Sears Methodist Retirement Systems Files for Chapter 11 Bankruptcy Protection | June 10, 2014
Sears Methodist Retirement System, Inc. and 11 affiliates filed for protection under Chapter 11 of the United States Bankruptcy Code on June 10, 2014 In the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, under Case No. 14-32821-SGJ-11. The case is currently pending before the Honorable Stacey G. Jernigan.
The debtors in these chapter 11 cases, along with the last four (4) digits of their taxpayer identification numbers, are: Sears Methodist Retirement System, Inc. (6330), Canyons Senior Living, L.P. (8545), Odessa Methodist Housing, Inc. (9569), Sears Brazos Retirement Corporation (8053), Sears Caprock Retirement Corporation (9581), Sears Methodist Centers, Inc. (4917), Sears Methodist Foundation (2545), Sears Panhandle Retirement Corporation (3233), Sears Permian Retirement Corporation (7608), Sears Plains Retirement Corporation (8233), Sears Tyler Methodist Retirement Corporation (0571) and Senior Dimensions, Inc. (4016). The mailing address of each of the debtors, solely for purposes of notices and communications, is 2100 Ross Avenue 21st Floor, c/o Paul Rundell, Dallas, Texas 75201
Paul B. Rundell is the Chief Restructuring Officer of Sears Methodist Retirement System, Inc. (“SMRS”), which controls, directly or indirectly, as applicable, Canyons Senior Living, L.P. (“CSL”), Odessa Methodist Housing, Inc. (“OMH”), Sears Brazos Retirement Corporation (“Brazos”), Sears Caprock Retirement Corporation (“Caprock”), Sears Methodist Centers, Inc. (“SMC”), Sears Methodist Foundation (“SMF”), Sears Panhandle Retirement Corporation (“Panhandle”), Sears Permian Retirement Corporation (“Permian”), Sears Plains Retirement Corporation (“Plains”), Sears Tyler Methodist Retirement Corporation (“Tyler”) and Senior Dimensions, Inc. (“SDI”), the debtors and debtors in possession in the above-captioned cases (collectively, the “Debtors”).
Mr. Rundell discusses the bankruptcy filing:
“The Debtors, affiliated non-profit corporations, are leaders in the senior living industry in the State of Texas and have built and maintained a successful business for almost fifty (50) years, beginning with SMC’s incorporation in 1966. During the past several years, however, an inability to service debt obligations, loss of revenue at certain facilities and increased costs have negatively impacted the Debtors and a recapitalization and restructuring of their debt obligations is now required. Because of these challenges, the Debtors have suffered asubstantial loss of revenue and lower than anticipated occupancy rates, which in turn have forced the Debtors to seek chapter 11 protection.
“SMRS controls, either directly or indirectly, the activities and business affairs of an affiliated group of corporations comprising the Sears Methodist Retirement System (the “System”) that includes the Debtors, Sears Methodist Senior Housing, LLC (“SMSH”), Texas Senior Management, Inc. (“TSM”), Senior Living Assurance, Inc. (“SLA”) and Southwest Assurance Company, Ltd. (“SWAC”). An organizational chart of the System is attached hereto. The System includes: (i) eight senior living communities located in Abilene, Amarillo, Lubbock, Odessa and Tyler, Texas (the “SMRS-Controlled Communities”); (ii) three veterans homes located in El Paso, McAllen and Big Spring, Texas (the “VLB Homes” and together with the SMRS-Controlled Communities, the “Facilities”), managed by SDI pursuant to contracts between SDI and the Veterans Land Board of Texas (“VLB”); and (iii) TSM, SLA and SWAC, which provide, as applicable, management and insurance services to the System. SMSH is the general partner of, and controls .01% of the interests in, CSL.
“In addition to controlling the various Debtor entities that own or operate the Facilities, SMRS provides management and oversight services to certain of the Facilities pursuant to a professional services agreement between SMRS and the relevant Debtor. Among other things, SMRS provides payroll, billing, strategic planning and employee benefit plan administration services. Additionally, the executive office of SMRS is responsible for overseeing residency contract templates, vendor contracting, licensing and regulatory filings, policies, corporate governance and compliance.
“The SMRS-Controlled Communities, described in more detail below, are as follows: (i) Parks Methodist Retirement Community (“Parks”), a senior living facility located in Odessa, Texas and owned by Permian; (ii) Wesley Court Methodist Retirement Community (“Wesley Court”), a senior living facility located in Abilene, Texas and owned by SMC; (iii) Craig Retirement Community (“Craig”), a senior living facility located in Amarillo, Texas and owned by Panhandle; (iv) The Mildred and Shirley L. Garrison Geriatric Education and Care Center (“Garrison”), a geriatric learning center and nursing facility located in Lubbock, Texas on the campus of Texas Tech University (“TTU”) and owned by Plains; (v) Meadow Lake Retirement Community (“Meadow Lake”), a senior living facility located in Tyler, Texas and owned by Tyler; (vi) Mesa Springs Retirement Village (“Mesa Springs”), a senior living facility located in Abilene, Texas and owned by Caprock; (vii) Desert Haven Retirement Community (“Desert Haven”), a low-income senior living facility located in Odessa, Texas and owned by OMH; and (viii) Canyons Retirement Community (“Canyons”), a senior living facility located in Amarillo, Texas and owned by CSL.
“SDI operates the VLB Homes, which are owned by the State of Texas and are designed for veterans, pursuant to separate contracts between SDI and the VLB. The three VLB Homes are: (i) Alfredo Gonzalez Texas State Veterans Home (“Alfredo Gonzalez”), located in McAllen, Texas; (ii) Ambrosio Guillen Texas State Veterans Home (“Ambrosio Guillen”), located in El Paso, Texas; and (iii) Lamun Lusk Sanchez Texas State Veterans Home (“Lamun Lusk Sanchez”), located in Big Spring, Texas.
“The Facilities offer seniors myriad residency options during their retirement years, providing affordable living accommodations, and in some cases related health care services, to a target market of middle-income seniors aged sixty-two (62) years and older. Each of the Facilities provides unmatched services and top of the line amenities. Specifically, the Facilities include dining experiences in well-appointed dining rooms, scenic Texas views, spacious floor plans, salons and spas, day excursions and housekeeping services. The Facilities also provide residents with multiple social outlets for all stages of their retirement living including, among other things, movie nights, live music, exercise classes and bible study.
“Depending on the type of Facility, the Debtors receive revenue from several sources, which include: (i) daily rates; (ii) monthly fees; and (iii) entrance deposits (“EDs”) from those residents living in certain cottages, apartments or executive homes at Craig, Wesley Court, Parks, Meadow Lake, Mesa Springs and Garrison (each, an “ED Unit”). Average daily rates, applicable at Garrison and the VLB Homes, range from $116 to $222. Monthly fees, applicable at all Facilities, range from $450 to $3,300. EDs range from $115,000 to $209,000. Monthly and daily fees cover operating expenses and capital costs, and do not include any health care benefits.
“Generally speaking, residents living in an ED Unit enter into a personal and non- assignable residency agreement, pursuant to which 90% of such resident’s ED is refunded upon certain circumstances (a “90% Refundable Agreement”). The 10% non-refundable portion of the ED is contributed to SMF and used for future benevolent care. Upon termination of a 90% Refundable Agreement, either by the resident, the Debtor-owner, or by reason of death, the Debtor-owner is required to refund 90% of the ED to residents or their estate within 30 days of the resale of the ED Unit and receipt of a new ED from the prospective resident. All refunds are paid without interest., Parks, Meadow Lake, Mesa Springs and Garrison (each, an “ED Unit”). Average daily rates, applicable at Garrison and the VLB Homes, range from $116 to $222. Monthly fees, applicable at all Facilities, range from $450 to $3,300. EDs range from $115,000 to $209,000. Monthly and daily fees cover operating expenses and capital costs, and do not include any health care benefits.
“In 2013, the Debtors collectively received approximately $14.8 million in Medicare payments and approximately $5.5 million in Medicaid payments.
Organizational Structure of the Debtors
Corporate Governance
“SMRS is governed by a Board of Trustees. There is an Executive Committee of the Board of Trustees, which makes up the board of directors of each of the Debtors.
Obligated Group
“The “Obligated Group,” consisting of SMRS, SMC (Wesley Court), Panhandle (Craig), Permian (Parks), Brazos and SMF, was created under that certain Master Trust Indenture (as amended and restated, the “SMRS Master Indenture”), dated as of August 1, 1998 and effective as of May 1, 2013, between the Obligated Group and Wells Fargo Bank, N.A., as successor Master Trustee (the “SMRS Trustee”). The Obligated Group and any future members of the Obligated Group are jointly and severally liable for payment and performance under the approximately $95.5 million of notes issued under the SMRS Master Indenture (the “Obligated Group Bond Debt”).
SMRS
“SMRS is a non-profit corporation which was chartered under the laws of the State of Texas on December 21, 1993. The mailing address of SMRS is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. SMRS has 48 employees: 13 are paid full-time hourly and 35 are full-time salaried employees.
“As of January 2014, on a book value basis, SMRS had approximately $34.1 million in assets and $103.8 million in liabilities. SMRS’s main assets consist of (i) approximately $8.6 million in cash and cash equivalents, the vast majority of which includes trustee-held funds; (ii) approximately $63,500 in accounts receivable; and (iii) approximately $1.9 million in property and equipment. SMRS’s main liabilities are: (i) its joint and several liability for the Obligated Group Bond Debt; (ii) approximately $3.2 million loaned by Texas Methodist Foundation (“TMF”) to SMRS (the “TMF Loan”) in connection with the 2013 restructuring, as described below; (iii) approximately $2.4 million in payables and accrued expenses; and (iv) reimbursement for any amounts drawn on that certain $1.5 million bank letter of credit (the “Letter of Credit”), issued by Life Care Services LLC (“LCS”) for the benefit of
TMF in connection with the TMF Loan.
Permian/Parks
“Permian, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. As described above, Permian owns Parks. Permian has 92 employees, including those who work at Desert Haven, which is located in the same town as Parks.
“Parks is located in Odessa, Texas and offers independent living in 22 patio homes, 33 executive homes, 23 assisted living rooms and suites and 85 nursing beds. As of May 2014, Parks had 136 residents and an 80.1% (YTD) occupancy rate.
“In June 2013, in connection with a joint venture between Permian, Prevarian Senior Living, L.P. (“Prevarian”) and certain other entities, a senior living facility called The Courtyards (“The Courtyards”) opened adjacent to the Parks. The Courtyards offers 40 assisted living residences and 30 memory care homes in a single-story community. The System donated the land and Prevarian and the other limited partners incurred all other costs of construction, marketing, working capital, opening and maintenance of The Courtyards. The partnership pays the System a monthly fee to manage the day-to-day operations of The Courtyard. The System has a right of first refusal to purchase The Courtyards and the underlying land upon certain conditions being met.
“As of January 2014, on a book value basis, Permian had approximately $7.5 million in assets and $4.6 million in liabilities, excluding its joint and several liability for the Obligated Group Bond Debt. Permian’s main assets consist of: (i) approximately $1.0 million in accounts receivable; and (ii) approximately $10.4 million in property and equipment. Permian’s main liabilities are: (i) its joint and several liability for the Obligated Group Bond Debt; and (ii) approximately $600,000 in accounts payable.
“In 2013, Permian received approximately $2.7 million in Medicare payments and approximately $1.2 million in Medicaid payments.
SMC/Wesley Court
“SMC, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. SMC has 97 employees. As described above, SMC owns Wesley Court.
“Wesley Court is located in Abilene, Texas and offers independent living in 78 apartments and 49 executive homes, 19 assisted living rooms and suites and 30 nursing beds. As of May 2014, Wesley Court had 171 residents and a 95.9% (YTD) occupancy rate.
“As of January 2014, on a book value basis, SMC had approximately $28.4 million in assets and $13.0 million in liabilities, excluding its joint and several liability for the Obligated Group Bond Debt. SMC’s main assets consist of: (i) approximately $148,000 in accounts receivable; and (ii) approximately $28.3 million in property and equipment. SMC’s main liabilities are: (i) its joint and several liability for the Obligated Group Bond Debt; and approximately $183,000 in accounts payable.
“In 2013, SMC received approximately $317,416 in Medicare payments.
Panhandle/Craig
“Panhandle, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. Panhandle has 191 employees. As described above, Panhandle owns Craig.
“Craig is located in Amarillo, Texas and offers independent living in 108 apartments and 65 executive homes, 40 assisted living rooms and suites, and 106 nursing beds. As of May 2014, Craig had 272 residents and an 88.7% (YTD) occupancy rate.
“As of January 2014, on a book value basis, Panhandle had approximately $25.3 million in assets and $9.3 million in liabilities, excluding its joint and several liability for the Obligated Group Bond Debt. Panhandle’s main assets consist of: (i) approximately $1.4 million in accounts receivable; and (ii) approximately $25.5 million in property and equipment. Panhandle’s main liabilities are: (i) its joint and several liability for the Obligated Group Bond Debt; and (ii) approximately $490,000 in accounts payable.
“In 2013, Panhandle received approximately $2.8 million in Medicare payments and approximately $1.7 million in Medicaid payments.
SMF
“SMF, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. SMF has no employees. SMF was formed for the purpose of managing and investing donor-restricted and board-designated investments for benevolent care and capital needs of the System, with the primary responsibility of generating contributions from donors and fundraising activities in the System’s primary operating markets.
“As of January 2014, on a book value basis, SMF had approximately $15.2 million in assets and $123,000 in liabilities, excluding its joint and several liability for the Obligated Group Bond Debt. SMF’s main assets consist of: (i) approximately $1,300 in cash and cash equivalents; and (ii) approximately $8.7 million in assets limited as to use. SMF’s main liabilities are: (i) its joint and several liability for the Obligated Group Bond Debt; and (ii) approximately $108,000 in long-term charitable gift annuities payable.
Brazos
“Brazos, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. Brazos has no employees. Brazos was incorporated in 2002 for the purpose of developing an Alzheimer’s care facility in Waco, Texas. Brazos sold the Alzheimer’s care facility in November 2011 and has no current operations.
“As of January 2014, on a book value basis, Brazos had approximately $0 in assets and $250 in liabilities, excluding its joint and several liability for the Obligated Group Bond Debt. Brazos’s main liabilities are its joint and several liability for the Obligated Group Bond Debt.
Non-Obligated Group
Plains/Garrison
“Plains, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. Plains has 145 employees. As described above, Plains owns Garrison.
“Garrison is located on the campus of TTU in Lubbock, Texas and consists of 104 nursing beds and one executive home. Garrison is also used as a training ground for Texas Tech University Health Sciences Center students. There are no EDs required at Garrison. As of May 2014, Garrison had 86 residents and a 92.7% (YTD) occupancy rate.
“As of January 2014, on a book value basis, Plains had approximately $12.8 million in assets and $10.2 million in liabilities. Plains’s main assets consist of: (i) approximately $1.1 million in cash and cash equivalents; (ii) approximately $620,000 in accounts receivable; and (iii) approximately $9.2 million in property and equipment. Plains’s main liabilities are: (i) approximately $8.2 million of bank loan debt (the “Plains Loan”), issued pursuant to that certain loan agreement (the “Plains Loan Agreement”), dated as of December 1, 2011, between Red River Health Facilities Development Corporation (“Red River”), Plains and Prosperity Bank (“Prosperity”), as successor lender to American State Bank; and approximately $480,000 in accounts payable.
“In 2013, Plains received approximately $3.7 million in Medicare payments and approximately $1.6 million in Medicaid payments.
Tyler/Meadow Lake
“Tyler, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. Tyler has 123 employees. As described above, Tyler owns Meadow Lake.
“Meadow Lake is located in Tyler, Texas and offers 35 executive homes, 20 assisted living apartments, 80 independent living apartments, 35 memory enhancement beds, and 30 nursing beds. As of May 2014, Meadow Lake had 161 residents and a 79.8% (YTD) occupancy rate.
“As of January 2014, on a book value basis, Tyler had approximately $56.3 million in assets and $67.8 million in liabilities. Tyler’s main assets consist of: (i) approximately $2.2 million in cash and cash equivalents; (ii) approximately $787,000 in accounts receivable; and approximately $49.5 million in property and equipment. Tyler’s main liabilities are: (i) approximately $43,050,000 in respect of the Tyler Bonds (as defined below) issued by HFDC of Central Texas, Inc. (“HFDC”); (ii) approximately $1.5 million in accrued interest payable; (iii) approximately $350,000 in accounts payable; and (iv) approximately $380,000 in contingent refundable residency fees.
“In 2013, Tyler received approximately $1.7 million in Medicare payments.
Caprock/Mesa Springs
“Caprock, a Texas non-profit corporation, is controlled by SMRS with its corporate office located at One Village Drive, Suite 400, Abilene, Texas 79606. Caprock has 96 employees. As described above, Caprock owns Mesa Springs.
“Mesa Springs is located in Abilene, Texas and offers 16 independent living executive homes, 34 independent living garden homes, and 10 independent living apartment homes. In addition, Caprock owns and operates The Mission at Mesa Springs, a healthcare center consisting of 75 semi-private and private skilled nursing beds. As of May 2014, Mesa Springs had 116 residents and an 87.2% (YTD) occupancy rate.
“As of January 2014, on a book value basis, Caprock had approximately $10.3 million in assets and $12.6 million in liabilities. Caprock’s main assets consist of: (i) approximately $265,000 in cash and cash equivalents; (ii) approximately $799,000 in accounts receivable; and (iii) approximately $8.2 million in property and equipment. Caprock’s main liabilities are: (i) approximately $7.1 million of bank loan debt (the “Caprock Loan”) issued pursuant to that certain Amended and Restated Reimbursement and Credit Agreement, dated as of May 20, 2013, between Caprock and Santander Bank, N.A. (“Santander”), as successor administrative agent and lender to Sovereign Bank (the “Caprock Loan Agreement”); and (ii) approximately $523,000 in accounts payable.
“In 2013, Caprock received approximately $2.6 million in Medicare payments and approximately $1.1 million in Medicaid payments.
CSL/Canyons
“CSL, a Texas limited partnership, is indirectly controlled by SMRS and its principal place of business is 1114 Lost Creek Boulevard, Suite 400, Austin, Texas 78746. SMSH is the general partner of, and controls .01% of the interests in, CSL. SDI is the limited partner of, and controls 99.99% percent of the interests in, CSL. As described herein, SMRS is the sole member of SMSH and sole owner of SDI. CSL has 12 employees. As described above, CSL owns Canyons.
“Canyons is located in Amarillo, Texas and consists of 109 independent living apartments. There are no EDs required at Canyons. As of May 2014, Canyons had 96 residents and an 86.0% (YTD) occupancy rate.
“As of January 2014, on a book value basis, CSL had approximately $12.8 million in assets and $12.0 million in liabilities. CSL’s main assets consist of: (i) approximately $43,000 in cash and cash equivalents; (ii) approximately $11,000 in accounts receivable; and (iii) approximately $12.2 million in property and equipment. CSL’s main liabilities are: (i) a loan of $3,637,300 (the “Canyons HUD Loan”) pursuant to that certain Building Loan Agreement between CSL and Prudential Huntoon Paige Associates, Ltd. (“Prudential”), as lender; and (ii) approximately $193,000 in accounts payable.
OMH/Desert Haven
“OMH, a Texas non-profit corporation, is controlled by SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. As described above, OMH owns Desert Haven. Individuals that work at Desert Haven are employees of Permian, the owner of Parks (located in the same town as Desert Haven).
“Desert Haven is located in Odessa, Texas and consists of forty (40) low-income, apartments in Odessa, Texas subsidized by the United States Department of Housing and Urban Development (“HUD”). There are no EDs required at Desert Haven. As of May 2014, Desert Haven had 37 residents and a 92.5% (YTD) occupancy rate.
“As of January 2014, on a book value basis, OMH had approximately $1.2 million in assets and $35,000 in liabilities. OMH’s main assets consist of: (i) approximately $64,000 in cash and cash equivalents; and (ii) approximately $1.1 million in property and equipment. OMH’s main liabilities are approximately $5,000 in accounts payable.
SDI/VLB Homes
“SDI, a Texas corporation, is a wholly-owned subsidiary of SMRS and its mailing address is 2100 Ross Avenue, 21st Floor, Dallas, Texas 75201. SDI has 530 employees. As described above, SDI operates the VLB Homes pursuant to a separate Management and Operations Agreement between SDI and the VLB for each of Alfredo Gonzalez, Ambrosio Guillen and Lamun Lusk Sanchez.
“Alfredo Gonzalez is located in McAllen, Texas and contains in excess of 100 beds dually certified by Medicaid and Medicare. As of May 2014, Alfredo Gonzalez had 160 units, 149 residents, and a 92.2% (YTD) occupancy rate.
“Ambrosio Guillen is located in El Paso, Texas and contains in excess of 100 beds dually certified by Medicaid and Medicare. As of May 2014, Ambrosio Guillen had 160 units, 154 residents, and a 95.9% (YTD) occupancy rate.
“Lamun Lusk Sanchez is located in Big Spring, Texas and contains in excess of 100 beds dually certified by Medicaid and Medicare. As of May 2014, Lamun Lusk Sanchez had 128 operational units, 114 residents, and an 93.1% (YTD) occupancy rate.
“As of January 2014, on a book value basis, SDI had approximately $5.1 million in assets and $4.1 million in liabilities. SDI’s main assets consist of: (i) approximately $3.8 million in accounts receivable; and (ii) approximately $211,000 in property and equipment. SDI’s main liabilities are: (i) approximately $1.8 million in accounts payable; and (ii) approximately $900,000 in accrued payroll and related taxes.
“In 2013, SDI received approximately $940,621 in Medicare payments.
Non-Debtors in the System
TSM
“TSM is a for-profit Texas corporation formed in December 2010 to serve as the management company for System projects developed outside the nonprofit corporations within the System. TSM manages The Courtyards.
SWAC
“SWAC is a wholly-owned subsidiary of the System domiciled in Grand Cayman. SWAC provides general and professional liability insurance for the System and its subsidiaries. SWAC is exempt from taxes on income and gains under Cayman Islands tax concession laws.
SLA
“SLA is a wholly-owned subsidiary of the System domiciled in Grand Cayman. SLA was formed to provide administrative and risk management services to SWAC. It manages the claims from the general and professional liability and employee liability insurance provided by SWAC.
Regulatory Agencies
“The senior care industry is heavily regulated by Federal and state authorities. For example, the System is subject to different regulations concerning, among other things, financial disclosures and solvency. Remedies for violating these regulations include, but are not limited to, temporary suspension of the Facility’s license and increased oversight. The regulatory agencies providing oversight to the Debtors are, among others, the Centers for Medicare & Medicaid Services (“CMS”), the Texas Health and Human Services Commission, the Texas Department of Aging and Disability Services (“TDADS”) and the Office of the Attorney General of the State of Texas (“AG”). During the past several years, as a result of surveys and/or investigations by TDADS, certain matters have been referred to CMS and the AG with respect to the VLB Homes.
Leasehold Obligations
“SMRS is the tenant under 2 office leases: (i) an 11,400 square foot office located at Century Plaza I Office Building, One Village Drive, Suite 400, Abilene, TX (the “Abilene Lease”); and (ii) 2,855 square foot office located at 1114 Lost Creek Blvd., Suite 210, Austin, TX 78746 (the “Austin Lease”).
“The original Abilene Lease was entered into on May 16, 2002. On December 17, 2009, SMRS extended the Abilene Lease for an additional 36 months beginning on January 1, 2013. The current expiration date of the Abilene Lease is December 31, 2015. The lessor for the Abilene Lease is Design Growth Investments, Inc.
“The Austin Lease, originally entered into July 22, 2009, was recently renewed for a period of 70 months commencing on December 1, 2013 and expiring on September 30, 2019. The lessors for the Austin Lease are Limestone Creek Properties, L.P. and Limestone Springs Properties, L.P.
“Additionally, the land upon which Garrison sits is leased to Plains pursuant to that certain Ground Lease, effective as of August 1, 1999 (the “TTU Lease”), between TTU, as lessor, and Plains, as lessee. The term of the TTU Lease is for a period of 50 years with two 10- year extensions. In the event Plains seeks to use the premises for a purpose other than the operation of a geriatric, long-term care facility and related ancillary uses, it must obtain the prior approval of TTU for such proposed use. If Plains seeks to assign or otherwise transfer its interest in the TTU Lease to a third party other than an affiliate of Plains, TTU has a right of first refusal to elect to purchase Plains’s leasehold interest.
Life Care Services LLC
“Prior to the Petition Date, certain management functions related to the Facilities were provided by LCS, an unaffiliated third party, pursuant to separate management agreements entered into during April of 2013 between (i) LCS and the Obligated Group and (ii) LCS, the Debtors other than the Obligated Group and SMSH (collectively, the “LCS Management Agreements”). Pursuant to the LCS Management Agreements, LCS, among other things, recommended and evaluated policies and procedures and made recommendations for the future operations of the communities. Although the LCS Management Agreements provided for LCS to “manage the day-to-day operations of the Communities,” because the executive directors and on-site personnel remained employees of SMRS, LCS’s role was not that of a day-to-day- manager, but rather that of a supervisor/consultant. Indeed, billing, marketing and operating functions were provided by employees of SMRS, not LCS. Additionally, pursuant to the LCS Management Agreements, LCS provided a Corporate Chief Executive Officer (the “CCEO”), who served as the chief executive of SMRS and was an employee of LCS.
“During the term of the LCS Management Agreements, the relationship between the System and LCS became strained due to, among other things, LCS’s performance under the LCS Management Agreements and the conflicted nature of the CCEO making major decisions of the System while at the same time being employed by LCS. In or around March and April of 2014, the parties engaged in discussions regarding renegotiating the terms of the LCS Management Agreements. In connection with such discussions, the CCEO was terminated. On April 8, 2014, the System received written notice of termination of the LCS Management Agreements.
The Debtors’ Prepetition Capital Structure
As of the Petition Date, the Debtors’ total consolidated funded debt obligations were approximately $160 million and consisted of, among other things, bond debt of the Obligated Group and Tyler, bank loan debt of Plains, Caprock and Canyons and the TMF Loan. The major components of the Debtors’ prepetition debt structure and their prepetition debt obligations are described below.
The Obligated Group’s Prepetition Capital Structure
Initial Bond Financing
“Between 1998 and 2003, the Obligated Group secured permanent financing through a series of bond offerings by the Abilene Health Facilities Development Corporation (“Abilene Health”) in the aggregate principal amount of approximately $73.1 million, consisting of $30,435,000 Series 1998A Abilene Health Facilities Development Corporation Bonds (the “Series 1998A Bonds”), $7,840,000 Series 1999 Abilene Health Facilities Development Corporation Bonds (the “Series 1999 Bonds”) and $34,820,000 Series 2003A Abilene Health Facilities Development Corporation Bonds (the “Series 2003A Bonds” and together with the Series 1998A Bonds and Series 1999 Bonds, the “Previously Issued Bonds”). The Previously Issued Bonds mature on various dates, with the next maturity date being November 15, 2018.
2013 Restructuring
“On May 9, 2013, a refinancing plan was completed for the Obligated Group. Following the refinancing plan, the Obligated Group emerged with $99.1 million of overall debt consisting of $95.6 million of bonds outstanding and $3.5 million in respect of the TMF Loan. As part of the refinancing plan, approximately $22.5 million of new money bonds were issued to help replace the $17.8 million of bank loans previously outstanding.
“Specifically, pursuant to an Offer to Tender and Exchange, dated April 9, 2013 (the “Offer”), the holders of the Previously Issued Bonds were given the opportunity to tender their Previously Issued Bonds for Series 2013A Retirement Facility Revenue Bonds (the “Series 2013A Bonds”) and Series 2013D Retirement Facility Revenue Bonds (the “Series 2013D Bonds” and together with the Series 2013A Bonds, the “Exchange Bonds”) to be issued by Red River. As a result of the Offer, the principal amount of the Exchange Bonds to be issued in exchange for the Original Bonds was $69,130,000 (94.54% of the aggregate principal amount outstanding). The holders of $3,965,000 in aggregate outstanding principal amount of the Previously Issued Bonds chose not to tender their bonds (the “Non-Exchanged Bonds”).
“On May 9, 2013, pursuant to an Indenture of Trust, dated as of May 1, 2013 (the “SMRS Bond Indenture”), between Red River and the SMRS Trustee, Red River issued (i) $69,130,000 in Exchange Bonds; (ii) $19,405,000 in Series 2013B Retirement Facility Revenue Bonds (the “Series 2013B Bonds”), (iii) $2,285,000 in Series 2013C Retirement Facility Revenue Bonds (the “Series 2013C Bonds” and together with the Series 2013B Bonds and the Series 2013D Bonds, the “New Money Bonds”), and (iv) $765,000 in Series 2013D Retirement Facility Revenue Bonds (collectively, the “2013 Bonds”). The Series 2013D Bonds were issued in part as New Money Bonds and in part as Exchange Bonds.
“The proceeds of the New Money Bonds were loaned to SMRS pursuant to a Loan Agreement, dated as of May 1, 2013 (the “SMRS Loan Agreement”), between Red River and SMRS. SMRS used these loan proceeds and the TMF Loan, together with certain other monies, to, among other things, (a) finance and refinance a portion of the cost of certain System health facilities located in Abilene, Amarillo, Lubbock, Tyler, and Odessa, Texas; (b) fund a debt service reserve fund to secure the 2013 Bonds; (c) satisfy the outstanding balance of a loan between SMRS and Capital One Bank, N.A.; and (d) pay the costs of issuing the 2013 Bonds.
“The 2013 Bonds mature on various dates, with the first maturity date being November 15, 2046.
“The New Money Bonds and the interest payable thereon are payable solely from and secured exclusively by the funds pledged thereto under the SMRS Bond Indenture, the payments to be made by SMRS pursuant to the SMRS Loan Agreement, and certain notes (the “New Money Bond Notes”) issued by SMRS under the SMRS Master Indenture.
“The New Money Bond Notes and other obligations of the Obligated Group under the SMRS Master Indenture are secured under the terms of three separate Deeds of Trust (each including a Security Agreement and Assignment of Rents and Leases) dated as of May 1, 2013 (collectively, the “Deeds of Trust”), between certain members of the Obligated Group and the SMRS Trustee, and two separate Subordinate Deeds of Trust (each including a Security Agreement and Assignment of Rents and Leases) dated as of May 8, 2013 (collectively, the “Subordinate Deeds of Trust”), between certain members of the Obligated Group and the SMRS Trustee. A promissory note evidencing the obligation of SMRS to repay the loan from Red River with respect to the Series 2013A Bonds (the “Series 2013A Note”) and the notes securing the Previously Issued Bonds are secured on a parity basis with the New Money Bond Notes under the SMRS Master Indenture and the Deeds of Trust. Additionally, the New Money Bond Notes and the Series 2013A Note are secured on a parity basis under the Subordinate Deeds of Trust.
“Under the terms of the documents governing Non-Exchanged Bonds and the 2013 Bonds (the “SMRS Bond Documents”), certain accounts were established and are held by the SMRS Trustee, including, but not limited to, (i) the Debt Service Reserve Fund (as defined in the SMRS Master Indenture); the Operating Reserve Fund (as defined in the SMRS Master Indenture); and the Project Account (as defined in the SMRS Bond Indenture). These funds, and any other accounts established by the SMRS Bond Documents and held by the SMRS Trustee are referred to herein as the “SMRS Trustee-Held Funds.”
“As discussed above, SMRS owes approximately $3.2 million in respect of the TMF Loan. In connection with the TMF Loan, LCS issued a $1.5 million bank letter of credit (the “Letter of Credit”) for the benefit of TMF. The Letter of Credit has a five-year term, and the amount of the Letter of Credit may be reduced proportionate to the reduction in the principal amount of the TMF Loan over the term of the Letter of Credit. Additionally, SMRS and LCS are parties to that certain Credit Support Agreement, dated as of May 8, 2013, pursuant to which SMRS agreed to, among other things, reimburse LCS for any amounts drawn on the Letter of Credit by TMF for payment of principal on the TMF Loan. As of the date hereof, no amounts have been drawn on the Letter of Credit.
“On May 8, 2013, TMF, the SMRS Trustee, SMRS and LCS entered into an intercreditor agreement (the “Intercreditor Agreement”) setting forth the relative priorities of TMF, the SMRS Trustee and LCS with respect to the collateral securing the obligations of the Obligated Group with respect to the 2013 Bonds and the TMF Loan. Pursuant to the Intercreditor Agreement, except with respect to liens on certain undeveloped land in Waco (the “Waco Property”) and Abilene (the “Abilene Property” and together with the Waco Property, the “Undeveloped Properties”), the liens and rights of the SMRS Trustee under the bond documents are superior to the liens and rights of TMF and LCS. Pursuant to the Intercreditor Agreement, the liens and rights of the SMRS Trustee under its deeds of trust with respect to the Undeveloped Properties are subordinate to those of TMF and LCS. Moreover, LCS’s rights in the Abilene Property are subordinate to TMF’s lien in such property.
“The monthly debt service payment under the Non-Exchanged Bonds and the 2013 Bonds is approximately $443,667. The monthly debt service under the TMF Loan is approximately $47,000.
Plains/Garrison Prepetition Capital Structure
“On December 1, 2011, Plains entered into the Plains Loan Agreement pursuant to which it borrowed $9,000,000 from Prosperity. The Plains Loan matures on October 1, 2016 and, as of May 2014, the loan balance was approximately $8,234,000. The Plains Loan is evidenced by an A note, accruing interest at 3.50%, a B note, accruing interest at 3.50% and a C note, accruing interest at 4.25%. The monthly debt service payment under the Plains Loan is approximately $57,392.
Tyler/Meadow Lake Prepetition Capital Structure
Tyler Bonds
“The construction of Meadow Lake was initially financed with proceeds of $8,545,000 Series 2009A Term Retirement Facility Revenue Bonds and an additional $27,555,000 Series 2009A Term Retirement Facility Revenue Bonds (collectively, the “Series 2009A Bonds”) and $7,850,000 Series 2009B Term Retirement Facility Revenue Bonds (the “Series 2009B Bonds” and together with the Series 2009A Bonds, the “Series 2009 Bonds”), issued pursuant to that certain Indenture of Trust, dated as of November 1, 2009 (the “Original Tyler Bond Indenture”) between HFDC and UMB Bank, N.A., as successor trustee (the “Tyler Trustee”). HFDC loaned the proceeds of the Series 2009 Bonds to Tyler pursuant to that certain Loan Agreement, dated as of November 1, 2009 (the “Original Tyler Loan Agreement”), between HFDC and Tyler and provided for the repayment of such loans by Tyler pursuant to certain notes issued by Tyler as required by the Original Tyler Loan Agreement (the “Series 2009 Notes”). The Series 2009A Bonds accrue interest at 7.75% and mature on either November 15, 2029 or November 15, 2044. The Series 2009B Bonds accrue interest at 6.375% and mature on November 15, 2019.
“The second phase of Meadow Lake’s construction was financed with the proceeds of $3,895,000 Series 2011A Retirement Facility Revenue Bonds (the “Series 2011A Bonds”) and $1,500,000 Series 2011B Retirement Facility Revenue Bonds (the “Series 2011B Bonds” and together with the Series 2011A Bonds, the “Series 2011 Bonds”), issued pursuant to that certain Supplemental Bond Indenture No. 1, dated as of February 1, 2011, between the HFDC and the Tyler Trustee (the “Supplemental Bond Indenture No. 1,” and collectively with the Original Tyler Bond Indenture, the “Tyler Bond Indenture”). The Series 2011 Bonds and the Series 2009 Bonds are collectively referred to herein as the “Tyler Bonds.” HFDC loaned the proceeds of the Series 2011 Bonds to Tyler pursuant to Amendment No. 1 to the Original Tyler Loan Agreement, dated as of February 1, 2011 (“Amendment No. 1,” and collectively with the Original Tyler Loan Agreement, the “Tyler Loan Agreement”), between HFDC and Tyler and provided for the repayment of such loans by Tyler pursuant to the Series 2011 Note (the “Series 2011 Note” and together with the Series 2009 Notes, the “Tyler Notes”), issued by Tyler as required by Amendment No. 1. The Series 2011A Bonds accrue interest at 8.50% and the Series 2011B Bonds accrue interest at 7.25%. Each of the Series 2011 Bonds mature on November 15, 2044. On November 15, 2019, the interest rate on any outstanding Series 2011B Bonds will increase to 10.0% per annum.
“To secure the payment of the Tyler Bonds and the Tyler Notes, Tyler and the Tyler Trustee entered into that certain Master Trust Indenture, Deed of Trust and Security Agreement, dated as of November 1, 2009 (the “Original Tyler Master Indenture”), as supplemented by Supplemental Indenture Number 1, dated as of November 11, 2009 (“Supplemental Indenture No. 1”), Supplemental Indenture Number 2, dated as of February 1, 2011 ( “Supplemental Indenture No. 2”), and Supplemental Indenture Number 3, dated as of May 1, 2012 (“Supplemental Indenture No. 3” and collectively with the Original Tyler Master Indenture, Supplemental Indenture No. 1 and Supplemental Indenture No. 2, the “Tyler Master Indenture”).
“The proceeds of the Series 2011 Bonds were intended to: (i) pay a portion of the costs of completing the acquisition, construction, furnishing and equipping of Meadow Lake; (ii) fund an increase in the debt service reserve fund securing the Tyler Bonds; (iii) fund interest on the Series 2011 Bonds for approximately three months; and (iv) pay the costs of issuance of the Series 2011 Bonds.
“As of May 2014, the outstanding balance owed in respect of the Tyler Bonds was approximately $43,050,000 and the monthly debt service payment was approximately $290,000. Tyler has not made any payments to the Tyler Trustee since May 2013, other than in connection with the forbearance agreements described below.
Forbearance
“A number of events of default under the Tyler Bonds and the Tyler Master Indenture have occurred and are continuing, including: (i) Tyler has not remitted any of the required interest payments since May 1, 2012; (ii) Tyler did not begin replenishment payments to a certain debt service reserve fund as required under the Tyler Bond documents; (iii) Tyler has not deposited its gross revenues in a certain revenue fund since July 1, 2012; (iv) Tyler failed to maintain cumulative cash from operations at amounts set forth in the loan documents; and (v) Tyler failed to maintain an occupancy covenant (collectively, the “Tyler Events of Default”).
“As a result of the Tyler Events of Default, Tyler and certain holders of the Tyler Bonds engaged in negotiations regarding the terms of a permanent restructuring. In the course of these negotiations, on November 15, 2013, Tyler and the beneficial owners of at least 66-2/3% in aggregate principal amount of the Tyler Bonds entered into a Forbearance Agreement (the “Tyler Forbearance Agreement”), pursuant to which the bondholders agreed to, among other things, forbear from exercising any remedies available with respect to the payment defaults until March 31, 2014. In connection therewith, Tyler deposited $150,000 with the Tyler Trustee to be used for fees and expenses related to the Tyler Forbearance Agreement. On March 31, 2014, the Tyler Trustee agreed to forbear from initiating any formal legal action to accelerate the Tyler Bonds or to foreclose upon the underlying collateral until April 15, 2014.
“On April 15, 2014, the Tyler Trustee and Tyler entered into a separate Forbearance Agreement (the “2014 Forbearance Agreement”), pursuant to which the Tyler Trustee agreed to, among other things, forbear on exercising any rights or remedies against Tyler available to the Tyler Trustee under the Tyler Loan Agreement, the Tyler Master Indenture or any other document governing the Tyler Bonds until the earlier of (i) July 14, 2014 or (ii) the occurrence of any Forbearance Termination Event (as defined therein). The Tyler Trustee may, in its sole discretion, extend the forbearance period for an additional ninety (90) days beyond July 14, 2014, to the extent that the Tyler Trustee is satisfied with the progress made towards implementing a restructuring or sale transaction and in the absence of contrary direction from the holders of the Tyler Bonds.
“Pursuant to the 2014 Forbearance Agreement, Tyler agreed to, among other things, (i) establish a fee escrow account with the Tyler Trustee, consisting of an initial deposit of $100,000 and subsequent deposits of $100,000 on May 15, 2014, and June 16, 2014, respectively and (ii) deliver a restructuring plan to the Tyler Trustee on or before May 30, 2014.
“If the Tyler Trustee and Tyler are unable to agree on the terms of the restructuring plan, or if the Tyler Trustee determines that the restructuring plan is not feasible or desirable, then the Tyler Trustee is required to inform Tyler of such determination on or before June 16, 2014.
Operating Support Agreement
“In connection with the issuance of the Series 2009 Bonds, Tyler entered into an Operating Support Agreement with SDI, dated as of November 1, 2009 (the “Operating Support Agreement”), pursuant to which, among other things, SDI (i) agreed to deposit all of its net cash flow from the VLB contracts into an operating support fund, and (ii) granted to Tyler a continuing security interest in and to all right, title and interest of SDI in its right to receive payments of money under the VLB contracts. Based on historical operations and future projections there is no Net Cash Flow (as defined in the Operating Support Agreement) distributable to Tyler.
Caprock/Mesa Springs Prepetition Capital Structure
“On April 10, 2008, Caprock acquired the assets of Mesa Springs. In consideration for the assets of Mesa Springs, Caprock paid the seller $5,600,000. On that same date, Caprock issued $3,275,000 Series 2008A Variable Rate Demand Retirement Facility Bonds and $4,620,000 Series 2008B Variable Rate Demand Retirement Facility Revenue Bonds (collectively, the “Caprock Bonds”). The proceeds of the Caprock Bonds were used to finance the acquisition, remodeling and equipping of Mesa Springs. The bonds were also used to fund additional startup costs and miscellaneous capital expenditures for Mesa Springs. As part of the asset purchase agreement, Caprock agreed to pay the seller, for a period of seven years after the closing, a deferred purchase price payment of (a) 50% of the proceeds of any initial sale or transaction where a deposit is generated or received involving certain gifted homes and (b) 50% of the increase in the amount of the refundable portion of any new deposits collected over the amount of the refundable portion of the previous deposit in any sale or other transaction where a deposit is generated or received involving remaining non-gifted homes.
“Caprock eventually defaulted under the credit and reimbursement agreement governing the Caprock Bonds. As discussed above, on May 20, 2013, Caprock entered into the Caprock Loan Agreement. In connection therewith, the Caprock Bonds were redeemed. The Caprock Loan consists of an A Note and a B Note, both of which accrue interest at LIBOR + 250 and matured on April 10, 2014. As of May 2014, the outstanding balance of the Caprock Loan was approximately $6,967,444 and the monthly debt service payment was approximately $56,200.
CSL/Canyons Prepetition Capital Structure
“Development of the Canyons began on December 31, 2010, and was financed through (i) the Canyons HUD Loan, (ii) a grant of $7,899,892 (the “TDHCA Grant”) awarded by the Texas Department of Housing and Community Affairs (“TDHCA”); and (iii) a grant of $272,500 from the City of Amarillo, Texas (the “Amarillo Grant”). Canyons was completed and placed into service in 2011.
“Pursuant to a certain Security Agreement (Equipment, Inventory, and Accounts), dated as of October 28, 2010, by and between CSL and Prudential (the “Canyons Security Agreement”), obligations arising under the Canyons HUD Loan are secured by the goods, inventory, equipment, accounts, general intangibles and fixtures arising from the property upon which Canyons is located.
“No amounts are currently due under the TDHCA Grant or the Amarillo Grant. The TDHCA Grant may only be called in the event that CSL fails to comply with certain requirements for use of the grant, including but not limited to maintaining a minimum percentage of units as “low income units.” As of May 2014, the outstanding balance of the Canyons HUD Loan was approximately $3,574,502 and the monthly debt service payment was approximately $26,896.
OMH/Desert Haven Prepetition Capital Structure
On October 9, 1996, OMH received a capital advance note from HUD in the aggregate amount of $1,957,700 (the “Desert Haven HUD Note”). The Desert Haven HUD Note bears no interest and payment is not required as long as the housing remains available for low- income persons. The note will be forgiven at its maturity date of September 1, 2037 if Desert Haven remains available for occupancy by eligible families until that date. Otherwise, the entire amount, plus interest at 7% since October 9, 1996, will be declared due and payable to HUD. Pursuant to a certain Deed of Trust, dated as of October 9, 1996, by and between OMH, as successor grantor and Jack T. Stark, as trustee, the Desert Haven HUD Note is secured by all property owned by OMH and all rents, profits and income attributed to its operations.
EVENTS LEADING TO BANKRUPTCY
The Decline in the Market
“Senior living facilities have recently experienced substantial declines in occupancy as a result of market changes. Prospective residents are faced with: (i) difficulty selling their homes due to uncertainty in value and (ii) significant declines in their equity portfolio value. This has made it difficult, if not impossible, for seniors to move into or remain in senior housing facilities due to, among other things, the upfront payment of EDs. These market conditions have contributed to decreased revenue and lower than anticipated occupancy rates at certain of the Debtors’ Facilities.
“To address these issues, the Debtors sought to implement a number of restructuring initiatives over the last year, including making appropriate adjustments in staffing and increasing negotiations with creditors. Additionally, in the past four months, the Debtors retained Cain Brothers & Company, LLC (“Cain”) to provide restructuring and other investment advisory services, DLA Piper LLP (US) to provide legal advice in connection with a potential restructuring, and A&M to provide a CRO and other financial advisory services.
“As discussed above, the relationship between the System and LCS became strained during the course of LCS’s management and the LCS Management Agreements were terminated on April 8, 2014. Additionally, around that time the CCEO was terminated by the System. After a detailed search, the Debtors hired an interim chief executive officer who remains employed by the System.
