Opinion ID: 752178
Heading Depth: 3
Heading Rank: 5

Heading: Salaries to Former Owners of Acquired Agencies

Text: 20 First American was growing rapidly during the late eighties and early nineties; in 1985, it operated only in Georgia, and by 1994 it was in 23 states. The company achieved this rapid expansion by acquiring local home health care providers, often those that were in financial difficulty. First American's cash-flow predicament, however, made it difficult for it to pay for even these ailing agencies. Medicare would not pay for First American's acquisition of other agencies' goodwill. 21 Jack solved this problem in a few cases by inducing the owners of acquired agencies to sell by putting them on First American's payroll to be community relations specialists or, as one was told, vice president of smiles. (R. 36 at 98-99.) Although the details differed from owner to owner, a common thread was that the jobs were sinecures that required a few hours of marketing work a week with no patient care-related responsibilities. Those who sought to do more were rebuffed. Many of these owners in fact pursued other enterprises, such as private health care work or real estate management. For instance, Catherine Brown, former owner of an agency in San Antonio, received $60,000 a year for five years as salary. After an initial transition period, however, she performed almost no work for First American, working instead on her separate private-care business. Brown's secretary also received a First American salary while performing virtually no work for First American. In all these instances, First American was careful to maintain an appearance of employment, firing the former owners when--as in the case of one Michigan former owner who was imprisoned--they were patently unable to work. Time sheets, often signed in blank by the owners, were also kept. 22 Another aspect of some of the agency acquisitions suggests that a purchase scheme motivated the sinecures' creation. First American avoided paying out of pocket more than a few thousand dollars for any agency, enough to cover the tangible assets such as furniture. Many of the owners had substantial liabilities, however, that they had guaranteed personally. Jack's solution to this problem was to encourage the agencies to delay reporting the purchase to the fiscal intermediary and to continue receiving periodic interim payments, which the owners would use as they pleased. Although the agency would owe those payments back to the government, the agency's sale of its assets to First American would prevent the government from ever collecting the money. Meanwhile, the liabilities would be paid, and the owner would walk away with a handsome employment contract. 23 The importance of this trick to First American's acquisition scheme is illustrated by two instances when owners balked at delaying report of the sale. In the case of one California agency, First American refused to honor the owner's employment contract, which prompted litigation that ended in a judgment in the owner's favor. A New Mexico agency owner refunded the interim payments rather than use them to pay off debts; First American then refused to a honor a contingent note intended to cover the agency's debts left over after the interim payments. Although several former owners independently testified to the existence of this strategy, Jack and current First American employees denied they ever proposed it.