Facing Suits, a Nursing Home in California Seeks Bankruptcy

A California nursing home fined by the state for substandard care and facing multiple lawsuits by patients and their families has taken the extreme measure of filing for bankruptcy protection in the face of millions of dollars in potential payouts.

The action, taken by North American Health Care, which operates more than 30 homes in California and other Western states, is being derided by plaintiffs’ lawyers as a legal maneuver to avoid what could be catastrophic legal verdicts, while defenders of the strategy say they are facing mounting lawsuits from overly aggressive trial lawyers.

Last year, another California chain filed for bankruptcy for similar reasons and in Florida, a bankruptcy judge forced Medicaid officials to continue paying a nursing home while it was under bankruptcy protection.

North American’s step comes at a time of rising bankruptcies in the health care industry. Filings were up by 38 percent between 2010 and 2014, according to indexes maintained by the law firm Frost Brown Todd, which tracks such data. Overall filings for Chapter 11 bankruptcy protection, by contrast, fell by about 60 percent over the same period.

Bobby Guy, who oversees the bankruptcy data for Frost Brown Todd, said the increase in filings among health care providers — like hospitals, nursing homes, surgical centers and home health agencies — reflected broader turmoil in the industry, including changes in the competitive landscape and the impact of the new health care law. The firm plans to release a report on the industry bankruptcy trend later this year.

The threat of major litigation is a common reason health care companies file for bankruptcy, Mr. Guy said, albeit an extreme one. “Bankruptcy is the tool of last resort, but it can be very effective if you have to go there,” he said.

When a company files for bankruptcy, all creditors must seek relief in court and all pending legal actions are halted. Mr. Guy said that filing early — even while a company was still profitable — could be better for everyone because there were more assets to divide fairly among creditors in bankruptcy court.

In legal filings, North American said it was profitable and “cash-flow positive” but risked going out of business if the lawsuits succeeded.

Lawyers who are suing North American described the move as a way of avoiding accountability and said it would do a disservice to their clients. “The bankruptcy laws were created for a legitimate purpose — when an entity is underwater — but this entity is highly profitable,” said Lesley Clement, a lawyer representing the family of a woman who fell in one of the chain’s facilities, Rosewood Post-Acute Rehab in Carmichael, Calif., and later died. “It’s a strategic defense mechanism to try to get the plaintiffs to go away and not get their day in court, ” Ms. Clement said.

Neither John Sorensen, North American’s chief executive, nor his lawyer responded to emails and telephone calls seeking comment. In the past, Mr. Sorensen has vigorously defended the company’s record for providing quality care to patients. In recent legal filings, the company repeated those assertions, noting that Rosewood holds a coveted five-star rating from the federal government.

North American Health Care and Rosewood, which is owned by an affiliated company that also filed for bankruptcy, was cited in a New York Times article in August about flaws in the federal government’s rating system for nursing homes. Despite its top rating from Medicare, Rosewood has been the focus of several lawsuits by former patients and their families saying there were lapses in quality of care. The state of California has fielded dozens of consumer complaints and reports of problems at the facility in recent years, and in 2013 fined Rosewood $100,000 — the highest fine possible — for causing the 2006 death of a woman who was given an overdose of a powerful blood thinner.

In legal filings, the chain said it had been targeted by lawyers who “have relentlessly pursued what they perceive to be potential ‘deep pockets’ for recovery.” If the company had not filed for protection, the company’s owners “would have been forced to close their business.”

Mark Parkinson, president and chief executive of the American Health Care Association, the lobbying group that represents for-profit nursing homes, said his members were increasingly struggling with the financial impact of lawsuits, describing it as a “financial cloud” looming over the industry. “It’s not the only one, with cuts in both Medicare and Medicaid slamming providers during the past few years,” he said in a statement. “They seem to be on the rise, and it’s clearly taking its toll.”

But some industry experts said the practice of filing for bankruptcy in the face of accusations of poor quality of care were just as troubling. Charlene Harrington, a professor emeritus at the University of California, San Francisco, pointed to past actions of companies like Country Villa, which filed for bankruptcy in the face of several lawsuits and settlements and then sold some of its facilities to new owners.

“I think it’s really unfortunate, when you have some high-profile successes like that — then it encourages facilities to do this,” said Ms. Harrington, who has served as an expert witness for plaintiffs’ attorneys, including in the Country Villa case and in a pending lawsuit against Rosewood.

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Facing Suits, a Nursing Home in California Seeks Bankruptcy