In a ruling described as a win for taxpayers and patients, a bankruptcy judge in Texas late Thursday rejected the insider sale of Genesis HealthCare, saying the nursing home chain’s secretive auction was “unfair” and needed to be redone, with the Justice Department monitoring the process.
The decision means that $1.6 billion in claims from roughly 600 families and vendors, and other creditors against the troubled chain will not be erased, as they would have been under the previous deal.
“I just feel way too uncomfortable about so much of what I have heard,” Chief Judge Stacey G. C. Jernigan said about the testimony in her courtroom.
An unusual two-day hearing on the bankruptcy involved petitions from US senators and the Department of Justice to scuttle the deal, as well as allegations that the private-equity owner of Genesis, Joel Landau, threatened a competing bidder for his company.
With 49 facilities in New England, including two in Western Massachusetts, Genesis has a history of violations, from medication errors and improper care of bed sores, to physical and sexual abuse of residents. Health leaders closed one of its facilities in Connecticut in 2022 after the deaths of two patients and additional safety concerns.
Last month, Genesis sold the chain to itself in a controversial bankruptcy auction, in which Genesis allowed just one company to bid against it and would not release transcripts of the shrouded proceedings.
The action allowed Genesis, which receives 80 percent of its revenue from taxpayer-funded Medicaid and Medicare programs, to wipe out much of the claims against it. Many of those claims are from families who accused Genesis facilities of negligent care that harmed patients or resulted in their death.
The role of Landau’s private equity firm ReGen Healthcare and its affiliate in the Genesis case epitomizes a pattern that advocates find concerning: Nursing homes in Massachusetts and across the country are being bought and sold at a rapid pace, in what critics say are deals engineered more to make a quick profit than to build a successful long-term business.
The pattern, also common in the wider health care arena, such as in the notorious Steward Health Care case, prompted Senator Elizabeth Warren to sponsor legislation that would impose prison sentences of up to six years for executives who siphon money out of nursing homes and hospitals, if that action results in a patient’s death.
The bankruptcy judge, Jernigan, said she would formalize her decision next week, but added she would at that time ask the US Trustee’s office, an arm of the Justice Department, to oversee another auction in the near future and to have access to all the bids. The Trustee’s office had filed a motion last week asking the judge to halt approval of the sale until the court could determine whether it was fair and equitable, and whether it was “the product of arms-length bargaining.”
Dan Simon, a Genesis lawyer, did not return a request for comment.
In its July bankruptcy filings, Genesis proposed to the court that it be acquired by ReGen Healthcare. ReGen already has at least 93 percent equity in Genesis.
Transcripts from the bankruptcy auction in November showed that one company, called Genie 3 Partners LLC, ultimately bid against Landau’s insider contender, identified only by the cryptic name as CPE 88988, but that Genesis asked the final bids to be sealed.
Landau’s CPE 88988 bid included a provision to wipe out nearly all the claims against Genesis by aggrieved families, vendors, and others. But Genie 3’s bid was valued at about $20 million more than CPE’s, according to testimony in bankruptcy court this week, and moreover, would have allowed those claims to stand, giving families a chance to be compensated for their losses.
Kathleen Donaghue, a New Hampshire health care worker whose mother, Dorothy Atkinson, died in 2022 after three successive falls in a Genesis-owned nursing home in Lowell, said she didn’t understand how the legal system initially allowed a company to make a “colossal mess” of patient care, and end up at the helm by winning the first secret auction.
“The devastation from losing my mother was like nothing I felt before, and it still pains me,“ she said.
“No one should get away with what they did,” she added. Donaghue said her mother, once a feisty spark plug of a woman, went downhill quickly after entering the nursing home where, Donaghue said, nurses failed to check on her or help her to the bathroom, and allowed her to lay in her own urine for hours.
“These are our elders who deserve all the time and care in the world,” she said.
Daniel Desatnik, a lawyer for the committee that represented roughly 600 families and vendors with lawsuits against Genesis and its affiliates, said the judge’s decision to reject Genesis’s insider sale was “tremendously positive” for taxpayers and patients.
“It sends a message that owners of health care facilities will not be able to take advantage of Medicare and Medicaid funds while providing substandard care and allowing injury claims to mount,” he said. “The bankruptcy court will not permit these liabilities to be simply washed away, but will hold owners accountable while ensuring a transparent and fair process.”
John Anthony, a lawyer in Florida who represented roughly 340 families, including several in Massachusetts and New Hampshire, with claims against Genesis, last week urged the judge to halt the sale and appoint an independent examiner to monitor a new auction. He said he was thrilled with the outcome and the judge’s insistence the new auction would not be conducted in secret.
“A business owner that bankrupts his company with a goal of buying the assets out of Chapter 11 for pennies must be prepared to participate in an open auction process,” Anthony said. “Not just kabuki theater.”
The judge, in rejecting the Genesis auction results, said she tried not to read media accounts about the issue. But she said she couldn’t help noticing the coverage of objections to Genesis’ actions by three members of New England’s congressional delegation, including Senator Warren. The three filed their objections as an amicus brief in support of Anthony’s group of 340 families.
On Friday, Warren said in a statement, “A private equity company tried to abuse the bankruptcy system to slither out of paying what they owe to neglected seniors in its nursing homes.
“This is a textbook case of why we need to get private equity out of health care altogether, and this decision is a good step forward in the fight to deliver relief for the victims of Genesis.”
Kay Lazar can be reached at kay.lazar@globe.com Follow her @GlobeKayLazar.