September 14, 2022 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) has added its voice to that of prepetition bond trustee and debtor-in-possession lender (“DIP”) lender UMB Bank, N.A. (the "Bond Trustee") and objected to the August 12th case dismissal motion filed by landlord Intercity Investment Properties, Inc. (the “Landlord”) [Docket No. 627].
In its September 13th objection [Docket No. 622, which we cover separately], UMB Bank argued: “The Motion to Dismiss is a colorful, performative pleading that exemplifies the Landlord’s ‘scorched-earth’ approach in these cases. The primary justification for dismissal is the Debtors’ ‘fairy tale’ Plan and a variety of premature confirmation objections associated therewith. The secondary justification is the oft-repeated, yet debunked, assertion of administrative insolvency. Neither argument constitutes ‘cause’ to dismiss these cases or otherwise justifies the ‘drastic’ relief the Landlord seeks."
The Committee objection largely mirrors that of the Bond Trustee arguing that:
- the dismissal motion restates arguments posited in parallel litigation, litigation that the bankruptcy Court has already held should continue;
- the dismissal motion fails to recognize the possibility of a viable non-Debtor Plan (the Committee suggests that it and other stakeholders are considering one);
- the Landlord fails in its arguments that mounting bankruptcy administrative costs presently justify a dismissal; and
- the Landlord turns a blind eye to the most important stakeholders in these csaes, the Debtors' 350 residents ("Dismissing these Chapter 11 Cases does nothing to assist the Debtors in reorganizing and remaining viable for the benefit of those residents and their community they call home and is not in the best interests of the Debtors or their estates").
The Committee objection [Docket No. 627] states, “The Landlord cannot establish ‘cause’ at this point in these Chapter 11 Cases for dismissal.
First, in characterizing the current Plan as ‘unconfirmable’ with terms that are ‘illegal’ the Motion to Dismiss essentially mirrors pleadings filed, and arguments made, in the litigation between the Debtors and the Landlord. Notably, since the Motion to Dismiss was filed, the Court issued its Order Granting in Part and Denying in Part the Defendants’ Motion to Dismiss the Complaint for Failure to State a Claim11 that rejected many of those same arguments, mainly that the relief the Debtors seek through the litigation (and upon which the Plan is based) is impossible and/or illegal, and they cannot attain that which they seek. There, the Court ruled that the litigation should continue, as the Debtors have stated plausible claims for relief. For the time being, these Chapter 11 Cases should continue, as well, to allow the Debtors to pursue those claims.
Second, even accepting as true the Landlord’s contentions regarding the current Plan, the Motion to Dismiss fails to recognize the possibility of a different Plan that may be proposed somewhere down the line that could successfully reorganize the Debtors. The Committee is actively engaged with stakeholders in contingency planning for potential alternate restructuring scenarios that may only be possible in bankruptcy, and the bankruptcy process is designed to allow such contingencies to be formulated and pursued. The Landlord’s ‘one strike and you’re out’ premise is nonsensical
Third, while the Committee is concerned about the accrual and payment of administrative expenses in these Chapter 11 Cases, the accrual of unpaid administrative expenses, by itself, is not equivalent to the requisite ‘negative cash flow or declining asset values’ nor does it constitute cause to dismiss otherwise viable bankruptcy cases. None of the cases cited by the Landlord support this proposition. Moreover, § 1112(b)(4)(A), which contains the ‘substantial or continuing loss’ prong, requires both the aforementioned loss and ‘the absence of a reasonable likelihood of reorganization.’ Even if the Landlord could demonstrate the former, it cannot do so with respect to the latter as discussed above.
Finally, the Landlord cannot demonstrate that dismissal—and a return to the prepetition status quo as between the Debtors and the Landlord—is in the best interests of the estate. As the Court and the parties are well aware, the Debtors operate a continuing-care retirement community home to more than 350 current residents, and their safety and continued care should be the highest priority of every party involved in these Chapter 11 Cases. Dismissing these Chapter 11 Cases does nothing to assist the Debtors in reorganizing and remaining viable for the benefit of those residents and their community they call home and is not in the best interests of the Debtors or their estates. It does, however, make a ‘Successful Outcome’ less likely, which is why the Motion to Dismiss was really filed in the first place.”
Dismissal Motion
The Landlord argued in its motion to dismiss that the Debtors' "flawed premise that the Lease…can be modified by the Plan" amounts to "a campaign of deception before this Court and the Edgemere’s residents by obscuring the facts and creating unrealistic expectations for both…that the Debtors and their Sponsor (Lifespace Communities, Inc. (‘Lifespace’)) are promoting a fantasy" and that the "grim reality is that the Debtors are hemorrhaging cash, squandering resources and lack sufficient funds to operate in chapter 11 under their current DIP Loan until the entry of a final order in the Adversary Proceeding."
Continuing as to the Debtors' expectation that they will be able to modify the lease (i.e., extend its term and lower the rent) using Chapter 11, the Landlord argues: "It is black letter bankruptcy law, engraved in stone, that a debtor cannot pick and choose which elements of an unexpired lease to assume or reject. It must assume or reject the lease in its entirety [and]…The Lease cannot be modified by the Plan. In fact, the Bankruptcy Code unequivocally requires that the Lease be assumed (or rejected) as is in its entirety. Once the projections attached as Exhibit 4 to the Disclosure Statement (the ‘Projections’) are modified to reflect this reality, it becomes instantly clear that the Plan is not feasible."
The dismissal motion [Docket No. 541] states, “The Debtors continue to engage in a campaign of deception before this Court and the Edgemere’s residents by obscuring the facts and creating unrealistic expectations for both. The Debtors’ recently filed Plan and Disclosure Statement are predicated on a Successful Outcome that is untethered to legal (or economic) realities, making it apparent that the Debtors and their Sponsor (Lifespace Communities, Inc. (‘Lifespace’)) are promoting a fantasy. Because there is no chance of a Successful Outcome as a matter of law, the Plan is unconfirmable and the Chapter 11 Cases must be dismissed immediately.
While like any good story, there are figments of truth, but the Plan reads more like a Disney fairy tale—describing a fictional world in which the Debtors wish to live, rather than the real world in which the Debtors operate. The Plan gives residents of the Edgemere a false sense of security that their deposits are ‘safe,’ based upon the flawed premise that the Lease (as defined herein) can be modified by the Plan. It cannot. The Lease cannot be modified by the Plan. In fact, the Bankruptcy Code unequivocally requires that the Lease be assumed (or rejected) as is in its entirety. Once the projections attached as Exhibit 4 to the Disclosure Statement (the ‘Projections’) are modified to reflect this reality, it becomes instantly clear that the Plan is not feasible. Moreover, neither the obligation to pay postpetition rent nor the obligation to pay the post Effective Date obligations to the counterparty of an assumed lease can be equitably subordinated.
Dismissal is also appropriate when, as here, the ability to consider confirmation of the Plan is entirely speculative. The Debtor’s Successful Outcome disregards (a) the pending motion to dismiss the Adversary Proceeding; (b) to the extent not dismissed in its entirety, the possibility that the Court does not have jurisdiction to enter a final order in such proceeding; and (c) the probability of appeal in the unlikely event of an adverse ruling against the Landlord. With respect to the last point, a confirmation hearing may not take place for years, rendering it nearly impossible to satisfy the feasibility standards of § 1129(a)(11) of the Bankruptcy Code.
Landlord further notes that the Debtors propose to pay their unsecured creditors nothing while at the same time allowing Lifespace, its de facto equity holder, to both retain its equity interest and get paid approximately $20,000,000.00 in Deferred Sponsor Fees through the proposed assumption of the Management Agreement, a clear end around the absolute priority rule.
The grim reality is that the Debtors are hemorrhaging cash, squandering resources and lack sufficient funds to operate in chapter 11 under their current DIP Loan until the entry of a final order in the Adversary Proceeding. Despite this reality, the Debtors continue spending inordinate amounts of time, money, and judicial resources prosecuting frivolous litigation claims against the Landlord and pushing a fallacious narrative regarding their prospects for reorganizing. This charade must end now. Given that the Successful Outcome cannot be achieved as a matter of law, the Chapter 11 Cases should be dismissed immediately”.
Landlord Action
On April 14, 2022, the Debtors 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.”
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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