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Texas Court Asked to Appoint Receiver for Key Subsidiary of TSX Listed Northstar Healthcare, Inc. (TSX NHC) on Claims of Mismanagement and Breach of Fiduciary Duty

Thursday, February 18, 2010 Medico Legal News J E 4
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HOUSTON, Feb. 17

CAUSE NO. 2010-10259 BRAD KOVNAT, IN THE DISTRICT COURT OF Plaintiff, v. THE PALLADIUM FOR SURGERY- HARRIS COUNTY, T E X A S HOUSTON, LTD., NORTHSTAR HEALTHCARE GENERAL PARTNER, L.L.C., and NORTHSTAR HEALTHCARE LIMITED PARTNER, L.L.C., Defendants. 190th JUDICIAL DISTRICT PLAINTIFF'S ORIGINAL PETITION AND APPLICATION FOR APPOINTMENT OF RECEIVER TO REHABILITATE DOMESTIC ENTITY, AND FOR AN ACCOUNTING TO THE HONORABLE JUDGE OF SAID COURT: Brad Kovnat, plaintiff in the above-styled and numbered cause, files this complaint about Defendants, The Palladium for Surgery--Houston, Ltd., a Texas limited partnership; Northstar Healthcare General Partner, L.L.C., a Delaware limited liability company; and Northstar Healthcare Limited Partner, L.L.C., a Delaware limited liability company. I. DISCOVERY LEVEL 1. Plaintiff intends to conduct discovery under Rule 190.4 (Level 3) of the Texas Rules of Civil Procedure. II. PARTIES 2. Plaintiff is an individual residing in Harris County, Texas. He can be served through his attorneys of record below. 3. Defendant The Palladium for Surgery--Houston, Ltd. ("the Partnership") is a Texas limited partnership existing under the Texas Business Organization Act with its registered office at Post Oak Tower, The Galleria, 5501 Westheimer, Ste. 1850, Houston, TX 77056, where citation may be served on Stewart A. Feldman, its registered agent. 4. Defendant Northstar Healthcare General Partner, L.L.C., is a Delaware limited liability company with its principal place of business in Houston, TX. Service may be made at the office of its registered agent, Incorp Services, Inc., One Commerce Center, 1201 Orange St. #600, Wilmington, DE 19889. 5. Defendant Northstar Healthcare Limited Partner, L.L.C., is a Delaware limited liability company with its principal place of business in Houston, TX. Service may be made at the office of its registered agent, Incorp Services, Inc., One Commerce Center, 1201 Orange St. #600, Wilmington, DE 19889. III. REQUESTS FOR DISCLOSURE 6. Pursuant to Rule 194, you are requested to disclose, within 30 days of service of this request, the information or material described in Rule 194.2. IV. VENUE AND JURISDICTION 7. The Court has jurisdiction to appoint a receiver over Defendant The Palladium for Surgery--Houston, Ltd., because both Defendant's registered office and principal place of business are located in Harris County, Texas. Tex. Bus. Orgs. Code Statute 11.402(b). This matter is within the jurisdictional limits of this Court. 8. Venue is proper in Harris County, Texas because at least one of the defendants maintains its principal office within Harris County, and the property and assets at issue in this action are also located within Harris County. Tex. Civ. Prac. & Rem. Code Statutes 15.001, 15.002, 15.005. V. FACTUAL BACKGROUND 9. The Palladium is an ambulatory surgery center. Northstar Healthcare, Inc., a publicly traded company that ultimately controls Palladium, appears intent on the destruction of the surgery center as an on-going financial business. The appointment of the receiver is necessary to conserve the assets and business of The Palladium for Surgery-Houston, Ltd., and to avoid destruction of the limited partners' interests in the Partnership. 10. The Palladium for Surgery--Houston, Ltd. is a Texas limited partnership with its principal place of business in Houston, Texas. The Partnership exists solely to own and operate The Palladium for Surgery- Houston ("Palladium"), an ambulatory surgery center ("ASC") also based in Houston. 11. The Partnership's general partner is Northstar Healthcare General Partner, L.L.C., a Delaware limited liability company. Together with its limited partner, Northstar Healthcare Limited Partner, L.L.C., also a Delaware limited liability company, the two companies (collectively, "the Northstar companies") own 70% of the Partnership. The Northstar companies are themselves owned by Northstar Healthcare, Inc., a Canadian corporation with its principal place of business in Houston. Northstar Healthcare owns and operates a number of ASCs located throughout Texas. 12. The remaining 30% of the Partnership is owned by a number of individuals and business entities, including Plaintiff and several surgeons who practice at Palladium. At all times relevant to this action, Plaintiff was and remains a limited partner in The Palladium for Surgery- Houston, Ltd. 13. The Northstar companies acquired 55% of the Partnership in May 2007. Shortly thereafter, the Northstar companies exercised their option to acquire an additional 15% of the Partnership. In total, the Northstar companies paid approximately $76 million for their 70% stake in the Partnership. This purchase price valued the Partnership at more than $108 million. 14. ASCs have become popular in recent years, as they provide patients with an alternative to traditional inpatient facilities, such as large hospitals. Indeed, there are approximately 400 ASCs currently operating in Texas alone. Like traditional hospitals, ASCs are licensed and regulated by the state, and provide facilities for a wide variety of surgical procedures. Physicians at Palladium, for example, perform surgeries in fields such as orthopedics, pain management, and podiatry. However, ASCs perform outpatient procedures exclusively, and do not provide overnight care. As a result of Palladium's focus on outpatient treatment, its patients are typically discharged within hours of their surgeries. These ambulatory surgery centers have been profitable entities in many different cities in Texas. 15. However, since the Northstar companies appointed new management in 2008, the Partnership's fortunes have taken a drastic turn for the worse. In 2008, net income for Palladium dropped by nearly 45% from 2007 levels. This poor performance accelerated in 2009, as Palladium's net income in December 2009 fell by nearly 55% compared to 2008. Palladium's hemorrhaging of revenue has shown no indication of halting, as just this month, partner distributions were cut by 50% due to the Northstar companies' concern over recent losses and declining future revenues. 16. The Northstar companies concede that the Partnership is in dire condition. In fact, on information and belief, the Northstar companies asserted as recently as last month that the Partnership's business had collapsed. Indeed, on information and belief, the Northstar companies now value their interest in the Partnership at less than $3 million. Put another way, the Northstar companies themselves admit that in little more than two years, the Partnership has lost over 96% of its value and shows no sign of recovery. 17. Although aware of the Partnership's drastic decrease in profitability, the Northstar companies have failed to address its deteriorating condition. Specifically, in spite of repeated entreaties from its limited partners, the Northstar companies have failed to recruit additional physicians, thus denying the Partnership the much-needed revenue that surgeons with healthy practices would bring. The Northstar companies have also failed to re-syndicate the Partnership--which would attract physicians to work at Palladium - and have, without basis, blamed Dr. Donald Kramer for their failure to act. In fact, beyond just failing to recruit partners actively, on information and belief, the Northstar companies have refused to bring on qualified physicians who approached them to discuss the possibility of joining the partnership. 18. Further, the Northstar companies have suspended development of several marketing campaigns that have been extensively developed for Palladium by its partners. As a result, the Partnership has failed to increase patient awareness of Palladium and its services, and other sources of revenue have been squandered. In spite of the Partnership's declining condition, the Northstar companies have decreased Partnership meetings, making them a quarterly, rather than monthly, occurrence. 19. Indeed, rather than focus on repairing the Partnership and developing new sources of revenue, Northstar's management, including its CEO, has engaged in wasteful and potentially damaging activities, including sending pornographic email messages to Partnership employees during working hours. 20. In fact, on information and belief, the Northstar companies appear to be working to destroy Palladium as an ongoing business. On information and belief, in an effort to open a new surgery center that would compete with Palladium, beginning in January 2010, Northstar began recruiting physicians away from Palladium. These actions have been hidden from Plaintiff. 21. Further, on information and belief, since November 2009, the Northstar companies have been attempting to shut down Palladium and to then sub-lease the facility to certain members of the Partnership. On information and belief, this business opportunity has only been offered to a small number of partners, and has been hidden from other partners, such as Plaintiff. 22. Finally, on information and belief, in November 2009, Northstar companies attempted to sell the assets of Palladium to one of the current partners for approximately $2.6 million. This sale would have been extremely detrimental to the remaining partners, and was hidden from Plaintiff and the other partners. 23. Because of the Northstar companies' aforementioned failures to develop business, their numerous acts of mismanagement, and their self- dealing at the expense of other partners, the Partnership is in imminent danger of insolvency. 24. All other remedies at law or in equity, including the appointment of a receiver for the specific assets of the defendant, are inadequate to protect the Partnership and the Plaintiff in that there is not presently pending any litigation that would allow Plaintiff to seek the appointment of an ancillary receiver, nor does plaintiff have a cause of action that, if asserted, would allow the appointment of a receiver for the Defendant's specific assets. VI. CAUSES OF ACTION First Cause of Action - Breach of Fiduciary Duty (Against Defendants Northstar Healthcare General Partner, L.L.C. and Northstar Healthcare Limited Partner, L.L.C.) 25. Plaintiff repeats and realleges each allegation set forth herein. 26. Plaintiff and the Northstar companies are parties to the Amended and Restated Partnership Agreement of The Palladium for Surgery--Houston, Ltd. ("Partnership Agreement"). The Partnership Agreement governs the responsibilities of the members of the Partnership. 27. Defendant Northstar Healthcare General Partner, L.L.C. is the general partner of the Partnership, and Defendant Northstar Healthcare Limited Partner, L.L.C. is a limited partner in the Partnership. Under the terms of the Partnership Agreement, the Northstar companies owe a duty of loyalty and a duty of care to the Partnership and its members. 28. Plaintiff specifically limits the scope of his cause of action to events occurring after October 21, 2009. 29. On information and belief, without informing Plaintiff or the Partnership, beginning in January 2010, the Northstar companies began attempting to divert the Partnership's most important assets--its physicians--to a competing ambulatory surgery center. 30. On information and belief, the Northstar companies are offering the opportunity to invest in the competing new surgery center to some limited partners but not to other limited partners, including Plaintiff. 31. On information and belief, without informing the Partnership, beginning in November 2009, the Northstar companies attempted to sell Palladium to one of the current partners for approximately $2.6 million. 32. On information and belief, without informing the Partnership, beginning in November 2009, the Northstar companies engaged in self- dealing by attempting to sub-lease Palladium to certain limited partners. Under this scenario, Northstar plans to shut down Palladium entirely, and lease its premises to a current partner, to the clear detriment of Plaintiff and other partners. 33. On account of the aforementioned actions, the Northstar companies have breached their duties of loyalty and care owed to the Partnership. 34. As a result of the Northstar companies' breach of their fiduciary duties, the Plaintiff has been damaged in an amount within the jurisdictional limits of this Court for which amount the Plaintiff sues. 35. Accordingly, and in addition to his actual damages, the Plaintiff is also entitled to exemplary damages for such breach for which amount the Plaintiff hereby sues. APPLICATION FOR APPOINTMENT OF RECEIVER 36. As a result of the foregoing, Plaintiff brings this action, made pursuant to section 11.404 of the Business Organizations Code, to have a receiver appointed for the assets and business of defendant in order to bring about a rehabilitation of the Partnership. All other requirements of the law have been satisfied. REQUEST FOR AN ACCOUNTING 37. In spite of the Partnership's worsening condition, the Northstar companies have cancelled regularly-scheduled meetings of the Partnership's Board of Governors, and have kept limited partners such as Plaintiff in the dark as to Palladium's current finances. On information and belief, the Northstar companies have also concealed their dealings with members of the Partnership, as well as their attempts to extract business from Palladium. Accordingly, Plaintiff requests that the court enter an order requiring Defendant to provide a verified accounting for the Partnership. 38. In order to protect his rights, Plaintiff has been required to retain the services of the undersigned attorney to prosecute this claim. Plaintiff is entitled to an award of reasonable attorney fees and expenses pursuant to Chapter 38 of the Texas Civil Practice & Remedies Code. VII. PRAYER Plaintiff submits that a receiver as the Court shall deem qualified, should be appointed operating receiver of the assets and business of Defendant The Palladium for Surgery--Houston, Ltd., with such powers as are provided by laws of general applicability relating to receivers and such other powers deemed appropriate by the Court to accomplish the Partnership's rehabilitation. WHEREFORE, plaintiff requests that Defendants be cited to appear and answer, and that on final trial, Plaintiff have the following: (1) Judgment, appointing a receiver as the Court deems qualified, of all the assets and business of The Palladium for Surgery--Houston, Ltd., with the powers described above. (2) All actual and exemplary damages for breach of fiduciary duty. (3) An order determining the amount and terms of the bonds of the applicant and the receiver. (4) An order requiring the Northstar companies to provide an accounting of the Partnership. (5) Cost of suit. (6) Such other and further relief as may be appropriate in the circumstances. Respectfully submitted, SMYSER KAPLAN & VESELKA, L.L.P. By: Craig Smyser State Bar No. 18777575 Timothy Byrd State Bar No. 03559050 700 Louisiana, Suite 2300 Houston, Texas 77002 (713) 221-2317 (713) 221-2320 - FAX ATTORNEYS FOR PLAINTIFF BRAD KOVNAT

SOURCE Brad Kovnat
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