Prospect Medical Holdings, which owns Manchester Memorial Hospital and four other healthcare entities in Connecticut, has filed a motion to dismiss a complaint filed by the organization that controls a multimillion-dollar bequest from a local philanthropist.
The philanthropist, Raymond F. Damato, left 20% of his estate as an “unrestricted gift to Manchester Memorial Hospital.” Damato, a developer who served on the board of directors for many organizations, died in 2014.
At the time of closing, the hospital was owned by Eastern Connecticut Hospital Network, which received $9.24 million from Damato’s estate.
In 2016, California-based Prospect purchased ECHN for $105 million, and made a capital commitment of $75 million over the next five years (the commitment was later reduced by $27 million to pay off ECHN’s debts and liabilities).
Prospect contends that it is entitled to Damato’s funds to partially reimburse itself for the capital commitment; however, ECHN’s successor, Legacy ECHN, has not turned over the money. The parties have been embroiled in litigation since 2019.
Legacy ECHN says in court documents that the money should go to the Eastern Connecticut Foundation for Health, a charitable organization.
The matter was scheduled for trial in Hartford Superior Court this month, but a judge granted an extension.
Legacy ECHN and the foundation told the court that the parties were “very close” to resolving the dispute, but there were outstanding issues with the Internal Revenue Service.
In a motion to dismiss filed on Sept. 28, Prospect called the complaint a “regrettable and needless waste of charitable assets that should otherwise be used for the healthcare needs of the residents of Eastern Connecticut.”
Prospect says the lawsuit is moot, or, “at a minimum, not ripe for adjudication.”
The complaint accuses Prospect of breach of contract and breach of the covenant of good faith. Legacy ECHN is seeking compensatory damages, a declaratory judgment that it is entitled to a defense against all claims and proceedings by the IRS, a declaratory judgment that it is entitled to indemnification, attorney fees and other relief.
Because Prospect’s acquisition of ECHN involved the sale of assets by a nonprofit hospital system, it required regulatory approvals from the attorney general and Office of Healthcare Access, based on the Connecticut Nonprofit Hospital Conversion Act.
The attorney general and healthcare office approved the sale, with the condition that net proceeds, consisting of charitable funds, be transferred to a new charitable organization after Legacy ECHN wound down its operations.
The Eastern Connecticut Foundation for Health was created for that purpose.
Also, the plaintiffs claim they face potential exposure to tax penalties that could be imposed by the IRS due to discrepancies in W2 forms submitted by Prospect.
The IRS sent multiple letters to Prospect in 2019 threatening penalties ranging from $1 million to nearly $6 million regarding Legacy ECHN’s funds, but Prospect didn’t respond until months after IRS deadlines had passed, according to court documents.
The IRS threatened additional penalties in 2020 for “intentional disregard” of the notices.
Prospect argues that there is no evidence of any unpaid tax penalties.
On Nov. 8, Superior Court Judge John Farley approved the plaintiffs’ request for a 30-day stay of the trial. The plaintiffs have until Dec. 21 to oppose Prospect’s motion to dismiss.
In a parallel case, Prospect is suing Legacy ECHN, claiming that Legacy ECHN had a substantial financial shortfall in paying off its debts and liabilities. Prospect says that after it meets ECHN’s obligations to creditors, and other contractual agreements, there will be “very little or nothing” left to transfer to the foundation.
Meanwhile, in October, Yale New Haven Health signed an agreement to purchase Prospect’s five Connecticut entities, including Manchester Memorial Hospital, Waterbury Hospital, Rockville General Hospital, Prospect CT Medical Foundation and Visiting Nurse and Health Services of CT.
The health systems would return to non-profit status under the deal.
