North Philly Health System’s ex-CEO doesn’t deserve $1.8 million in severance pay, lawsuit claims

The former CEO of bankrupt North Philadelphia Health System, which was poorly managed for years, has no right to the $1.8 million in severance pay he wants, a new lawsuit contends.

The lawsuit was filed by the trustee in charge of overseeing the distribution of what is expected to be about 10 cents on the dollar to unsecured creditors of the health system, which emerged from bankruptcy last fall.

The health system filed for bankruptcy protection in late 2016 with $17 million in secured debt and $29 million in unsecured debt. Proceeds from the sale of real estate were used to pay off the system’s secured creditors. The final amount of unsecured claims is expected to be in the low $20 million range, with about $2 million available over a decade to pay those claims. The liquidating trustee is trying to eliminate claims by the former CEO and others, to increase the percentage return to remaining creditors.

The suit, filed Friday in U.S. Bankruptcy Court for the Eastern District of Pennsylvania, alleged that years of financial losses before the bankruptcy — dating to 1994 — were due to the “incompetence and self-dealing of management,” including former CEO George J. Walmsley III. Allegations include fraudulent conveyance and breach of fiduciary duty. Walmsley’s annual base salary was $459,504.

Walmsley, who learned of the suit Monday from an Inquirer reporter, declined to comment because he hadn’t yet discussed it with his lawyer. Walmsley is the only one of six executives who refused to waive his claim, according to the suit. The organization’s former chief financial officer, Margaret A. Boemmel, waived her claim of $608,423. Four others waived claims totaling $121,367.

Specifically, the trustee objected to a July 2015 addendum to Walmsley’s severance agreement that extended the agreement on a rolling three-year basis, effectively “evergreening” the deal at a time when NPHS was “woefully insolvent and unable to pay its debts as they came due.” Just six months later, NPHS announced that it was closing St. Joseph’s Hospital. The move followed a decision that year by the Pennsylvania Department of Human Services to end a subsidy that topped out at $16 million.

NPHS was an unusual nonprofit in that its politically connected chairman, Dominic Sabatini, received an annual salary. Sabatini received $197,401 for 30 hours a week in 2014, the most recent year available. He has no pending claims, according to court documents.

NPHS was able to emerge from bankruptcy with significant help from state and city officials. The state and the city wrote off millions in health system liabilities, and the city rented the property from its new owner for $2.2 million for one year and leased it back to NPHS for $1 in annual rent to help with the financial recovery. NPHS has since taken over the rent.

Currently, the main operations are limited to behavioral health services and substance abuse treatment at Girard Medical Center.