Judge Blocks Buy-Out Plan for FHP Inc. : Temporarily Restrains HMO Purchase Proposal
A judge Thursday temporarily blocked Dr. Robert Gumbiner from converting FHP Inc., a nonprofit health-care organization, to for-profit status after the state attorney general’s office accused Gumbiner of seeking to “divert” millions of dollars in charitable assets to his personal use.
An attorney for Gumbiner, founder and chairman of the Fountain Valley-based health maintenance organization, said it was entirely proper for Gumbiner and 17 employee-investors to buy the assets of FHP for $14 million less than a competing bid. Hawthorne-based Maxicare Health Plans, a rival HMO, has offered $50 million in cash for FHP’s business.
The attorney general’s charitable trust division contends that, if FHP’s directors sell its assets, they must accept the highest price offered. Gumbiner contends that a lower price may be accepted if it benefits FHP’s subscribers.
Los Angeles Superior Court Judge Eli Chernow granted a temporary restraining order that delays the conversion until after an Oct. 18 hearing. At that time, the attorney general’s petition and a lawsuit filed last month by Maxicare will be considered.
Competition With Maxicare
Maxicare, with 650,000 subscribers in 11 states, competes with FHP in Southern California and Utah. FHP has 220,000 medical subscribers in Southern California, Utah and Guam and 70,000 dental subscribers and plans in January to enter the Reno market, where Maxicare is the major HMO.
Maxicare, a for-profit HMO, may raise its bid to $80 million, Chairman Fred Wasserman said earlier. But Gumbiner said FHP will not accept any offer from Maxicare. He said Thursday that he is now “thinking about” withdrawing the conversion application.
The state Department of Corporations on Sept. 20 approved a plan by HMO Health Group, lead by Gumbiner, to pay $7.2 million in cash and the remainder of the $36 million over 10 years.
When a nonprofit organization converts to for-profit status, the buyer must repay the public for the value of its assets, usually by making contributions to other charitable organizations.
Deputy Atty. Gen. William Abbey said Maxicare’s $50-million cash offer makes the bid by HMO Health Group “inadequate.” If the lower price is accepted, Abbey said, Gumbiner and others will have “diverted to themselves a substantial amount” of charitable assets in “gross abuse” of their duties as trustees of those charitable assets.
Abbey told Judge Chernow that his office believes that the planned conversion violates a 1977 Los Angeles County Superior Court order barring FHP from engaging in business transactions with its principals unless the attorney general gives written approval in advance.
Rick McKnight, an attorney representing Gumbiner and FHP, said the order was effectively voided by a 1983 change in state law granting the Department of Corporations jurisdiction over conversions of nonprofit HMOs to for-profit status. Documents that FHP filed with the Department of Corporations show that Gumbiner and some of the other individuals covered by that 1977 order have continuously engaged in business transactions with FHP since three weeks before Gumbiner signed it.
Maxicare originally believed that the lower price was being approved by the Department of Corporations because of “bureaucratic bungling,” attorney Frank Zepp of Latham & Watkins said.
But Zepp, noting that Maxicare had to obtain a court order to get access to the Department of Corporations’ public file on the conversion, told Judge Chernow: “I think we are now dealing with a major scandal here.”
Abbey said that Andrea Ordin, chief assistant attorney general, pleaded with Corporations Commissioner Franklin Thom to delay approval of the conversion until the attorney general could ascertain whether FHP’s assets were worth more than $36 million.
Thom’s office, after examining analyses based on unaudited financial data submitted by FHP, initially proposed valuing the assets at $47 million.
Later, it agreed to accept $36 million over 10 years.
Gumbiner has said that he believes that Maxicare is not interested in buying FHP but only in pushing the price for FHP’s assets so high that Gumbiner and his fellow investors cannot raise enough money to buy FHP.
Gumbiner said that for-profit status would make it easier for FHP to attract capital and expand.
