Navigating the Increased Prevalence of Massachusetts Skilled Nursing Facility Receiverships

More recently, however, operators of facilities and their creditors (including landlords) have sought out alternatives to a sale or restructuring under the federal bankruptcy laws.

Creditors often prefer a mechanism in which they can retain greater control over the proceedings and the disposition of their assets or collateral. Hence, receiverships have become a preferred option to address issues arising in connection with financially troubled skilled nursing facilities. Industry experts believe that skilled nursing facilities in Massachusetts are likely to continue to encounter financial difficulty in 2025 and beyond. Hence, it is imperative for both creditors and operators to understand the legal framework that is applied to a receivership proceeding involving a skilled nursing facility.

The Statutory Scheme: State v. Creditor Initiated Receiverships

There are two possible pathways to the appointment of a receiver over a skilled nursing facility in Massachusetts. The first is pursuant to M.G.L.c.111,§72N (and related provisions), which pertain specifically to skilled nursing facilities and grant standing to seek the appointment of a receiver exclusively to either state authorities (specifically, the state’s Department of Public Health and the Office of the Attorney General), residents of a facility, or their guardians.

Section 72N specifically provides that the primary purpose of a receiver’s appointment under this provision is to “protect the health, safety and continuity of care to residents.” This statute confers authority upon the Superior Court to appoint a receiver at the behest of the Commonwealth, even on an ex parte basis, in appropriate circumstances. What’s more, this statutory scheme — like the Bankruptcy Code — contains a number of provisions which are designed to confer immediate protections to the facility and the receivership estate. These include, for example, the imposition of a 60-day automatic stay against actions against the facility and a bar against the termination of insurance coverage or utility services. Further, the statutory scheme also contains detailed provisions spelling out the rights and duties of the receiver and protocols for obtaining financing, performing repairs, and closing the facility when appropriate.

Alternatively, in instances where the Commonwealth has not initiated a receivership, a creditor of a financially troubled skilled nursing facility may likewise seek the appointment of a receiver in the Superior Court or Federal Court in furtherance of a commercial collection action. Unlike Section 72 which confers standing on designated state actors to initiate a receivership proceeding, the General Laws do not contain provisions that are specific to the imposition of a receivership over a skilled nursing facility in the commercial context.[1] That said, Section 72N itself recognizes that the right to seek the appointment of a receiver is not limited to governmental actors.[2] Courts in the Commonwealth may rely, for example, on other sections of the General Laws to support the appointment of a receiver in this context. See, e.g., M.G.L.c. 214 and c. 156D, §14.32. In at least two cases filed in late 2024, the Superior Court appointed receivers over skilled nursing facilities at the behest of landlords, thereby leaving little doubt that the court has power to do so under the applicable provisions of the General Laws and its equitable power.[3]

In contrast to the detailed provisions of Section 72N described above, the General Laws governing commercial receiverships is somewhat scant. Instead, the receiver’s powers, duties, and obligations are typically set forth in a detailed and comprehensive receivership order which is proposed by the plaintiff/creditor and approved by the court, in its discretion. Typically, the receivership order will vest the facility’s assets with the receiver, require third parties to turn over the facility’s property to the receiver, stay actions against the receivership estate, confer authority upon the receiver to manage the business of the facility (including obtaining financing, if necessary), and provide a mechanism by which the receiver, subject to the regulatory review and approval powers of the Department of Public Health, may seek to sell the assets or business of the facility if the receiver concludes that it is best to do so. The receivership order also typically will establish financial reporting obligations with which the receiver must comply during the pendency of the receivership.

The principal purpose of a commercial receivership is to establish a mechanism by which the creditor may collect the obligations that it is owed. That said, it is also the case that care for the residents is of paramount importance. Further, despite the fact that the Commonwealth does not initiate a commercial receivership proceeding, the Department of Public Health and other state actors typically monitor a commercial receivership of a skilled nursing facility to ensure appropriate resident care and, as applicable, proper transition to a new operator.

Finally, it should be noted that once appointed, courts in the Commonwealth have wide discretion to leave the receiver in place “so long as the Court finds necessary for said purposes.” See, M.G.L.c. 156B, §104. Well-settled decisional law underscores this point. See, George Altman, Inc. v. Vogue Int’l, Inc., 366 Mass. 176, 180 (1974) (holding that the appointment of a receiver, and the decision to leave a receiver in place, is within the sound discretion of the judge).

Commercial Receiverships as a Creditor’s Rights Tool for Landlords

Skilled nursing facilities are frequently owned and operated via a so-called PROPCO/OPCO structure whereby the facility and real estate are owned by an entity (PROPCO) that acts as landlord to an operating company that holds the skilled nursing facility license issued by the Department of Public Health (commonly referred to as an OPCO). When a facility experiences financial distress, it is often the landlord that bears the brunt of this because of delinquent rent payments. In such circumstances, the legal remedies that are typically available to landlords (such as eviction) are impractical because of the likely negative impact upon the residents of the facility. Consequently, seeking the appointment of a receiver is often the best recourse for a landlord because it enables the landlord to divest the OPCO from control of the facility, stabilize operations, obtain necessary financing to pay wages of employees and critical vendors, and ultimately oversee a process through which the business is transitioned to a new operator. At the same time, importantly, the receiver can ensure that resident care is carefully monitored and maintained (or improved, if necessary).

It is common for a distressed OPCO to suffer from poor capitalization. In such circumstance, the receiver may require financing (often on an exigent basis) to meet expenses that are critical to maintaining resident care (such as paying employee wages and claims of critical vendors for items such as pharmacy supplies, dining and housekeeping expenses). Urgent needs may also include capital improvements to the physical plant which are necessary to ensure resident safety and welfare.

Because obtaining the necessary financing in a distressed situation can be difficult, it is not uncommon for the landlord to provide financing to the receiver. The business rationale for this is driven by the desire of the PROPCO to maintain the value of its asset (which often is purpose-built to operate a skilled nursing facility) and because obtaining third-party financing can be challenging and costly. Where a landlord expects that the receiver will need to obtain financing to stabilize operations, the landlord should ensure that the receivership order authorizes the receiver to borrow funds on a senior secured basis from the landlord with a right to immediate repayment should the receivership be terminated.

Other Important Strategic Considerations for Landlords

When the OPCO has become delinquent on rent and is in default of its lease, it is important for the landlord to exercise the rights available to it including terminating the lease and accelerating the amounts owed. Termination of the lease is essential to protect against a defendant who seeks to terminate the receivership and divest the receiver following his or her appointment. That is to say, if the defendant no longer has a legal right of occupancy because the lease has been terminated its recourse to terminate the receivership should be significantly curtailed.

Another important strategic consideration for landlords is to ensure that the lease agreement vests the property and assets of the facility with the landlord and not the OPCO. This can be a critical issue where the receiver proposes to sell the facility — both its property and assets — as a going concern. To the extent that an operating company retains ownership of a facility’s assets, it will have standing to oppose the sale. On the other hand, where all of the assets are controlled by the landlord, it alone should have consent over whether the facility is sold as an integrated going concern and on what terms.

Considerations for the OPCO and Its Principals

Upon commencement of an action to appoint a receiver, the principals of the operating company should carefully consider whether they will resist or consent to the appointment of the receiver. In this situation, the principals are well-advised to realistically analyze whether they have the financial resources to stabilize operations, pay critical vendors, and maintain a high degree of resident care. The accrual and non-payment of certain types of liabilities could result in exposure personally for officers and directors of the operating company. These include, for example, unpaid wages and related employment taxes. In addition, the principals may also be guarantors of the lease, which could also trigger personal liability. It may behoove principals in this situation to try to negotiate a release of their guaranties in exchange for consenting to the appointment of the receiver and cooperation with the transition of the business to the receiver’s control. At a minimum, cooperation may engender goodwill with the plaintiff and defuse an otherwise acrimonious situation.

Conclusion

Operating a skilled nursing facility in Massachusetts is a complex and capital-intensive endeavor, which is compounded in a financially distressed situation. The parties involved — whether it be the operator, landlord, or other creditors — are well-advised to carefully consider whether the appointment of a receiver would be in their best interest and the interest of the residents. Reliance on professionals with expertise in both health care law and Massachusetts receivership proceedings is of paramount importance in such situations.