BRADENTON, Fla. — South Carolina's Tuomey Healthcare System told bondholders Wednesday that it plans to file for Chapter 11 bankruptcy if its dispute with the federal government over violations of the Stark Law and the False Claims Act is not resolved.

The government won a $237 million judgment against the hospital, which Tuomey is attempting to appeal.

The hospital is trying to negotiate an out-of-court resolution of the lawsuit and delay enforcement of the judgment on terms that would not constitute an event of default under its bond documents, Tuomey said in a notice posted on the Municipal Securities Rulemaking Board's EMMA filing system.

No agreement has been reached with the government.

The 301-bed hospital in Sumter is also appealing a demand by federal prosecutors that Tuomey add another $20 million in escrow to the $50 million it already posted as security while it appeals the large judgment handed down on Sept. 30.

After reviewing the hospital's financial status and bond covenants, and ability to satisfy the judgment while continuing to operate, the Tuomey Board of Trustees voted April 28 to file a petition seeking relief under Chapter 11 of the bankruptcy code if one of three conditions occurs, according to Tuomey's material event notice.

The hospital said it would file for reorganization if the court denies its motion to delay the $70 million payment in order to continue with its appeal of the larger judgment, or a stay is granted with a more burdensome security requirement, or the final decision on the security is more than $10 million and the court does not limit the government's ability to recoup its judgment.

Tuomey has $52 million of outstanding revenue bonds issued in 2006 by the South Carolina Jobs Economic Development Authority. The bonds are insured by CIFG Assurance North America.

Another $21 million of unrated 1998 bonds insured by Ambac Assurance Corp. are also outstanding. The hospital also has $16.4 million of unrated, uninsured bonds that it repurchased in 2010.

In February, Standard & Poor's revised the outlook on the 2006 bonds to negative on its CCC ratings due to the legal risk associated with the $237 million fraud judgment, and "substantial" operating losses.

At the time, S&P analyst Margaret McNamara said Tuomey would risk violating several bond covenants if the court grants the government's request for the full security deposit.

Tuomey has also "sustained substantial operating losses, generating extremely weak debt service coverage of just 1.06 times" though it continues to make timely principal and interest payments, she said.

The negative outlook reflects the possibility of the system filing for bankruptcy if cash reserves are depleted, in addition to the weak operating performance, McNamara said.

In a case that has spanned nine years, a federal jury found Tuomey's compensation arrangements with 19 referring physicians that had part-time employment agreements were not permitted under what is known as the Stark Law, resulting in nearly 22,000 violations of the False Claims Act and more than $39 million in overpayments by Medicaid and Medicare.

The Stark Law limits how much physicians can receive from hospitals for certain procedures or referrals for Medicare and Medicaid patients if the physician has a financial relationship with the hospital.

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