Foothill Ranch-based Skilled Healthcare Group Inc. is hoping to come to terms with litigants who won a potentially crippling jury award against the company earlier this month.
Skilled last week said it reached an agreement to put court proceedings on hold and pursue a settlement of the class action lawsuit.
The deal gives the nursing home operator until Aug. 9 to try and come up with a settlement or seek a retrial before a judge.
Skilled officials, through a spokeswoman, declined to comment.
On July 7, a Northern California jury decided Skilled should pay $671 million in damages for providing inadequate staffing at its California facilities. The tally could go higher if punitive damages are assessed.
The jury decision caused a one-day 75% drop in Skilled’s stock and raised the possibility of bankruptcy for the company.
The award is nearly six times the company’s recent market value of about $100 million and exceeds its available insurance coverage.
Skilled operates 100 nursing homes in California and other states and has yearly sales of about $760 million.
Word of settlement talks last week drove a surge in Skilled’s shares, which already had bounced back some as company watchers bet the big number wouldn’t stand.
Most analysts believe the award—which includes $613 million in statutory damages and $58 million in restitution damages—will be settled, reduced or thrown out.
“We believe the state of California does not desire to bankrupt” Skilled, said analyst Brian Williams in a research note.
Williams follows Skilled for Nashville, Tenn.-based Avondale Partners LLC.
Analyst Robert Mains of Memphis-based Morgan Keegan & Co. said the “unexpectedly large verdict against Skilled strikes us as unusual.”
Skilled earlier said it could pursue an appeal in the case. But the company may not be able to afford to do so.
To appeal, Skilled has to post a bond for 150% of the final judgment amount, which some analysts estimate would be about $1 billion.
Skilled had about $2 million in cash and equivalents as of March 31.
It has access to about $100 million in financing, “which in our opinion, is the outer limits of what the company can afford to pay,” said Arthur Henderson, a nursing home analyst with Jefferies & Co. of Stamford, Conn.
If Skilled is required to pay the damages or post an appeal bond, the company “will have little choice but to file for bankruptcy and the stock is worthless,” Henderson said.
If Skilled is able to settle the case for an amount much lower than the verdict, “some equity value could be preserved,” he said.
Legal Moves
The company has a legal move short of an appeal, said plaintiff lawyer Daniel Callahan, founder of Santa Ana-based Callahan & Blaine.
Skilled could ask Humboldt County trial Judge Bruce Watson for what’s called “judgment not withstanding the verdict,” in which he could put aside the jury verdict and impose his own, according to Callahan.
Plaintiffs generally don’t like to force a company into bankruptcy because it puts them last in line to get paid, Callahan said.
“The secured creditors would stand in line ahead of them,” he said.
Priority unsecured creditors, covering things such as workers’ wages, would be paid next.
“By the time it gets around to (plaintiffs), there’s nothing left,” Callahan said.
That’s what happened to Callahan and his clients in a lawsuit against Irvine-based Freedom Communications Inc., parent of the Orange County Register.
In 2008, Callahan won a $42 million judgment for Register newspaper carriers. But Freedom’s 2009 bankruptcy reorganization knocked that down to $14.5 million.
Callahan now is suing Freedom’s former directors to try to make up the difference.
If Skilled were able to afford an appeal, it could see the jury damages lowered or thrown out entirely.
“When you have a number this large, the judges look at this really hard,” Callahan said. “Judgments this large don’t usually survive.”
Callahan again speaks from experience—he won a $934 million verdict in a highly publicized 2003 lawsuits that pitted Brea-based medical diagnostic company Beckman Coulter Inc. against Singapore’s Flextronics International Ltd. over a breach of contract.
That verdict was the largest in Orange County’s history.
Beckman and Flextronics settled the suit in late 2003 for $23 million.
The suit against Skilled, which went to court in November, contends the company didn’t provide adequate staffing for patients at several of its California facilities from 2003 to 2009.
California law requires nursing homes to maintain 3.2 nursing hours per patient, per day.
Skilled has 22 facilities in California.
