Accountants Stars of Show During Blockbuster SavaSeniorCare Trial
By Jotham Sederstrom October 9, 2012 7:00 am
reprintsA newly formed company, National Senior Care Inc., bought all of the shares of Old Mariner, then sold the real estate to one of Schron’s companies, SMV. That entity then leased the properties to another newly formed company, SavaSeniorCare, controlled by Mssrs. Grunstein and Forman. National Senior Care retained the operations of about 100 nursing homes located on properties that were leased from third parties.
While neither Mr. Grunstein nor Mr. Forman put any of his own money into the deal, Mr. Schron raised about $1.1 billion in financing, acquiring real estate valued at about $800 million. According to documents signed at closing, the financing included a $100 million loan to the owner of Sava that gave him an option to acquire the company, the judge wrote.
By 2010, the deal had soured. Mr. Schron sued Mssrs. Grunstein and Forman, saying they owed him more than $100 million under loan agreements and accusing them of “stealing for themselves tens of millions of dollars of value, properties and rights,” Bloomberg News reported.
When Mr. Schron sought to exercise his option, Mr. Grunstein claimed that the loan was never funded and that there was no indebtedness to be released and contributed toward a purchase of the company, the judge wrote. The rival accountants’ task was to sort out transactions among some 30 people and entities involved in the buyout, as well as the movement of money through an escrow account from entities on Mr. Schon’s side of the deal to Mr. Grunstein and his companies, to establish whether, and how much of, the money was lent.
After the court ruled in March that the option was enforceable, the 10-day, non-jury trial in August focused on the limited issue of the amount of indebtedness available to be paid at the closing toward the purchase price.
Mr. Williams testified that parties to complex transactions such as this typically prepare a “deal book” to document the agreement. In this case, no deal book was prepared, though schedules of sources and uses of the funds transferred at the closing were prepared by Marks, Paneth & Shron, an accounting firm engaged by the acquirers to ensure there was adequate funding to complete the deal. Much of Mr. Grunstein’s defense involved the alleged unreliability of the documents, the judge wrote.
Mr. Kelly said a promissory note signed by both sides at the time of closing—and amended and restated in 2006 when a second, $20 million loan was made—was the best evidence that the loan existed. And he said documents showed that the nursing home company had made use of the money, including making a $65 million loan to the “New Mariner” entity on the day of the transaction.
Aided by Mr. Kelly, the plaintiffs argued that “at least $118 million of excess Schron funds are shown on the sources and uses schedules” prepared by accountants in December 2004.
“When both counterparties sign and agree to something, that’s the best evidence from the accounting point of view,” Mr. Kelly testified. “We have a multitude of documents that support [that conclusion] throughout the years, all of which are consistent with the notion that there was a loan, and it had been funded.”
