Lancaster County Judge Jeffrey Conrad leaned forward on the bench and pointed to a video monitor showing the 80-year-old real estate investor testifying from his Brooklyn home office.
Conrad had repeatedly heard David Silverstein express concern about patients and employees affected by the bankruptcy of Retreat Behavioral Health, Inc. Silverstein had spent 14 years helping to build the company but claimed he was not involved in its day-to-day management.
Silverstein said Retreat's sudden collapse in June and the closure of its clinics in Lancaster County, Florida, and Connecticut were triggered by the suicides of his friend, Retreat founder Peter Scholl, and the company's chief administrative officer, Scott Korogodski.
“Don't talk nonsense to me,” Conrad yelled at Silverstein. “Are you sure everything went wrong then?”
Conrad's stern rebuke came during a day-long hearing in several lawsuits in which creditors are seeking to split up Retreat's assets to cover its debts. Conrad, who was appointed to the case several months ago, has already heard testimony and read documents detailing how the substance abuse and mental health rehabilitation company's financial troubles date back more than five years.
The judge then read out the report of the appointed receiver which showed that while Retreat was declining over the past three and a half years, Mr. Silverstein and companies he controlled had collected $13.2 million in management fees and other fees from the company.
Silverstein's lawyer, Jason Asbell, said Silverstein was unavailable to appear in court and referred LNP|LancasterOnline to court documents.
Founded in Lancaster County in 2011, Retreat employed about 300 people at its sprawling, 14-acre, 175-bed treatment facility in Ephrata and its outpatient center in Akron, a renovated former restaurant. Retreat's sudden closure has wreaked havoc on countless people's lives. Judge Conrad noted that Retreat's bankruptcy has left hundreds of people unemployed and without weeks of pay, as well as many patients on the streets. The future of Retreat's assets and former employees will have major ramifications throughout the county.
Creditors and the judge have said Silverstein had multiple opportunities to sell the business even before it collapsed.The creditors, two private equity funds that bought Retreat's defaulted loans from its original banks, want the company's assets to be sold by a court-appointed receiver to recoup about $30 million in debt.
They also believe Silverstein, the sole surviving owner of a complex network of holding companies that runs Retreat clinics in three states, should not be allowed to run the company, suggesting they doubt he can repay his debts.
The trustees are questioning payments to Retreat employees linked to the late CEO. Retreat Behavioral Health trustees say $400,000 was transferred even though bank accounts were frozen. Local business owners say Retreat Behavioral Health left the company with thousands of dollars in unpaid bills.
This aerial photo shows the Lancaster County Retreat, located at 1170 S. State St. in Ephrata Borough, Thursday, June 27, 2024.
Blaine Shahan | Staff Photographer
Overrated
Silverstein maintains he should be free to sell and reopen the business, but testimony and court documents show his claims are fanciful at best. He argued that transferring the state licenses under which Retreat clinics operate to new owners would create added value that he could use to pay off debt and invest in reopening the company.
But the licenses are unlikely to be transferred: According to the Pennsylvania Department of Human Services, the inpatient and outpatient licenses for Retreat's clinics in Akron and Ephrata both expired as of June 26. Licenses for adult residential treatment facilities, like the one in Ephrata, cannot be transferred to a new owner.
“If a facility or agency will operate under a new legal entity, the new legal entity must complete and submit a new application for a Certificate of Compliance at least 30 days prior to the change,” Homeland Security spokesman Brandon Kwarina wrote.
The new owner also would need approval from a certifying agency, which is essential to receiving payments from insurance companies, said James Young, the trustee appointed in June to oversee the Retreat's Pennsylvania operations.
In arguing for control of Retreat's assets, Mr. Silverstein pointed to the amount of money the company owes insurers and individual patients. He said at a July hearing that the money for Retreat's operations in Florida and Pennsylvania, totaling $24 million, was among the assets that could be used for new loans or recouped to fund reopening the clinics.
But Silverstein had overestimated the company's value, as documented as early as 2019 in an on-site audit by Retreat's lenders.
Five years ago, bankers' biggest concern was the backlog of unpaid bills at Retreat: An audit prepared by Santander found 28,000 unpaid bills sent to patients, 65% of which were more than 150 days old as of May 2019.
The Healthcare Financial Management Association recommends that accounts receivable should be paid within 30 to 40 days. Ideally, accounts receivable older than 90 days should be less than 10 percent of all outstanding bills, and less than 30 percent of self-paid accounts (billing individual patients, not insurance companies) should be outstanding more than 90 days, according to the association.
“The amount of past due receivables exceeded the allowance for doubtful accounts by $2.5 million,” the audit report said in 2019. Retreat had posted a net loss of $3 million through March 2019, the bank's audit found.
“All the facts raise concerns about the quality of the accounts receivable,” the 2019 report said.
According to an Aug. 13 trustee court filing, there were 56,000 unpaid out-of-pocket bills through 2024. Young, the trustee who manages The Retreat's Pennsylvania assets, said 80% of those accounts were more than a year old. The report also noted that NR Pennsylvania Associates LLC, which operates The Retreat, reported assets of $53.2 million as of the end of June, but his own analysis showed total assets were actually one-seventh of that, or just $7.6 million.
Young wrote that the high number of self-pay accounts and Retreat's policy of not turning them over for collection indicate that patient responsibility for copayments and deductibles “may not have been systematically pursued.”
Young also reported possible health care fraud, overvaluation of assets and millions of dollars in unexplained payments to Silverstein. He told Lancaster County Court he learned of an investigation that could lead to damages claims against Retreat, including alleged improper payments of bonuses related to referring discharged patients to certain sober living facilities.
An LNP file photo of the main entrance to The Retreat in Ephrata on Friday, July 14, 2017.
Dan Maruschka | Staff Photographer Pennsylvania Retreat's trustee raises possible fraud, suggests assets were overvalued Denver company wins lawsuit against Retreat Behavioral Health
Sense of urgency
Silverstein and creditors Alba Investors LLC and Lapis Advisors LLC agree that unless something is done quickly, the Retreat property will continue to lose value for every day it sits unused.
At a hearing last month in Florida, where Lapis is seeking to appoint Young as asset manager for Retreat, Silverstein testified that he was in negotiations with a potential buyer for the entire business, valued at $65 million.
During Monday's hearing, Judge Conrad questioned Silverstein's assertion that he could sell the company to repay creditors in full. The judge noted that Silverstein was supposed to sell the properties as part of a settlement with Schorr two years ago, but had not done so at the time of Schorr's death in June. The September 2022 settlement contemplated a $75 million sale-and-leaseback transaction for the three inpatient facilities and the outpatient facility in Akron, according to a report from the trustee.
As recently as July 31, Silverstein refused to sign letters of intent from potential buyers for properties in Ephrata and Akron, according to testimony from Zachary Furman, managing partner at Alba Investors, who described two deals that fell through this year, including a sale-leaseback agreement with a private equity firm, that fell apart before another creditor, Lapis Advisors, froze Retreat's Fulton Bank account in May.
Furman said he received an unsolicited offer for the company when news of Retreat's closure became public.
“There's a lot of interest right now,” he said. “There's a market out there with qualified buyers contacting us.”
A qualified buyer would be a company large enough to have enough capital to reopen the facility. Trustee James Young said it could take a year and $36 million in capital to get The Retreat, which has been closed for nearly two months, back up and running.
Like Furman, Young said he has sufficient capital and experience obtaining certifications and dealing with insurance companies to help open the facility, and he is in contact with interested buyers.
Meanwhile, tax liens have expanded, with more than $200,000 owed to the boroughs and counties of Akron and Ephrata.
Julie Murphy, an attorney for Alba Investors, estimated that if the property doesn't sell and goes to sheriff auction, it could take nine to 12 months and then be sold to an apartment developer.
On Monday, Murphy asked Silverstein how quickly he thought the property could be sold.
After a long pause, he said, “Very soon. It depends on the legal hurdles to overcome.”
Mr Murphy asked if that meant Alba had appointed a receiver to try to recover the debt.
“Alba is alone,” Silverstein said. “It's all up to Alba.”
The lawyer, apparently disgusted by Silverstein's refusal to acknowledge that Retreat was financially unstable and that his legal maneuvers were slowing creditors' attempts to sell the business, responded:
“it's up to you.”
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