Aria faces allegations of 'gross self-dealing' in Arkansas bankruptcy case

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Filings in bankruptcy court allege improper transfers between Aria and its subsidiaries.
Filings in bankruptcy court allege improper transfers between Aria and its subsidiaries.

Aria Health Group and its owners participated in “gross self-dealing and corporate wrong” by transferring money from debtors it controlled to itself in the months before and after those companies filed for bankruptcy in 2016, a federal complaint alleges.

The claim was brought by James Dowden, a Chapter 7 bankruptcy trustee for Highlands Arkansas Holding, who argued in filings that his client and its affiliates were compelled to make double payments disguised as “special rent” and repayment of capital advances to Aria even as they petitioned for bankruptcy.

In all, Dowden alleges some $5.1 million in questionable transfers were made in the year leading up to bankruptcy. Had they not been made, that money would have been part of the bankruptcy estate for the debtors (HAH).

“Despite making inconsistent, late or no payment to their landlords and other vendors for the duration of the operation of the Arkansas Facilities, the HAH Subsidiaries made numerous repayments of working capital advances to Aria,” court documents state.

HAH also made management or other payments — nearly $570,000 worth— to Aria after the bankruptcy filing date, Dowden's attorney alleges.

“There can be no plausible business justification for such transfers,” he wrote.

In a complicated case muddied by multiple owners, sales, consultancies and renegotiated lease agreements, Dowden lays out his allegations in a 26-page claim that references bank and rental income statements.

The claim, filed in federal bankruptcy court March 28, was first reported by Arkansas Business on Monday.

Aria and HAH shared the same ownership, and Dowden claims those individuals were the “sole decisionmakers” for the actions outlined in the complaint.

In 2015, Aria and HAH took over operations of nine Arkansas skilled nursing facilities and one assisted living facility from AdCare Health System. AdCare is now doing business as Regional Health Properties.

According to an SEC filing, AdCare contracted with Aria to operate nine of the facilities until February 2016, when the company reached a new agreement with Skyline Healthcare. Later in 2016, AdCare sold the nine Arkansas buildings to Skyline, still the operator, for $55 million. Skyline has since collapsed, with Arkansas taking over two of the company's 21 facilities in the state.

Dowden's attorney points out at least one instance when a $19,000 management fee was paid to Aria by Highlands of Fort Smith a month after Skyline became the manager. Other, similar payments are marked as “true ups” or back billing through June 2016, a month after the bankruptcy action.

“It is circumspect, to say the least, that such significant true up of management fees only took place after management had transferred from Aria to Skyline,” Dowden argued.

Dowden is seeking repayment, plus about $570,000 paid to Aria after bankruptcy, and actual and compensatory damages for breaches of fiduciary duties by both Aria and owners Blaine Brint and R. Denny Barnett.

A separate but related claim also asks the court to dismiss AdCare's lien against the property of the estate. In that case, Dowden is seeing relief from AdCare, Regional Health Properties, Park Heritage Property Holdings and 18 other properties or affiliates.

An attorney for Aria was not listed in the complaint, and a call to AdCare's investor relations representative was not returned by production deadline.