Bond trustee UMB Bank NA has sued Wisconsin's Public Finance Authority and a trio of healthcare management companies over the "collapse" of two Indiana-based addiction treatment centers financed with $117 million of tax-exempt bonds.
UMB has asked the court to appoint a receiver to take over the facilities, which are owned by the PFA under its little-known asset ownership program. The PFA told The Bond Buyer it supports receivership.
Issued less than four years ago, the debt includes $85.6 million of senior tax-exempt bonds and $32.3 million of subordinate bonds. PFA used most of the bond proceeds to acquire the facilities from then-manager Crossroads Health Management LLC, and then kept Crossroads on as manager under a management agreement that is the subject of the trustee's lawsuit.
In addition to PFA, the defendants are Crossroads Health Management, LLC; Hickory House Recovery LLC; and Wintersong Recovery, LLC, d/b/a Hickory Treatment Center at Knox.
The bonds have not traded since they were issued at par in July 2023, according to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access website. The debt matures through 2058 and features coupons ranging from 7% in 2033 to 8.125% in 2058. The official statement is not available on EMMA likely because the unrated sale was restricted to sophisticated investors.
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The agreement also called for Crossroads to provide $6 million of liquidity support through letters of credit that could be drawn upon to cover operating deficits or debt service shortfalls. Starting in late 2024, UMB had to draw on reserve funds and the letters of credit to cover debt payments, it said in a
Drawing on the liquidity "displeased" Crossroads, the trustee said. Separately, Crossroads said it had injected $2.8 billion into the centers and should be repaid before the debt, the lawsuit said.
"As the relationship between the manager and the bondholders deteriorated, the manager ceased providing required financial reporting and refused to produce documents and information about the project requested by the trustee," the lawsuit said. "Meanwhile, the project's financial condition continued to worsen."
The centers apparently do not generate enough cash to fund operations without contributions from the manager, UMB said, a situation that endangers not only the bondholders but the "vulnerable patients who rely on their continued operation for care and safety."
UMB declined to comment. Crossroads could not be reached.
Asked if PFA bears any responsibility for Crossroads' management actions, Andy Phillips, PFA's attorney, said, "The answer is no."
The project "is set up so that PFA asks the manager to carry out responsibilities and functions that a manager, an operator of any facility, would carry out," Phillips said.
"PFA works with the bondholders, the trustee, to ensure that the manager or operator is carrying out those functions," he said. "And in this circumstance, we have allegations that the manager or operator is not carrying out those functions."
PFA has "a very close relationship" with UMB and bondholders and is determined to ensure that investors' interests are protected, he said.
"We want to make sure that the manager is either brought into compliance, so to speak, or there's a new manager appointed," he said. "In this lawsuit, the trustee is seeking the appointment of a receiver, and given what we know thus far, PFA supports that desire to have a receiver appointed."
Asked about the unorthodox financial management practices of Crossroads that UMB alleges in the lawsuit, Phillips said, "I think that's a charitable way to put it."
UMB's lawsuit alleges that Crossroads' receivables amounted to half of annual income by late 2024, with cash balances low and the required debt service transfers to the trustee unmade. It claims the manager told the trustee "that it was intentionally delaying billing for services so that patients would exhaust their insurance deductibles before claims were submitted," and that cash would pour in once the late claims were submitted.
"Instead, receivables continued to grow and cash balances remained low," the lawsuit states.
"Most plans allow up to a year post-service to submit claims," said David Boll, a Wisconsin-based independent consultant for health insurance carriers who also practices chiropractic medicine, and who is not affiliated with any parties to the lawsuit. "So when you look at allegations of fraud, there has to be shown clear intent. That might be kind of hard to do … unless they're flat-out saying that they did it for this reason."
He added, "Is it a yellow flag? Yes." But as to how unusual it is, he said, one would have to see when the actual claim forms are typically submitted to insurance carriers.
"I've seen some providers submit a batch of claims, wait several months, and then submit other claims to make it look like it is individual episodes when it's not," he said. "I've seen them try to skirt plan languages that do not allow for maintenance or supportive care. That's the only thing I've seen that would mirror anything close to this."
But as for "the F-word" — fraud — the accuser "really does have to show intent," he said. "A jury or judge has to determine that, no one else."
Drew McCartney, CEO of Hickory House Recovery, which was also named in the lawsuit, said Hickory House is no longer affiliated with the management team at Crossroads that is the focus of the lawsuit.
"We did have a historical association, but those businesses have been fully divested," he said. "We had a period in which we provided services to that group, but that concluded awhile back, mostly attributable to nonpayment and other concerns."
PFA owns the two Crossroads-managed treatment facilities and issued the bonds to acquire them under its Asset Ownership Program, which has put about 10 projects under the tax-exempt umbrella of PFA, a governmental entity that has authority both to own assets and to issue tax-exempt governmental purpose bonds. The PFA was authorized by Wisconsin lawmakers in 2010 as a
The PFA uses the asset ownership program primarily for healthcare facilities and student housing, Phillips said.
"It's a way to achieve tax-exempt financing for a public benefit project, where otherwise the project would never qualify for tax-exempt financing," he said.
Phillips declined to say whether any of the other credits PFA owns through the program are impaired or in default. But he acknowledged that a proton therapy cancer treatment center in Alabama is one of the program's assets. The PFA and Georgia-based Proton International LLC center at the University of Alabama Birmingham were
The PFA also owns the Maryland Proton Treatment Center, which has been in default since 2022, according to Moody's Ratings. Proton centers
As with the Indiana centers, the PFA often hires operators who were the previous owners, according to a
Financial information on the PFA's asset ownership program — like all of its programs, operations and board meetings — is difficult to find. The PFA is required under state law to file biannual audits with Wisconsin's Department of Administration but they do not appear to be posted on the DOA's website. The DOA did not respond to requests for comment.
One of the municipal market's more controversial issuers, the PFA as of the end of February carried 45 impaired borrowers, according to Municipal Market Analytics, which calls that figure "an all-time high" that translates into $3.5 billion of outstanding par debt.
So far this year there have been four defaults by borrowers that issued through the PFA, accounting for 14% of total muni impairments, MMA said in a Feb. 25 report. "Since 2019, Wisconsin PFA has provided 6-10% of annual impairments for the whole market, so 2026 represents an early divergence," MMA said.
