Clare Oaks – Bondholders File Chapter 11 Plan of Reorganization as Residents of Retirement Community Face Dangerous Choice

May 15, 2020 – Bondholders Lapis Advisers, LP and Amundi Pioneer Asset Management, Inc. (together, the “Plan Sponsors”) filed a Chapter 11 Plan and a related Disclosure Statement [Docket Nos. 364 and 365, respectively]; and further filed a motion requesting Court approval of (i) their Disclosure Statement (ii) Plan solicitation and voting procedures and (iii) a proposed schedule culminating in a July 28th Plan confirmation hearing [Docket No. 366].

Overview of the Plan

The crux of this Plan is a choice to be made by certain community residents as to whether they will accept modifications to their residency agreements relating to the return of deposits. If they do (ie, if they vote in favor of the Plan), "the Debtor would continue to operate substantially as it did prior to the bankruptcy." If they don't, the Debtors' assets will be sold and in all probability all claims of current and former residents will be worth $0. Some choice.

The change that would preserve the Debtors' status quo, is not, however, without risk to residents. If agreed to as the Debtors urge, it would mean that a resident (or as is often the case, the resident's estate) would not get their substantial deposit back until after a new resident has occupied a vacated unit and provided the Debtors with a new deposit. As it currently stands, the Debtors have to return deposits after a certain period of time has passed (usually 12 or 24 months) regardless of whether the Debtors have found a replacement resident (and deposit). The Debtors also engaged in several deposit-related paractices which meant that they collected new deposits well before returning old ones, effectively collecting two deposits for a single unit, this making the Debtors highly vulnerable to a period when they cannot attract new residents but still have to pay out deposits to old ones. This being exactly why the Debtors had to file for bankruptcy protection in the first place.  

Not highlighted for these senior residents (including in risk factors) is the obvious concern that the financially strapped Debtors, operating in an admittedly highly competitive market and after a period during which the Debtors have under-invested in the retirement community, might not find replacement residents for a long time…if at all.

This is an alarming development for the retirement community business model, with deposits and residents' wellbeing/rights to date generally considered sacrosanct, even in the bankruptcy context. The result of this development will undoubtedly mean that a community's ability to attract new residents will increasingly depend on the apparent financial health (and waiting list) of that retirement community; new residents taking spots where the likelihood of a quick replacement (if/when they leave) is manifestly evident by a healthy waiting list.

The Disclosure statement provides, “The Plan provides for two alternative scenarios. Under the first scenario, the Debtor’s debt obligations would be restructured and the Debtor would continue to operate substantially as it did prior to the bankruptcy. The Debtor would continue to operate its independent living units and its Health Center units, although it would convert some of the skilled nursing units to assisted living units. The Residency Agreements of IL Residents would undergo a minor modification to allow refund obligations to be paid on an alternative schedule, but would otherwise remain the same. The refund obligations owed to Health Center Residents would be paid in full before principal payments on account of the new 2020 Bonds, and refund obligations owed to Former Resident would be paid in full from Excess Cash.

The second possible scenario under the Plan involves a sale of the Clare Oaks Campus to Lapis Advisers, LP or its designee (the ‘Purchaser’) for a purchase price of $40,000,000, subject to the ability of other parties to submit higher offers in accordance with the procedures set forth in Article XV of this Disclosure Statement. The net proceeds of such sale will be used to pay, at Closing, first, any payments required by the Bankruptcy Code to be made by the Effective Date, and second, to UMB Bank, N.A., as master trustee with respect to the 2012 Bonds (the ‘Master Trustee’) on account of the 2012 Bonds. Any assets not sold shall be transferred to the Liquidating Trust to be administered by the Liquidating Trustee and distributed pursuant to the terms and conditions of the Liquidating Trust Agreement.

In the opinion of the Plan Sponsors, the first of the two above scenarios is far preferable as it permits Clare Oaks to generally continue to operate as it has in the past. The decision of whether this first scenario is possible, however, will be made by the IL Residents. All IL Residents will be asked to elect to enter into Modified Residency Agreements that, as described below, are the same as the current Residency Agreements except for the timing of payment of Refund obligations. If ninety-five percent (95%) of the IL Residents agree to this change, and the other conditions to reorganization are met (including that Allowed Professional Fees do not exceed the Professional Fee Claims Cap), then a reorganization is possible, and the reorganization provisions of the Plan become operable. If not, the Plan pivots to the Sale Transaction scenario.

Under the proposed restructuring option, the Reorganized Debtor will be more financially secure. As set forth in greater detail below, key features of the Plan Sponsors’ restructuring scenario include:

1. a new $5 million investment by the Plan Sponsors for critical capital investments to improve the community, including converting many of the underutilized skilled nursing beds to assisted living units, and to provide a stabilized operating liquidity for the benefit of all residents;
2. new professional management by Evergreen Senior Living Properties, LLC (‘Evergreen’), a management company with a proven record of success of operating continuing care retirement communities such as Clare Oaks; and
3. a restructuring of the secured debt to significantly reduce the aggregate principal bond debt from over $83.6 million to approximately $50 million in principal, much of which is subordinated so that it will not be required to be paid unless cash flows permit.

In addition, under the restructuring scenario, the Plan Sponsors have agreed to defer all principal payments on the new 2020 Bonds until the Refund obligations owed to Health Center Residents (after they leave the community and begin to receive payments) have been fully paid.

The Plan Sponsors believe that the Plan is the best and only viable option for Clare Oaks. No other plan will provide the much needed multi-million dollar investment necessary to revitalize the Clare Oaks Campus. No other Plan will provide for the voluntary deferment of all principal payments until all amounts due to Health Center Residents are paid. And no other Plan will have the support of the Bondholders, who hold a first-priority security interest on all of the Debtor’s assets. While the Plan Sponsors have not yet reached agreement on the terms of the Plan with the Debtor and the Committee, the Plan Sponsors are optimistic that they will be able to support the Plan as it is the only viable alternative to liquidation under chapter 7 of the Bankruptcy Code.”

The following is summary of classes, claims, voting rights and expected recoveries (Defined terms are as in the Plan and/or Disclosure Statement):

• Class 1 (“Secured Bond Claim”) is impaired and entitled to vote on the Plan. The estimated Claims/ Interests ranges is 2012A-1: $5,740,000, 2012A-2: $2,875,000, 2012B: $39,991,090. Projected recovery if modification Election threshold is met 2012A-1: 100%, 2012A-2: 100%, 2012B: 49%-84%. Projected recovery if modification election threshold is not met 2012A-1: 100%, 2012A-2: 100%, 2012B: 60% – 70%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated Claims/ Interests ranges is $0, Projected recovery if modification election threshold is met 100%, Projected recovery if modification election threshold is not met 100%.
• Class 3 (“Independent Living Residents”) is impaired only for those IL Residents who are not willing to modify their Residency Agreements as set forth in the Plan, or if the Modification Election Threshold is not met. Voting Rights: IL Residents must first elect if they are willing to modify their Residency Agreements as set forth in the Plan. If a particular IL Resident does not accept a Modified Residency Agreement, then that IL Resident is eligible to vote for or against the Plan. However, if a particular IL Resident elects to accept a Modified Residency Agreement, they do not vote on the Plan. The estimated Claims/ Interests ranges is N/A, Projected recovery if modification election threshold is met N/A, Projected recovery if modification election threshold is not met N/A.
• Class 4 (“Health Center Resident Claims”) is impaired and entitled to vote on the Plan. The estimated Claims/ Interests ranges is $7,754,808, Projected recovery if modification election threshold is met 100%, Projected recovery if modification election threshold is not met $0.
• Class 5 (“Former Resident Claims”) is impaired and entitled to vote on the Plan. The estimated Claims/ Interests ranges is $6,166,336 – $6,916,936, Projected recovery if modification election threshold is met 100%, Projected recovery if modification election threshold is not met $0.
• Class 6 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated Claims/ Interests ranges is $629,040 – $875,370, Projected recovery if modification election threshold is met up to 5%, Projected recovery if modification election threshold is not met $0.
• Class 7 (“Series 2012C Bond Claim”) is impaired and entitled to vote on the Plan. The estimated Claims/ Interests ranges is $35,009,974, Projected recovery if modification election threshold is met up to 1%, Projected recovery if modification election threshold is not met $0.
• Class 8 (“Interests”) is impaired, deemed to reject, and not entitled to vote on the Plan. The estimated Claims/ Interests ranges is unknown, Projected recovery if modification election threshold is met $0, Projected recovery if modification election threshold is not met $0.

The Disclosure Statement attached the following documents:

• Exhibits A: Plan (filed separately)
• Exhibits B: Liquidation Analysis
• Exhibits C: Plan Projections
• Exhibits D: Ballots

Proposed Key Dates:

• Objection deadline on the Disclosure Statement: June 12, 2020
• Hearing on approval of the Disclosure Statement: June 16, 2020
• Voting Deadline: July 17, 2020
• Auction (if necessary): July 23, 2020 [5 days prior to the Confirmation Hearing]
• Confirmation Hearing on the Bondholders’ Plan: July 28, 2020

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