Quorum and Community Health Systems inching closer to a resolution on shareholder lawsuits


Quorum and Community Health Systems inching closer to a resolution on shareholder lawsuits

By MATT BLOIS

The Williamson County hospital chains Quorum Health and Community Health Systems are inching closer to resolving several shareholder lawsuits related to Quorum’s 2016 spin-off from CHS.

In July, Quorum settled a lawsuit filed against CHS and Quorum in Williamson County Court by the firm R2 Investments. The lawsuit alleged the companies underestimated the cost of running Quorum as an independent business.

Quorum didn’t reveal how much it cost to settle. Community Health Systems is still defending itself in that case.

In March, a federal judge certified a class action lawsuit filed against Quorum and CHS making a similar claim. At the same time, the judge also dismissed many of the allegations in the lawsuit.

Another shareholder lawsuit related to the spin-off filed against Quorum in federal court is on pause until the class action lawsuit it resolved.

In the class action complaint, originally filed in 2016, shareholders argued CHS and Quorum overestimated Quorum’s future financial performance and underestimated its operating costs, which led to inaccurate financial guidance before the spin-off.

The lawsuit also claimed that Quorum and CHS didn’t calculate Quorum’s goodwill impairment correctly during the spin off.

In the same order certifying the class action lawsuit, a judge dismissed large parts of the complaint because shareholders can’t sue Quorum for inaccurately predicting its future performance. Those statements are protected.

The judge allowed the claims about improperly accounting for Quorum’s goodwill impairment to move forward.

Another federal lawsuit filed only against Quorum in September 2018 depends on the outcome of the class action suit. In that case, a Quorum shareholder makes similar claims about Quorum’s goodwill impairment, arguing the company overstated the value of its assets from the spin-off.

The plaintiff also argues those actions put Quorum at risk of getting sued, citing the R2 and class action lawsuits.

Quorum didn’t respond to questions about these lawsuits, but the company’s most recent quarterly report says it plans to defend itself following the resolution of the class action suit.

A representative from Community Health Systems wrote in an email that the company doesn’t typically comment on lawsuits beyond public filings.

The core of the R2 Investments lawsuit in Williamson County court that was recently settled by Quorum is based on some of the same arguments that were dismissed in the class action suit.

In October 2016, R2 Investments wrote a letter to Quorum’s board asking for an independent investigation into the spin-off. The firm filed the lawsuit shortly after publishing the letter, which contain many of the same arguments. 

In response to the R2 letter Quorum recruited a law firm to conduct an investigation into the spin-off. Investigators determined that Quorum shouldn’t sue CHS or Quorum executives over the spin-off, but concluded the sequence of events was suspicious.

In the lawsuit, R2 claimed CHS should have been able to more accurately predict Quorum’s operating costs because CHS provided some back office services following the spin-off and negotiated some of Quorum’s contracts.

After the spin-off Quorum started withholding some payments for the services that CHS was providing, claiming CHS was charging too much.

CHS brought the disagreement to an arbitration panel in 2017, which decided earlier this year that CHS was charging too much for some services but not others.

Quorum is starting to move away from using CHS for back office services. Recently, the company announced that it would work directly with the Franklin company MEDHOST to manage electronic health records. 

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