The Foundation for Delaware County could take a big financial hit from Crozer Health bankruptcy

A Delaware County foundation formed with $55 million in proceeds from the 2016 sale of Crozer-Keystone Health System to Prospect Medical Holdings could take a significant financial hit from the company’s bankruptcy.

That’s because the Foundation for Delaware County is liable if California-based Prospect doesn’t pay rent on two Springfield Township medical office buildings that are leased through September 2029. Prospect’s unpaid rent and taxes could cost the foundation as much as $30 million, according to a court filing last week.

At the end of June, the foundation had $64 million in unrestricted investments. When a for-profit buys a nonprofit health system, as occurred with Crozer-Keystone, net proceeds from the sale are typically put into a foundation that is supposed to serve the community. The Philadelphia region has 10 of these so-called conversion foundations.

Prospect already owes $5.1 million in unpaid taxes and rent from before the company filed for bankruptcy on Jan. 11, and another $3.7 million for the period since then, the foundation said.

Now, Prospect is asking the bankruptcy judge overseeing its case to allow it to cancel the Springfield leases. And if it succeeds, the foundation would be responsible for paying out the lease unless another tenant replaces Prospect.

“This development puts a substantial portion of the foundation’s unrestricted funds at risk,” foundation president Frances M. Sheehan said in a Jan. 30 email to The Inquirer.

“Just this week, we had to pay $1.3 million to cure some of Prospect’s rent defaults — funds that should have been used to support our nonprofit community and invest in the maternal health services we provide.”

The foundation employs 80 people who provide maternal outreach services at four locations in Delaware County. It also makes grants available to nonprofits that work to improve social factors that impact health, such as jobs, food security, and housing.

Prospect did not respond to a request for comment on its dealings with the foundation.

Crozer entered a new stage of bankruptcy last week, with a receiver overseen by the Pennsylvania attorney general taking control of Crozer-Chester Medical Center near Chester and Taylor Hospital in Ridley Park.

The state wants the receiver to bring financial stability to Crozer, so its medical services can be transferred to a new nonprofit, though it’s not clear who will form the new entity to own Crozer.

Crozer is Delaware County’s largest health system and serves a low-income area without easy access to other health-care options. Prospect previously closed two other Crozer hospitals in Springfield and Drexel Hill.

The foundation’s predicament is rooted in an October 2009 real estate deal by the nonprofit Crozer-Keystone Health System, seven years before the sale to Prospect.

Crozer raised money to bolster its financial position by selling two medical office buildings and a Crozer sports club in a separate building on the Springfield Hospital campus for $37 million, according to Crozer’s audited financial statement for fiscal 2010.

Crozer then agreed to lease the buildings on the Springfield Hospital campus from the buyer for 30 years in what is known as a sale lease back. (In 2019, Prospect made a similar deal for the rest of Crozer’s property, including Springfield Hospital.)

The hitch for the foundation, the legal successor to the former nonprofit owner, came during the sale to Prospect. Ventas Inc., the landlord for the three Springfield properties, wanted to keep the leases in the foundation’s name for the sake of financial security in case things didn’t go well for Prospect.

Prospect subleased the properties from the foundation.

However, Prospect agreed at the time to work with the foundation to take financial responsibility for the leases, according to a Delaware County Orphans’ Court ruling in October. That never happened, despite years of legal efforts by the foundation to get off the Springfield leases.

The lease for the sports club has been taken over by Community YMCA of Eastern Delaware County, which received permission this week to pay the landlord directly and not funnel money through Prospect.

» READ MORE: Crozer Health since Prospect acquired it in 2016: A timeline

The foundation’s litigation resulted in some favorable rulings, but Prospect has not always complied with court orders. A judge ordered Prospect last March to buy a bond that would cover the costs for three of the final five years of the leases. That did not happen, according to legal filings.

In September, the judge, Cheryl L. Austin, ordered Prospect to pay $2.17 million in 2023 real estate taxes, most of which would have gone to Springfield School District. A school district attorney said last week that money has not been paid.

In an October opinion, Austin reiterated her demand that Prospect take financial responsibility for the leases. Austin expressed exasperation that Prospect paid $457 million in dividends to investors and executives in 2018, but didn’t relieve the foundation of the lease liabilities while it was “flush” with money.

“The record demonstrably shows that Prospect chose to line the pockets of its shareholders while its contractual obligation toward ending [the foundation’s] exposure remained unaddressed and unmet,” Austin wrote.