With $18 million in payroll due next week, bankrupt hospital operator Prospect Medical Holdings asked a judge on Wednesday to approve $30 million in emergency debt financing as it faces a cash crunch.
Prospect, which owns Waterbury, Manchester Memorial and Rockville General hospitals, said it needed the cash infusion to avoid layoffs and service cuts at its hospitals in California and Connecticut.
“That’s a big sword hanging over our heads,” lead Prospect attorney Thomas Califano said at a hearing in North Texas bankruptcy court on Wednesday afternoon, adding that at least another $55 million would be needed in coming weeks to meet ongoing cash needs through the summer.
Prospect, a for-profit company with private equity backing, filed for bankruptcy in January, citing debts in the $1 billion to $10 billion range.
Prospect wants to sell its hospitals but the process has taken longer than expected, Califano told Judge Stacy Jernigan. Initial deadlines to schedule an auction and approve sales of the Connecticut hospitals by early June have been extended indefinitely, although multiple parties are said to be interested.
Reflecting the slow pace of the bankruptcy process, the city of Waterbury last month wrote off $18.4 million in 2024 and 2025 property taxes owed by Waterbury Hospital, deeming them uncollectible.
“This case has taken longer than expected … it’s been more difficult than expected, frankly,” Califano said. “But everyone understands that we need to obtain more financing.”
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Jernigan approved the new loan, described as an “upsize” of an initial $100 million loan package taken out at the start of the bankruptcy case.
“The debtor needs this money in just a few days or it’s not going to be able to make payroll and other important expenses to preserve the value of the estate,” Jernigan said in explaining her decision.
JMB, the lender of the $30 million, has agreed to provide an additional $55 million in funding if Prospect meets auction milestones for its California hospitals by mid-August.
After failing to find buyers, Prospect closed down two safety-net hospitals it owns near Philadelphia in April due to mounting financial losses.
Landlord objects to new loan, claims it disrupts deal
The new $30 million loan the bankruptcy judge approved Wednesday could endanger a deal Prospect struck with its landlord, Medical Properties Trust, and further delay the planned sales of its California and Connecticut hospitals, according to court testimony.
MPT agreed in March to allow the hospitals to be sold as a package with their real estate, which was purchased in a 2019 deal that netted Prospect $1.6 billion in proceeds but saddled its hospitals nationwide with hefty rent payments.
In its objection to the $30 million “upsize,” MPT said that the new JMB loan undermines Prospect’s sales hopes by disrupting the debt repayment process outlined in the earlier agreement.
“The debtors have yet again created their own emergency and put the parties and the court in a position where they need to choose between a fair process and meeting a supposed liquidity need,” MPT said in its objection.
At the hearing, MPT attorney Michael Cassel called the JMB loan “a complete repudiation” of the earlier settlement between the landlord and tenant, which was intended to prevent a lengthy court battle that could further delay the sale of the hospitals.
Califano countered that Prospect needed to maintain the option of borrowing more than $30 million to continue operating and continue the sales process, and that JMB was the company’s best option.
“Let’s get ready for the next step, which is figuring out how we get from mid-August to closing the sales … and getting out of Chapter 11 and wrapping up this case,” Califano said.
Prospect’s cash crunch comes as its Connecticut hospitals as a group continue to generate proceeds, according to court documents.
In an operating report filed on July 3, Prospect reported that $12.5 million was deducted from its Connecticut operations’ receipts under the category of "intercompany activity" in the month of April. Bankruptcy expert Thomas S. Marrion of the University of Connecticut has said that companies in Chapter 11 often move cash from divisions operating in the black to support ailing parts of the business.
For the period between its bankruptcy filing in January through April 30, Prospect reported $33 million in net losses in Connecticut and $245 million in net losses on all of its holdings, according to the report.
Judge denounces chat messages
The mounting stress on Prospect and its creditors, employees and other stakeholders was highlighted in angry exchanges between lawyers during a court break at Wednesday’s hearing. Califano, who bills Prospect’s estate at a rate of $2,120 an hour, used an expletive to say “don’t touch my" stuff, and then scolded another lawyer for not reading a document before the hearing.
Califano’s firm, Sidley Austin, billed the Prospect estate more than $13 million through April for work on the bankruptcy case.
An exchange of text messages in the chat during the live-streamed hearing also drew a formal rebuke from Judge Jernigan.
“I’ve got a good cash management idea: Execute all lawyers!” a user named “MPW bagholder” posted in the chat early in the nearly four-hour hearing.
“If you were here in person, whoever you are, I would be calling up the U.S. Marshals to deal with that potentially threatening language,” Jernigan said, referring to the text message.
“We know there are hundreds, if not thousands of human beings who are affected by these bankruptcies,” Jernigan added. “I don’t want to cut off anyone from being able to observe these court proceedings, but if you act like a child, we’re going to cut you off.”