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Shaky foundation: Lawsuits threaten Memorial's money

If it loses either or both cases, there's no telling how much money will be left for a community foundation



Leasing city-owned Memorial Hospital was billed as a win for everyone, and 83 percent of the voters approved of the deal Aug. 28. But Colorado Springs now faces two lawsuits stemming from that transaction. And if it loses either or both cases, or others not yet filed, there's no telling how much money will be left for a community foundation.

Last year, the city got into a lawsuit with the Public Employees' Retirement Association. At issue there was how much the city owed to cover pensions for Memorial's 4,000 workers, who left PERA when control of Memorial transferred to the University of Colorado Health on Oct. 1. The city claims it owes PERA nothing, though UCH paid the city $185 million to cover the PERA obligation; PERA contends it's owed $240 million. A trial is scheduled for October.

Now, a second lawsuit is underway. Filed Oct. 31, the suit was brought by nine investment funds and alleges the city illegally redeemed $41.8 million in bonds without paying interest through 2019, as it promised it would in 2009. The amount due is $18.6 million, bondholders claim.

City Attorney Chris Melcher hasn't formally briefed City Council on the new case, say Councilor Brandy Williams and President Pro Tem Jan Martin, though a brief description of the lawsuit is found on page 11 of Melcher's 68-page quarterly legal report.

"I don't remember being made formally aware of that," Williams says in an interview, adding that she wasn't happy to hear about it "through the grapevine." Martin says she is "appalled" Melcher didn't report "something as important as this" to Council. "There's already concern [that] so much is tied up in the PERA lawsuit," Martin notes.

Asked why he hasn't told the Council yet, Melcher says, "It's not a major piece of litigation, and we don't expect it to have a significant impact that requires Council's immediate attention."

Help from D.C.

The city was paid $259 million when the lease closed — $185 million to satisfy the PERA obligation and $74 million in an up-front lease payment. The city also was given roughly $330 million in cash-on-hand from Memorial, in exchange for assuming responsibility for Memorial's debt.

In a July 20 interview with the Independent, Melcher said there were ample funds to pay off the debt, which included a bank loan, a series of bonds that could be paid off early without penalty, and another bond issue that couldn't be paid off without a penalty.

"We are working right now," Melcher said then, "with outside counsel and bond lawyers to be sure we secure those funds in an appropriate account, maybe an escrow account or some other vehicle, to pay those bonds as they come due and as they are able to be called."

But the city redeemed the bonds in October, despite protests from the nine funds, who represent investors, including retirees, from New York to San Francisco.

According to the investors' lawsuit, the city maneuvered to avoid future interest by transferring Memorial not to UCH, which is a governmental entity, but rather to its nonprofit partner, Fort Collins-based Poudre Valley Health System. A nonprofit can't legally hold tax-free bonds like those issued by Memorial; only a governmental entity can do so, the lawsuit states. "In this way," the lawsuit states, "the city hoped to force a mandatory redemption ..."

But the transaction with Poudre Valley was a straw transaction, the lawsuit asserts, because the lease agreement calls for Poudre Valley to hold the lease for just 18 months, then transfer it to UCH-MHS, a new entity being created, for the remainder of the 40-year lease.

When asked for comment, the plaintiffs' attorney Elizabeth Burnett of Boston stated, "The city's so called 'redemption' of the bonds wrongfully deprived them of future interest payments of over $18 million."

While Melcher dismissed the lawsuit as having "no merit," he's hired a Washington, D.C., law firm, Wilmer Cutler Pickering Hale and Dorr, which has represented such A-list clients as Apple, Boeing, General Electric and Goldman Sachs. Melcher didn't provide the dollar figure of the retention agreement by press time.

UCH spokeswoman Jacque Montgomery distanced UCH from the dispute, saying via e-mail, "UCHealth made an up-front payment to the city when we began operating Memorial. It was the city's decision to choose how to relieve itself of the outstanding debt."

Melcher's mindset

The lawsuits are important, because their outcome will determine how much the city retains from the Memorial lease to spend on other community health needs, via the newly created Colorado Springs Health Foundation.

Melcher says he doesn't think the lawsuits will have a material impact. "We fully expect all the funds that we have projected to be available to the foundation to still be available to the foundation," he says.

But Martin, who in September said she was "nervous" the deal wouldn't play out as planned, still has reservations.

"It appears we haven't been kept informed what lawsuits are out there regarding Memorial," she says. "So without that information it's hard to even know what the long-term consequences might be. The money we received from Memorial is currently tied up in an escrow account for PERA. So I think there's quite a few questions to be answered before I can say what's ahead for that money."

Melcher says the city hasn't heard of other bondholder claims that might lead to lawsuits, and notes the city has $25 million in foundation money to cover outstanding, but as yet unknown, liabilities that might arise from the city's prior operation of Memorial, such as workers' compensation and malpractice suits.

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