii) [Bayhealth Medical Center ($2.2mn trade claim)..
- Delaware not-for-profit specializing in psychiatric and substance abuse problems files with over $50.0mn of liabilities
- Debtor cites COVID-19; loss of major contract ($60.0mn annual revenue); and litigation/investigations as to billing and methadone documentation
- Will pursue going concern sale under section 363
Goals of the Chapter 11 Filings
The Katz Declaration (defined below) provides: "Despite the improvements made by the Organization in its operations over the past year, due to the magnitude of the lawsuits, the loss of $60 million of contract revenue, trailing overhead expenses in conjunction with the lost contract, a United States Depart of Justice (USDOJ) investigation, insufficient and subpar billing and collection, system and processes and the Covid 19 Pandemic, the Organization seeks chapter 11 relief in an effort to sell its assets as a going concern under section 363 of the Bankruptcy Code to one or more potential purchasers..."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Katz Declaration”), Robert D. Katz, the Debtors’ CRO, detailed the events leading to [Company]’s Chapter 11 filing. The Katz Declaration provides: “…the Chapter 11 process will permit the Debtors to address and alleviate burdensome costs deriving from
(i) the COVID-19 pandemic that has negatively impacted the Organization and its revenue,
(ii) the loss of contracts with the DOC that had accounted for approximately $60 million in annual revenue for CCSP,
(iii) the inability of CCSP to adjust its overhead and exit contracts and leases in a timely manner in connection with the loss of the DOC contracts,
(iv) liquidity issues as a result of the loss of availability under CCSP’s Prepetition Credit Facilities, and
(v) ongoing and costly litigation with, among others, (x) contract counterparties and (y) former clients, mostly arising in connection with the former DOC contracts and an investigation by the United States Department of Justice that resulted in the recently filed DOJ Litigation.”
- On COVID-19, the Katz Declaration continues: "As a result of the COVID-19 pandemic, CCSP has been required to curtail certain in-person treatment. In addition, CCSP has incurred significant and unexpected costs for the past year as a result of infection with or exposure to the COVID-19 virus among its Employees and patients, including in particular overtime for its Employees, covering for fellow Employees exposed or infected, and the costs associated with obtaining additional personal protective equipment (‘PPE’) and implementing measures critical to preventing the spread of the virus. CCSP estimates that because of the COVID-19 pandemic its revenues have declined during the last twelve (12) month period, while its expenses have increased during such time period. As a non-profit corporation, CCSP had and has little or no reserve funds to address such exigencies.
The COVID-19 pandemic has, in addition, only further exacerbated billing and collection issues that have plagued CCSP for several years. Indeed, as of the Petition Date CCSP has approximately $11.7 million in accounts receivable that are aged over ninety (90) days and, therefore, ineligible as part of the borrowing base under the Debtor’s Prepetition Credit Facilities. Furthermore, CCSP had an additional charge off of approximately $7 million as of June 30, 2020 for receivables that were deemed to be not collectible"
- On DOC Conrracts: "…in April, 2020, the DOC terminated its contracts with the Debtor. The contracts with the DOC (collectively the ‘DOC Contracts’) consisted of agreements entered into between the State of Delaware and CCSP (i) in July 2012 for mental health, substance abuse and DUI services and (ii) in June 2014 for the health services generally in the Delaware state prison system. The services provided through the July 2012 agreements contributed approximately $12,000,000 to CCSP’s annual revenue. The DOC’s subsequent health services contracts added an additional approximately $48,000,000 to the annual gross revenue of CCSP.
Although CCSP was able to right size its operations to some extent following the loss of the DOC Contracts, significant overhead in connection with such contracts and the services provided thereunder remained, including certain above market lease obligations that CCSP did not (and does not) require. In addition, CCSP continued to be party to numerous lawsuits, including those filed by inmates in connection with the services provided under the DOC Contracts, primarily in connection with the general health services DOC Contracts and certain former employees of CCSP. CCSP is also now a defendant in actions brought by the U.S. Department of Justice (‘DOJ’). The costs associated with such legacy lawsuits as of the Petition Date totaled in excess of $1,000,000 annually."
- On Defaults, Borrowing Base Reduction and Liquidity Constraints: "On March 20, 2020, the scheduled maturity date of the revolving line of credit made available by WSFS to CCSP occurred, and the loan became due and payable in full. At that time, CCSP had nearly fully drawn the entire $12,000,000 commitment available under the revolving line of credit. Because CCSP was in default, CCSP could not access additional liquidity through such loans.
In April 2020, WSFS determined that approximately $3,000,000 in accounts receivable formerly eligible for inclusion in the borrowing base under the Prepetition Credit Facilities was no longer eligible. In addition, and as outlined above, the Organization took an approximate $7 million additional charge off/loss on its financial statements for these and additional aged and past due accounts receivable."
- On Litigation and DOJ Investigation: " At the same time as it was facing these liquidity issues, CCSP was also incurring substantial litigation expenses, primarily in connection with its former DOC contracts and an investigation by the DOJ into alleged false claims submitted by CCSP in connection with CCSP’s MAT programs. In addition to over one hundred (100) lawsuits by inmates in the DOC, CCSP also was sued by BayHealth and separately by ChristianaCare for alleged unpaid bills relating to treatment provided by such institutions for prisoners served by CCSP. CCSP incurred in excess of $500,000 in legal fees defending lawsuits related to the DOC contracts.
In approximately March 2019, the DOJ began investigating certain billing issues and alleged noncompliant methadone documentation as a result of allegations made by two former employees of CCSP, included in a qui tam False Claim Act lawsuit (the ‘Qui Tam Action’) filed under seal by such former employees on March 7, 2019, in the United States District Court for the District of Delaware, case number 19-475 (CFC). Although the Qui Tam Action was filed under seal, CCSP became aware of certain of the allegations when the DOJ began its investigation of CCSP.
After over two years of such investigation and the Organization incurring over $2 million of costs, on April 9, 2021, the DOJ ultimately filed its Complaint in Intervention joining in certain counts of the Qui Tam Action and seeking treble damages for the $4,356,910.90 that CCSP allegedly overbilled Medicaid. Although CCSP had been cooperating with the DOJ and had argued to the DOJ that it had an inability to pay any significant judgment in connection with the allegations, the DOJ insisted that CCSP agree to a $10,000,000 dollar judgment, with a $1 million upfront payment and payment of the remainder of such judgment over time. Not only could CCSP not afford to pay any such judgment, it could no longer afford to pay its outside attorneys representing it in the investigation."
- Prepetition Loan Agreements. The Debtor has two loans (and a corporate credit card) with its pre-petition secured lender, Wilmington Savings Fund Society, FSB (the ‘Prepetition Secured Lender’ or ‘WSFS’) WSFS secured by liens on substantially all of the Debtor’s assets. As of the Petition Date, the total due under such secured loans, inclusive of principal and interest was approximately $9.8 million.
- As of the Petition Date, the Debtor was in maturity default under the Prepetition Credit Agreements, the forbearance agreement with WSFS had expired and CCSP’s liquidity was severely restricted.
- Mortgaged Properties. In addition to the secured debt owed to WSFS, the Debtor owns certain real estate encumbered by liens of the National Council on Agricultural Life & Labor Research Fund, Inc., the Delaware State Housing Authority, and the United States of America, acting through the Rural Housing Services and the United States Department of Agriculture. CCSP may have additional secured debt owed to vendors in connection with properly perfected purchase money security agreements and certain equipment leases, to the extent that such leases are not, in fact ‘true’ leases. The Debtor’s review of such additional potential secured obligations remains ongoing and is estimated potentially to be in excess of $20 million.
- Unsecured Debt. As a result of restrictions to the Organization’s liquidity and its ability during the past several months to make only critical payments, as of the Petition Date CCSP’s unpaid debt to vendors and landlords totaled approximately $12 million.
About the Debtors
According to the Debtors: “Connections Community Support Programs, Inc. provides a comprehensive array of health care, housing, and employment opportunities that help individuals and families to achieve their goals and enhance our communities.
Connections is one of Delaware’s largest nonprofits, collaborating with government, community, corporate, and other philanthropic partners to maximize services for our state’s most vulnerable citizens.
We operate in more than 100 separate locations in Delaware, and have recently expanded our services to the eastern shore of Maryland. We have more than 1,200 full-time employees who serve tens of thousands of Delawareans each year."
The Katz declaration adds: "The Organization is a multifaceted not-for-profit 501(c)(3) health and human services organization operating and founded in Delaware with over one hundred (100) locations throughout the State of Delaware and more than eleven hundred (1,100) employees (the ‘Employees’). As a non-profit, CCSP has no owners or equity holders who receive distributions or other value from the Debtor. Instead, CCSP exists to pursue its mission of providing therapy and other treatment services for addiction, mental health, and intellectual disabilities issues to its thousands of patients.
Since its founding in 1985, CCSP has grown from providing assistance to older adults with lifelong histories of psychiatric hospitalization to one of Delaware’s largest nonprofit organizations that touches the lives of approximately ten thousand (10,000) of Delaware’s most vulnerable citizens and their families, dealing with behavioral health and substance use disorders, housing challenges, and developmental and intellectual disabilities.
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