The court-appointed receiver in the bankruptcy of Edina, Minn.-based Welcov Healthcare has sued two executives from the now-defunct skilled nursing operator, seeking at least $18 million.
The Minneapolis Star Tribune first reported the news.
Lighthouse Management Group filed suit against former Welcov CEO Paul Contris and company president Thomas Boerboom in Hennepin County, Minn., alleging that Contris improperly removed $11.6 million from Welcov via distributions of its cash reserves between 2013 and 2018. The suit alleges that the company — which operated 22 nursing homes and assisted living centers in Minnesota, South Dakota, Montana, Iowa, Nebraska and Wyoming — was insolvent during those years.
The lawsuit additionally alleges that Boerboom improperly diverted $6.3 million to himself in the same timframe.
An attorney for both former Welcov execs denied the accusations, though he declined to comment further, citing the ongoing litigation.
“We are vigorously defending against the allegations,” Gregory Merz, who is representing Contris and Boerboom, told Skilled Nursing News. “We believe they’re incorrect.”
Lighthouse partner Patrick Finn — who is overseeing the liquidation of Welcov, according to the Star Tribune — declined to comment to SNN.
Reports of Welcov’s bankruptcy began circulating at the start of the year, and the operations of the 22 facilities were officially transferred by the beginning of February. The transfer occurred after three of Welcov’s creditors — Medline Industries, Healthcare Services Group, and Monida Healthcare Staffing Solutions — filed an involuntary Chapter 7 bankruptcy case against the operator on January 18.
Welcov had agreed with its landlords to transfer the operations of the facilities, but the involuntary bankruptcy halted any transfer activities. As a result, the settlement included a concession by the landlords to subordinate their secured claim to the trade date, with a limited exception.
By approving the request to settle, the judge dismissed the involuntary bankruptcy petition; the parties involved agreed to a process called assignment for the benefit of creditors (ABC) under Minnesota law.
Lighthouse served as the assignee, facilitating the transfer of properties to the new operator. In this role, it was also expected to collect Welcov’s accounts receivable and distribute the receipts to the senior secured creditor — MidCap Funding IV Trust, which funded the assignment — along with various other creditors before finally repaying the landlords.
Welcov’s creditors are owed a total of $26.7 million, the Star Tribune reported, citing court records.
The Lightouse lawsuit alleges that Contris and Boerboom improperly spent $250,000 in Welcov funds to buy life insurance policies that only benefited them, according to the Star Tribune.
In a response filed on Contris’s behalf, Merz said the life insurance was received based on advice from “legal and accounting professionals.”
In the filing, Contris requested the complaint to be dismissed in its entirety, arguing that it fails because — among other reasons — the disputed payments did not reduce the value of Welcov, and because the company and another entity known as LEH were not insolvent at the time of the payments.
“The Complaint fails, in whole or in part, because the disputed payments were made in connection with good-faith, bona fide transactions,” Merz asserted in the filing.