The West Hollywood Owner of Klean Recovery Centers Struggles with $7.8 Million in Debt

The owner of Klean, the addiction recovery service provider whose headquarters is in West Hollywood, is in the middle of a legal battle with its lenders, who have asked a judge to appoint an independent receiver to manage the financially challenged organization.

Since 2009, Klean has operated a residential addiction treatment facility in West Hollywood at 850 Hilldale Ave. That facility is expected to close no later than June of next year and employees have already complained about not being paid.  Klean also offers outpatient services in West Hollywood and in Astoria and Bend, Ore., where similar complaints have been made. It operates a 50-bed residential treatment facility in Long Beach, Wash., and has closed one in La Pine, Ore.

The West Hollywood facility, which has 26 beds, is said to bill about $30,000 a month to insurance companies for services it provides each resident. Klean also provides free residential treatment to as many as three West Hollywood residents a month, a condition required as part of a settlement of a lawsuit between the City of West Hollywood and Klean’s owners, White Rabbit Partners, in which the city claimed White Rabbit illegally occupied rent stabilized apartment buildings in opening the Hilldale facility.

The current lawsuit was filed by Presidential Healthcare Credit Corporation, a lender based in Alpharetta, Ga. In 2013, PHCC entered an agreement with companies controlling White Rabbit Partners and their managers to provide a revolving loan of $2.9 million and a set loan of $1.1 million. Andrew Spanswick, Klean’s founder and CEO; Alan Jason Coe, a Klean co-founder and its medical director, and Mark Honzel, a doctor who is a Klean co-owner, personally guaranteed repayment of the loans.

In the lawsuit, filed in U.S. District Court in California’s Central District, PHCC claims as of Oct. 26, White Rabbit Partners owed $7,970,057, which includes $995,178 that it advanced to White Rabbit to keep it in business while it looked for other financing options.

PHCC argues that the court must approve appointment of a receiver to wind down Klean’s operations, which would include finding other facilities for its patients. PHCC also alleges that Klean’s management may have used money it has received to fund its own operations rather than pay what it owes on the loans.

White Rabbit has argued against the appointment of a receiver for several reasons. For one thing, it says, “real damage will occur to WRP’s patients if a receiver is appointed. The patients suffer from a myriad of psychiatric and behavioral disorders. The patients require a regular routine and to interact with the fewest different staff members. The upheaval created by the abrupt appointment of a receiver and loss of employees will likely threaten their fragile
sobriety. “

“Our patient population is extremely high risk for suicide, homicide and/or overdosing on prescription medications and/or street drugs. Putting patients through more instability and effectually wasting many days of the therapeutic process/practice, is ethically and morally irresponsible.”

White Rabbit also argues that Spanswick and the company’s chief financial officer were unaware that an agreement with PHCC in May for a quick loan to fund the company’s payroll had a provision that would allow PHCC to petition for a receiver to be appointed.

“I was out of the office and recovering from a hospital procedure and on medication the day that Plaintiff required the Forbearance Agreement to be signed,” Spanswick said in a document filed with the court. “Likewise Klean’s General Counsel Phil Sbaratta was away that day, tending to family matters in Boston. Due to the urgency of the Forbearance Agreement, our then Chief Operating Officer, Darryl Olivier (“Olivier”) executed the Forbearance Agreement without me having a chance to review it or have it reviewed by counsel.”

White Rabbit notes that it has been looking for other investors and has considered a possible merger to keep the business alive. It also argues that Klean expects to receive $1 million to 1.4 million a month from its recent operations, which it says would allow it to meet some of its debt obligations and, with staff cuts, “maintain the safety and care of its clients.”

In a statement filed with the court, Spanswick said PHCC has swallowed up all of Klean’s revenue to cover the loan payments, requiring him and the other owners to put $500,000 of their own money into the business to keep it going. Spanswick said he has cut his pay by 90%.

To date, the court has declined to grant PHCC’s request that it appoint a receiver. Instead it has asked both sides to find a way for PHCC to conduct an audit of Klean’s finances to determine whether or not the value of Klean actually has declined so much that PHCC’s loan is at risk. At that time the judge will consider whether to appoint a receiver.