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Joel Freedman wanted to borrow $17.5M to keep bankrupt Hahnemann hospital intact. Not so fast, bankruptcy judge says.

Freedman said he needed to borrow $17.5 million because he was running out of money to maintain the former Hahnemann buildings. More than $3 million would have gone to Freedman’s company, Paladin Healthcare, documents show.

Lawyers are fighting in bankruptcy court over who should get the proceeds from the eventual sale of the empty Hahnemann University Hospital buildings in Philadelphia, Joel Freedman or the bankrupt shells of Hahnemann and St. Christopher's Hospital for Children. Hahnemann is shown here in August 2019 around the time when it closed.
Lawyers are fighting in bankruptcy court over who should get the proceeds from the eventual sale of the empty Hahnemann University Hospital buildings in Philadelphia, Joel Freedman or the bankrupt shells of Hahnemann and St. Christopher's Hospital for Children. Hahnemann is shown here in August 2019 around the time when it closed.Read moreANTHONY PEZZOTTI / Staff Photographer

A judge overseeing the Hahnemann University Hospital bankruptcy rejected Joel Freedman’s plan to borrow $17.5 million to cover expenses of the hospital buildings in Center City Philadelphia as well as pay money owed to lawyers, his own company, and others helping him try to sell the property.

Freedman’s companies that own the buildings will run out of money early next year, he said in filings to the bankruptcy court, which held a four-hour online hearing Wednesday.

In her denial, U.S. Bankruptcy Judge Mary F. Walrath said there were unanswered questions about how much of the proposed 15-month loan would have been used specifically to maintain the properties at Broad and Vine Streets, as opposed to paying other expenses.

“It is clear there is a big question as to what amount of a loan is necessary, and also there is a question as to the length of a loan that is necessary to preserve and maximize the value of those properties,” Walrath said.

» READ MORE: The Hahnemann bankruptcy has been more contentious than most.

Freedman, a California businessman who bought Hahnemann and St. Christopher’s Hospital for Children in 2018 for $170 million, has been at loggerheads with the bankrupt hospital’s estate since the bankruptcy began in June 2019.

When Freedman bought the hospitals, borrowing virtually all the money, he split the real estate from the hospital businesses, holding the real estate in companies that he controls. Such splits are common because real estate alone is typically more valuable as collateral for a loan than a business is.

The 2019 bankruptcy of Hahnemann and St. Chris did not include the real estate occupied by either of the hospitals. Freedman sold the St. Chris business to a joint venture of Tower Health and Drexel University for $58 million and most of the real estate there to Iron Stone Real Estate Partners for $65 million. The company leases the site to the hospital.

Although St. Chris’ operations and real estate were sold, there is still a legal entity in the bankruptcy that used to own the hospital and that owes people money.

But lawyers for the bankrupt shells of both hospitals have sued Freedman, claiming that proceeds from an eventual sale of the Hahnemann buildings should be used to pay bankruptcy claims that could reach $300 million, according to one estimate.

Those lawyers, whose suit against Freedman in bankruptcy court in Delaware is sealed, opposed Freedman’s plan to borrow $17.5 million because that money would be repaid first after a sale, leaving less for the bankrupt entities if they succeed in dragging Freedman’s real estate into the bankruptcy.

They also objected to the cost of the loan. No more than $6.5 million of the $17.5 million loan would have been available for the preservation of the buildings, Mark Minuti, of Saul Ewing Arnstein & Lehr LLP, Hahnemann’s lead bankruptcy lawyer, told Walrath on Wednesday.

» READ MORE: Joel Freedman failed in his turnaround bid at Hahnemann University Hospital.

Most of the the money would have been used to pay the interest and other costs of the loan, a pension reserve, as well as fees to lawyers and other advisors. More than $3 million would have gone to Freedman’s company, Paladin Healthcare, documents show.

As alternative financing, the bankrupt business offered Freedman a six-month, $5.6 million loan. In a court filing, Freedman rejected the offer as “draconian” because the term was too short and would allow creditors to foreclose on the buildings when the loan was due.

Walrath advised Freedman and lawyers for the bankrupt hospitals to compromise on the size and length of a loan to protect the Hahnemann properties until they are sold.

The monthly cost of maintaining the buildings — including utilities, security, sprinkler systems, insurance, and taxes — is $400,000 to $450,000, a Freedman representative testified.

“I don’t think you want my business judgment to reign,” she said.