August 22, 2022 – The Debtor's Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors' August 4th amended debtor-in-possession ("DIP") financing motion, arguing that it provides bond trustee UMB Bank, N.A. ("UMB Bank," also the Debtors' DIP lender) with control over the Debtors' ongoing litigation with its landlord; that litigation not only "an important asset of the estate" but its resolution/settlement also "the single most important factor in determining the future viability of Edgemere."
UMB Bank's efforts to use proposed amendments to the DIP credit agreement to control the landlord litigation, the Committee continues, amount to an "end run" around an earlier Court decision rebuffing efforts by UMB Bank "to intervene in the Landlord Litigation in order to assert their own causes of action."
The crux of the matter here are the divergent interests of (i) UMB Bank (and the bondholders it represents), which first and foremost wants to protect amounts loaned to the Debtors, (ii) the interests of unsecured creditors (including residents and/or their estates who have made deposits in respect of housing) and (iii) the Debtors' residents, who would be forced to relocate in the event that the Debtors' operations ceased; with the recovery pie not likely to be large enough to satisfy creditor groups unless the landlord litigation is "extremely successful."
Short of that extremely successful outcome, "the Debtor may be forced to explore a settlement that may not allow a meaningful dividend to creditors, but will at least allow Edgemere to continue operations and to avoid a forced relocation of over 300 residents." That eventuality, the Committee argues, would not be acceptable to "Bondholders [who] therefore want to position themselves to make it as difficult as possible for the Debtor to agree to any such 'save Edgemere' settlement."
Background
On April 14, 2022, Northwest Senior Housing Corporation, doing business as Edgemere, and one affiliated Debtor (“Northwest Senior Housing” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn.
At filing, the Debtors, a luxury senior living retirement community in Dallas, Texas, noted that it "has been challenged by the COVID-19 Pandemic" and COVID's knock on impact on occupancy rates and ultimately its "ability to honor its long-term debt obligations and maintain its operational stability."
On June 23rd, the Court issued a final order authorizing the Debtors to access the $8.1mn balance of what is in total $10.1mn DIP financing being provided by UMB Bank, with the Debtor having received access to a first $2.0mn tranche on April 20th.
On August 4th, the Debtors filed a motion to amend the final DIP financing order by revising milestones and providing with UMB Bank, N.A. certain rights and remedies in connection with a Landlord Action [Docket No. 512].
Committee Objection
The objection [Docket No. 557] explains, “As this Court knows, the Landlord Litigation is an important asset of the estate. The resolution or settlement of the Landlord Litigation will be the single most important factor in determining the future viability of Edgemere.
The Bondholders are apparently not willing to allow the Debtor, as a fiduciary of the estate, the authority to prosecute, and to negotiate the potential settlement of, the Landlord Litigation on behalf of the estate without their material participation, influence and indirect control
The Bondholders first requested permission to intervene in the Landlord Litigation in order to assert their own causes of action. Intervention would have effectively provided the Bondholders with veto power over any attempt by the Debtor to settle the Landlord Litigation without their consent (the Landlord would not have settled without a release from both plaintiffs if the Bondholders would have been allowed to intervene). The Court denied the intervention, correctly finding that the Debtor, as a fiduciary to all creditors of the estate, adequately represented the interest of the estate in the prosecution of that litigation.
The Bondholders are now making a second attempt to obtain improper influence and indirect control over the Landlord Litigation. The Bondholders will only approve the Debtor’s Plan (required in the DIP Loan documents) if the Debtor agrees to amend the DIP Loan Agreement to allow the Bondholders improper influence and indirect control over the Landlord Litigation. The proposed DIP Order amendments provide the Bondholders:
- the right to review and comment on pleadings before filed;
- the right to review discovery and attend depositions;
- the right to participate in all settlement discussions and mediations; and
- the Debtor’s promise that it will not settle the Landlord Litigation without the Bondholders’ prior consent.
The Debtor has agreed to not settle the litigation without Bondholder approval, unless it is compelled to do so in the fulfillment of its fiduciary duty owed to the estate. The Bondholders, apparently concerned about this ‘fiduciary out,’ FN have therefore required the Debtor to agree to terminate plan exclusivity for the Bondholders only if the Debtor exercises its fiduciary out and settles the litigation without the Bondholders’ consent.
The proposed DIP Order Amendments are an attempt to make an ‘end run’ around this Court’s order denying the Bondholders’ intervention motion. The Bondholders are concerned that the Debtor will compromise and settle the Landlord Litigation in a way that is not as advantageous to the Bondholders as they might like. Despite the opportunity for notice and opportunity to object to any proposed settlement pursuant to Bankruptcy Rule 9019, the Bondholders want the right to participate in the litigation and to control any proposed settlement. If the Debtor decides it must settle without their consent in order to fulfill its fiduciary duty to the estate, the Bondholders want plan exclusivity to terminate for the Bondholders only.
The proposed amendments to the DIP Order provide the Bondholders with inappropriate influence and indirect control over the Landlord Litigation. The Bondholders have no fiduciary duty to the estate, and they should not be provided the influence and indirect control requested over such an important asset of the estate. The Bondholders’ interests are protected by their right to notice and an opportunity to object to any proposed settlement under Bankruptcy Rule 9019. The Motion for Authority to Amend the DIP Financing Order should therefore be denied.”
FN: It is unclear whether the “fiduciary out” is available in the sole discretion of the Debtor, or is subject to dispute and litigation by the Bondholders and, if so, if the Court will be responsible to make that determination.
The objection continues: "Why are the Bondholders So Determined to Control the Landlord Litigation?
The Bondholders know the Landlord Litigation has to be extremely successful in order for the Debtor to pay a meaningful dividend to the Bondholders. The Committee knows the Landlord Litigation has to be extremely successful in order for the Debtor to repay the entrance feesFN8.
FN8 The only way for Edgemere to generate enough revenue to pay any meaningful dividend to the Bondholders, or to refund the resident entrance fees, is for Edgemere to continue using the entrance fee model. The only way for Edgemere to be able to continue using the entrance fee model is with a significant modification of the Ground Lease, as requested in the Landlord Litigation and as made a condition precedent to the Debtor’s proposed Plan.
The Debtor, in fulfilling its fiduciary duty to the estate and the residents, must continue to monitor and assess the likelihood of success of the Landlord Litigation and, if it appears that its request for such extraordinary relief is not probable, the Debtor may be forced to explore a settlement that may not allow a meaningful dividend to creditors, but will at least allow Edgemere to continue operations and to avoid a forced relocation of over 300 residents.
The Bondholders would not be interested in a settlement that ensures the continued operations of Edgemere but which provides no divided to the Bondholders. The Bondholders therefore want to position themselves to make it as difficult as possible for the Debtor to agree to any such 'save Edgemere' settlement. Having failed in their request to intervene as a party, they now want to do this by obtaining the right to review pleadings before filed, to review discovery, to 'participate' in all settlement discussions, and to prohibit settlement without their permission. If the Debtor does rely on its 'fiduciary out' and settles without their permission, the Bondholders want the right to file what will essentially be a competing plan that will compete with the proposed settlement and make approval of the settlement more difficult and expensive.
These requested rights provide the Bondholders with improper influence and indirect control over the Landlord Litigation and the settlement process, and should be denied. The Bondholders rights are more than protected by their right to notice and an opportunity to object to any proposed motion to approve any proposed settlement pursuant to Bankruptcy Rule 9019."
Landlord Action
On April 14, 2022, the Debtor filed a complaint against Intercity Investment Properties, Inc., and Kong Capital, LLC. The Complaint explains: "Since 1999, Edgemere has owned and operated a continuing care retirement community (the 'Community' known as a 'CCRC') in the Dallas metropolitan area.
Over the course of the last several months, Defendants have engaged in unprecedented and unlawful activities attempting to destroy Edgemere’s business. Despite being under a non-disclosure agreement with Edgemere, and in possession of Edgemere’s confidential information, Defendants directly contacted the press, Edgemere’s residents and Texas regulators without notice to Edgemere, all for the singular purpose of trying to manufacture an improper basis to terminate Intercity’s 52-year ground lease with Edgemere and wrongfully retake the property on which the Community sits – all so that they can repurpose it to make a windfall profit.
Defendants’ combined efforts would not only destroy Edgemere’s business, but also directly endanger the well-being of the more than 400 senior citizens that depend on Edgemere to provide both a safe place to live and certain health care services. Defendants’ actions would result in the loss of the significant entrance fee deposits paid by residents to become part of the Community, the loss of their homes, and the loss of the health care services upon which they rely. Defendants’ unlawful conduct has significantly damaged Edgemere’s business and the Community, and Edgemere is entitled to significant compensatory and exemplary (including punitive) damages as well as equitable relief to ensure Edgemere’s continued operations without Defendants’ interference."
Prepetition Indebtedness
As of the Petition Date, the Debtors owe a total of approximately $112 million consisting of bond obligations and unsecured obligations (the “Bond Obligations”). The following is an approximate overview of the Debtors’ consolidated capital structure as of the Petition Date:
About the Debtors
According to the Debtors: “Edgemere opened its doors in 2001, and immediately set a new standard for luxury senior living retirement communities in North Texas. It was the first Life Care community to land in Dallas and, for almost a generation now, it’s offered residents an unparalleled set of benefits.
Edgemere’s drive to deliver a top-tier experience is reflective of our vision for excellence in senior living. It’s a vision shared across all 15 members of the Lifespace Communities® family. Together, our missions remain focused on one thing — celebrating the lives of seniors in everything we do. This simple notion has led Lifespace and its multistate system of senior living communities to experience decades of success and financial stability and, even more importantly, earn the trust of thousands of team members, residents and their families.
Additionally, Edgemere’s status as a 501(c)(3) not-for-profit organization means all revenues are reinvested into the community. This not only fuels the development of better services, amenities and opportunities for our residents, but also ensures that in the event of a financial hardship that’s no fault of your own, you won’t be asked to leave the community."
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