GRAND TRAVERSE LAWSUIT: Pavilions agreement with PACE North disputed in court

Jul. 7—TRAVERSE CITY — Officials with a county-owned nursing home and its charitable foundation are suing an organization they helped start, accusing PACE North of trying to dodge about $5 million in start-up and operating debt.

A complaint filed in 13th Circuit Court accuses the PACE North board of seeking to terminate a management agreement with Grand Traverse Pavilions as a way to avoid the debt.

"PACE North's actions represent a contrived scheme to undermine the DHHS Board in an attempt to terminate the Management Agreement without any basis for doing so because they don't like the bargained-for deal," the complaint, filed June 30, states.

Exhibits attached to the complaint include a $2.96 million promissory note from National Cooperative Bank listing PACE North as borrower and signed by Jerry Worden, then-President of PACE North.

Current PACE North board president, Betsy Aderholdt, did not return a call seeking comment Thursday.

Further accounting on the debt was not specified in court documents.

PACE North on Wednesday did post an unsigned statement in response to the lawsuit on the organization's website.

"PACE North has learned of reports from the media that the Grand Traverse Department of Health and Human Services board (DHHS) has filed a lawsuit against PACE North," the statement reads.

"PACE North has not received any notice of legal action taken by the Grand Traverse Pavilions or the DHHS board of directors. When we receive information and review it, we will post a response. Please know that serving the participants enrolled in PACE North is our sole focus and remains our highest priority, there will be no impact on care or services received."

PACE North Executive Director Nicole Farkas replied to a reporter's questions Thursday with an updated media statement:

"The PACE North board and staff attempted to collaboratively revise the Management Agreement to address well substantiated issues over the last 18 months," the statement, dated July 6, reads.

"PACE North was met with persistent resistance and delay from Grand Traverse Pavilions, necessitating the PACE North board's action in recommending the termination of the Management Agreement to definitively eliminate known exposure. The PACE North Board remains open to finding an alternative, legally-compliant approach to addressing the Grand Traverse Pavilion's desire to be repaid its initial investment in the PACE North start up — use of an unconscionable Management Agreement is simply not a fair means to accomplish this task."

The local DHHS board oversees operation of the Pavilions, and this board, along with the Pavilions charitable foundation, are suing PACE North for breach of contract and unjust enrichment, court records show.

DHHS Chair Cecil McNally referenced the $5 million figure in a press release.

McNally said a management agreement between the Pavilions and PACE North called for the Pavilions to subsidize PACE North's start-up costs beginning in about 2016.

That money, McNally said, was a loan — not a gift — and once PACE North reached certain financial milestones, they were supposed to begin repayment.

"That has not happened," McNally said.

PACE North, in its July 6 statement, disputed this, stating, "the Management Agreement is mischaracterized in the press release as a document for repayment of an initial investment by GTP. Rather, the plain language of the Management Agreement sets forth administrative services GTP will provide in exchange for a fee. PACE North is being overcharged for the few administrative services it does receive and has not received other services listed in the Management Agreement."

PACE stands for "Program of All Inclusive Care for the Elderly," and is a state-organized, federally funded program that aims to assist seniors who want to stay in their homes by providing them with specialized, center-based care.

PACE North is a private nonprofit that accepts Medicare, Medicaid, and private pay, and buses seniors from Benzie, Grand Traverse, Kalkaska, Leelanau and Wexford counties, to the PACE North day center on Garfield Road.

Grand Traverse Pavilions and PACE North have been closely intertwined since Pavilions leadership first began a PACE-related organizing effort in 2010, including entering into a 20-year management agreement, sharing a website template and sharing certain leadership and personnel.

For example, McNally and another current DHHS board member, Mary Marois, also serve on the PACE board, as does Grand Traverse Pavilions director, Rose Coleman.

The county owns the Garfield Road building that serves as the PACE North day center, and records show the lease lists Grand Traverse Pavilions as the lessee, PACE North as the sublessee, essentially making the nursing home PACE North's landlord.

PACE North would pay about $3,500 twice a year to Grand Traverse Pavilions for use of the 18,000-square-foot building, and also would pay for repairs and maintenance, plus property and liability insurance.

The building required extensive renovation, at a cost of $3.5 million, to house the PACE North program and the Pavilions' foundation helped fundraise, as previously reported.

This relationship appeared to function mostly satisfactorily, though some Grand Traverse County commissioners in 2019 and 2020 were critical of the arrangement and of PACE North's initially low participant numbers.

Some participants complained of the long bus ride, especially in winter weather, though others previously told the Record-Eagle they liked the friendly atmosphere at the day center and the specialized services.

Things began to unravel on May 27, the complaint states, days before a special meeting of the PACE North board, after Farkas sent an email to board members with an attached resolution that, if passed, would terminate the management agreement.

According to an email Farkas sent Coleman, the PACE North board reportedly did pass the resolution.

Farkas then emailed the Pavilions stating the agreement would end July 30, though, according to the complaint, she did not specify a reason as required by the agreement.

"Hello Rose," Farkas wrote to Coleman. "At the 5/31/23 board meeting that Cecil, Mary and you were present for, the "Resolutions of the Board of Directors of PACE North" passed. There was an amendment proposed which passed stating that termination of the agreement would be 60 days from 5/31/23."

The agreement does provide for termination in the event certain conditions apply, such as accrual of unpaid fees of $1 million or more, insolvency by either party, or if either party's tax exemption is in jeopardy.

The complaint filed in court, however, states that none were cited, as did a June 20 response to Farkas from Coleman.

"Hi Nikki, You noted that the Management Agreement ends on 7/30, but GTP has not received formal written notice from PACE regarding its intent to terminate the Management Agreement. We will not address this until GTP receives formal written notice regarding this issue from PACE in accordance with the Management Agreement. Thank you, Rose"

Grand Traverse Pavilions is county-owned, funded with taxpayer money so their monthly DHHS board meetings are open to the public and their meeting minutes are posted online and available to public view.

PACE North, however, is a private nonprofit, so their meeting minutes are not required to be public and are not subject to the Freedom of Information Act, even though the organization receives a portion of its operating support in public money.

A management agreement between the two organizations, first signed Oct. 1, 2018, and again Dec. 29, 2022, lists PACE North as "Owner" and Grand Traverse Pavilions as "Manager" and states PACE North began subleasing the Garfield Road building Aug. 1, 2017, though it did not begin providing services until October 2019.

The contract states the manager selected by the Pavilions will run the business portion of PACE North, including purchasing, technology, accounting, etc., and the PACE North board will hire an executive director, a medical director and medical staff, will maintain appropriate insurance, follow all applicable laws, reimburse manager for expenses, and retain "all income and other monies received from operation of the Program."

PACE North, this agreement states, would pay Grand Traverse Pavilions a percent of its gross revenues, depending on the number of participants who enrolled in the program.

A remote hearing is scheduled July 17 in 13th Circuit Court at 4:30 p.m.

Plaintiffs are seeking financial damages and a permanent injunction against PACE North from terminating the management contract outside those reasons specified in the agreement.