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Local Government Center asks judge if restructuring moves are legal

New Hampshire Union Leader

September 08. 2013 9:38PM

In the midst of a recent corporate restructuring of the New Hampshire Local Government Center and its former subsidiaries, the LGC received letters from its state regulator telling it that the moves were illegal and would repeat mistakes the LGC made in 2003.

The boards forged ahead, and are now asking a Merrimack County Superior Court judge to decide whether the moves are legal.State Sen. Peter Bragdon, the executive director of HealthTrust, which enveloped most LGC employees following the Sept. 1 reorganization, said the risk pool management agencies filed a lawsuit seeking declaratory judgment to avoid the reorganization problems that plagued LGC for more than a decade and saw its not-for-profit, taxpayer-funded insurance risk pools run by limited liability corporations that, technically at least, were for-profit companies.

“We said, ‘Let’s get this clarified,’” Bragdon said. “Let’s not let this simmer for 10 years.”

The reorganization and lawsuit, filed against the Secretary of State’s Office and the risk pools’ regulating agency, the Bureau of Securities Regulation, are the latest issues to feature finger-pointing between the public insurance administrator and state authorities.

For them to just do it and spend more of their members’ money on legal fees; it’s just a little mind-boggling that that is their focus,” said BSR attorney Andru Volinsky. “They just unilaterally stopped the dialogue.”

Who is right?

As the entities once known as the LGC began their reorganization a few months ago, they repeatedly requested, and for the most part got, meetings with regulators, according to a time line of files, emails and letters LGC released this month. At first, former LGC interim executive director George Bald proposed that the restructuring take effect July 1 to coincide with the organization’s fiscal year, but was asked by regulators to slow down, hence the rescheduling to last week.

LGC, which had operated as the owner of several subsidiaries, changed its name back to the New Hampshire Municipal Association. There already was a New Hampshire Municipal Association, which handles lobbying on behalf of member municipalities and provides training on government operations to municipal officials. Its function stayed the same, so the LGC moniker was eliminated.

LGC’s health insurance arm, HealthTrust, and its property and casualty arm, Property-Liability Trust, kept their names, but are now governed by not-for-profit corporations organized under a state law called RSA 292 and are no longer LLCs.

But a major sticking point, and the reason for the lawsuit, is the nearly half-billion dollars in assets and liabilities that, when the reorganization was adopted last month, were acquired by the new not-for-profit corporations from the LLCs.

This issue resulted in a written back-and-forth between the BSR and LGC lawyers while the boards were in the process of adopting resolutions to complete the restructuring by Sept. 1.

“The resolution seems to define the contemplated transaction as an acquisition and, in fact, refers to this transaction as ‘the Acquisition,’” an Aug. 22 letter from BSR Director Barry Glennon to LGC officials said.

Glennon wrote that RSA 292:7 allows not-for-profit corporations to acquire only other not-for-profit corporations.

Patrick C. Closson, an attorney with McLane, Graf, Raulerson and Middleton, Manchester, who served as legal counsel for LGC for the reorganization, said in a responding letter that Glennon had the situation wrong because the new entities were not acquiring the old LLCs, but just assets and liabilities.

He wrote that, “we know of no law, either statutory or case law, nor legislative history, that suggests that acquiring all or substantially all of the assets from another person or entity is also not within the power” of a not-for-profit corporation.

Bragdon said LGC’s move is similar to a not-for-profit hospital acquiring the assets and liabilities of a private doctor’s office.

“I think the BSR is saying we’re acquiring the LLCs,” he said. “No, we’re not. We’re acquiring the assets.”

In a follow-up letter dated Aug. 29, Glennon disagreed.“It should also be noted that the transactions you proposed are not simply acquisitions of assets but also involve the complete assumption of operations of one entity by another,” he wrote.

So, Bragdon said, LGC went to court.

“We’re saying to the court, ‘OK, who’s right here?’” he said.

Deja vu

The reorganization is LGC’s attempt to undo a series of illegal and failed mergers that happened in 2003 because then-LGC Executive Director John Andrews and LGC attorneys ignored Secretary of State and Attorney General’s Office officials who told them that LGC’s operations couldn’t merge into LLCs.

They created shell LLCs in Delaware, merging the New Hampshire-based not-for-profit corporations into them, then merging the Delaware LLCs into newly created New Hampshire LLCs, then changed various bank accounts’ names and corresponding federal tax identification numbers.

LGC officials were told several times over the years that the mergers were illegal and invalid. They did nothing until last year.

Bragdon said HealthTrust and its sister organizations do not want to repeat the problem, hence the court action.

“Otherwise, it’s going to seem like deja vu all over again and certainly we’re trying to avoid that,” he said. But Glennon wrote that LGC’s attempt, without guidance by the state, is a repeat of what Andrews did 10 years ago.

“As outlined above, the transactions you have proposed are essentially the mirror image of the transactions that were originally attempted by LGC in 2003 and the exact same legal problems persist,” he wrote Aug. 29.

Bragdon said the request for declaratory judgment is “completely unrelated” to a state hearings officer’s order compelling LGC, which has appealed the order to the state Supreme Court, to return more than $50 million deemed held in excess reserves. LGC has already mailed out checks to comply with a Sept. 1 deadline to return $33.2 million held by HealthTrust and $3.1 million from Property-Liability Trust. It has until Dec. 1 to repay $17 million that the order ruled was improperly transferred from HealthTrust to prop up LGC’s money-losing workers’ compensation program.

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