Clare Oaks – Creditors’ Committee Files Plan (and Disclosure Statement) that Will Face Off Against Competing Bondholder Plan, Aims for August 25th Confirmation Hearing

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June 5, 2020 – The Debtor's Official Committee of Unsecured Creditors (the “Committee”) filed a Chapter 11 Plan and a related Disclosure Statement [Docket Nos. 382 and 383, respectively]; and further filed a motion requesting Court approval of (i) the Disclosure Statement, (ii) proposed Plan solicitation and voting procedures, and (iii) a proposed timetable culminating in a scheduling a Plan confirmation hearing [Docket No. 384].

The Debtor's Creditors now have two competing Plans to choose from, neither of them actually put forward by the Debtors. On May 15th, Bondholders Lapis Advisers, LP and Amundi Pioneer Asset Management, Inc. filed a Plan (which we cover separately [Docket No. 364], but also summarize below) which the Committee roundly condemns as " prioritiz[ing] short-term returns for bond investors…and potentially forces senior citizen residents to leave their homes at the Clare Oaks Campus during a global pandemic." Their own Plan, the Committee argues is intended to "honor the Debtor’s commitments to its senior citizen residents and their families by assuming all residency agreements without modification and paying all entrance fee refunds owed to current and former residents in full." The pain in the Committee Plan is largely to be born by bondholders who will see approximately $70.0mn of claims receive de minimis recoveries.

Overview of Committee Plan

The Disclosure Statement [Docket No. 383] notes that, “The Plan provides for the reorganization of the Debtor, which operates a continuing care retirement community known as Clare Oaks comprised of approximately 164 independent living units (including 10 cottages), 33 assisted living units (including 16 memory care units), and 120 skilled nursing units, located in Bartlett, Illinois. The primary goal of the Plan is to honor the Debtor’s commitments to its senior citizen residents and their families by assuming all residency agreements without modification and paying all entrance fee refunds owed to current and former residents in full. The Plan also provides a significant Cash distribution to general unsecured creditors on the Effective Date equal to approximately 34% of the total estimated amount of General Unsecured Claims. Finally, the Plan substantially reduces and restructures the crippling amount of secured bond debt, that has forced Clare Oaks into bankruptcy twice in less than ten years, from more than $80 million down to $20 million with debt service payments extended over 40 years at a market rate of interest. The terms of the Plan, as described in further detail herein and in the Plan, will allow the Debtor to successfully emerge from chapter 11 with a healthy balance sheet and allow all residents to remain in their homes at the Clare Oaks Campus on the same terms they agreed to when they moved in and entrusted the Debtor with their life savings.

Another chapter 11 plan (the “Bond Investor Plan”) has been proposed by certain distressed bond investors with a very different goal. The Bond Investor Plan prioritizes short-term returns for bond investors at the expense of the residents of Clare Oaks and their families and the Debtor’s long-term financial stability. The Bond Investor Plan proposes to load more than $50 million of secured bond debt on Clare Oaks, threatens to modify or reject all residency agreements, and potentially forces senior citizen residents to leave their homes at the Clare Oaks Campus during a global pandemic. The Bond Investor Plan also seeks to delay payment of entrance fee refunds to former residents and their families for more than 15 years (if they get paid at all) and makes a de minimis distribution of less than 5% to General Unsecured Creditors. The Committee strongly believes that the Bond Investor Plan provides far worse treatment for all stakeholders other than opportunistic bond investors and would be devastating to the future of Clare Oaks.

Accordingly, the Committee believes that the Plan is the best and only viable option for Clare Oaks to successfully emerge from chapter 11 with a restructured balance sheet and thriving resident community. Unlike the Bond Investor Plan, the Committee expects that it will have the support of the Debtor in confirming the Plan.”

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 (“Series 2012A Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $8,615,000 and the estimated recovery is 100%. The Holders of Allowed Series 2012A Bond Claims shall retain their senior Lien on the Collateral and be repaid monthly over a term of fifteen (15) years at an interest rate of 5.0% per annum, with interest only payments for the first five (5) years and principal and interest payments for the remainder of the term.
  • Class 2 (“Series 2012B Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $11,385,000 and the estimated recovery is 100%. The Holders of the Allowed Series 2012B Bond Claims shall retain their subordinate Lien on the Collateral and be repaid monthly over a term of forty (40) years with interest only payments at an interest rate of 4.0% per annum for the first fifteen (15) years and principal and interest payments from years sixteen (16) through forty (40) at an interest rate of 6.0% per annum.

FN: If the Holders of the Series 2012B Bond Claims make the election pursuant to section 1111(b)(2) of the Bankruptcy Code to have their Claims treated as fully Secured, the Holders of such Claims shall be deemed to have a Secured Claim in the aggregate amount of $39,991,094. The Holders of Allowed Series 2012B Bond Claims shall retain their subordinate Lien on the Collateral and be repaid monthly over a term of forty (40) years with interest only payments at an interest rate of 4.0% per annum for the first fifteen (15) years and principal and interest payments from years sixteen (16) through forty (40) at an interest rate of 6.0% per annum and a balloon payment at the end of the forty (40) year term, which payments shall total at least $39,991,094 with a net present value equal to the residual value of the Collateral in the amount of $11,385,000, which equals the total Collateral value of $20,000,000 less the amount of the Series 2012A Bond Claims of $8,615,000 that have a senior Lien on the Collateral.

  • Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and the estimated recovery is 100%.
  • Class 4 (“Non-SSJ Resident Entrance Fee Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $6,873,955 and the estimated recovery is 100%. All Residency Agreements of Holders of Non-SSJ Resident Entrance Fee Claims, to the extent such Residency Agreements remain executory, shall be rejected. Except to the extent that a Holder of an Allowed Non-SSJ Resident Entrance Fee Claim agrees to different treatment, in full satisfaction, discharge, settlement, release, and compromise of and in exchange for each Allowed Non-SSJ Resident Entrance Fee Claim, such Holders shall receive payment in full, without interest, as follows: (i) on the Effective Date, or as soon as practicable thereafter, each Holder’s Pro-Rata share of Cash equal to $687,395; (ii) on or before the first (1st) anniversary of the Effective Date, each Holder’s Pro-Rata share of Cash equal to $1,500,000; (iii) on or before the second (2nd) anniversary of the Effective Date, each Holder’s Pro-Rata share of Cash equal to $750,000; (iv) on or before the third (3rd) anniversary of the Effective Date, each Holder’s Pro-Rata share of Cash equal to $1,500,000; and (v) on or before the fourth (4th) anniversary of the Effective Date, each Holder’s Pro-Rata share of Cash equal to $2,436,560. 
  • Class 5 (“SSJ Resident Entrance Fee Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2,063,250 and the estimated recovery is 100%. All Residency Agreements of Holders of SSJ Resident Entrance Fee Claims, to the extent such Residency Agreements remain executory, shall be rejected. Except to the extent that a Holder of an Allowed SSJ Resident Entrance Fee Claim agrees to different treatment, in full satisfaction, discharge, settlement, release, and compromise of and in exchange for each Allowed SSJ Resident Entrance Fee Claim, such Holders shall receive payment in full, without interest, as follows: (i) on or before December 31, 2025, such Holder’s Pro-Rata share of Cash equal to $1,031,625; and (ii) on or before December 31, 2026, such Holder’s Pro-Rata share of Cash equal to $1,031,625.
  • Class 6 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $450,000 and the estimated recovery is 34%. Each Holder of an Allowed General Unsecured Claim shall receive on the Effective Date, or as soon as practicable thereafter, such Holder’s Pro-Rata share of Cash equal to $150,000. The Committee, the Debtor and the Reorganized Debtor reserve their rights to dispute the validity of any General Unsecured Claim, whether or not objected to prior to the Effective Date.
  • Class 7 (“Series 2012B Bond Deficiency Claim”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $28,606,094 and the estimated recovery is 0.01%. Each Holder of an Allowed Series 2012B Bond Deficiency Claim shall receive on the Effective Date, or as soon as practicable thereafter, such Holder’s Pro-Rata share of Cash equal to $25,000. 
  • Class 8 (“Series 2012C Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $40,177,032 and the estimated recovery is 0.007%. Each Holder of an Allowed Series 2012C Bond Claim shall receive on the Effective Date, or as soon as practicable thereafter, each such Holder’s Pro-Rata share of Cash equal to $25,000.
  • Class 9 (“Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.

The Disclosure Statement attached the following Exhibits

  • Exhibit 1: The Official Committee of Unsecured Creditors’ Chapter 11 Plan of Reorganization, dated June 5, 2020 
  • Exhibit 2: Financial Statements for the Period of July 1, 2018 – June 30, 2019 
  • Exhibit 3: Financial Statements for the Period of July 1, 2019 – April 30, 2020 
  • Exhibit 4: Plan Projections
  • Exhibit 5: Liquidation Analysis

Proposed Key Dates

  • Deadline to File Objections to the Disclosure Statement: July 7, 2020
  • Hearing on approval of the Disclosure Statement: July 14, 2020
  • Voting Deadline: August 14, 2020
  • Hearing on confirmation of the Plan: August 25, 2020

Overview of the Bond Investor 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.

About the Debtor

The Debtor, a private Illinois not-for-profit corporation, leases and operates a continuing care retirement community (“CCRC”) comprised of multiple connected buildings and ten cottages on forty-one (41) acres of land located in Bartlett, Illinois (the “Property” or the “Clare Oaks Campus”). The Property is owned by the Sisters of St. Joseph of the Third Order of St. Francis, Inc. (“SSJ-TOSF”). SSJ-TOSF leases the Property to the Debtor pursuant to the Amended and Restated Ground Lease dated December 1, 2012. 

The Debtor provides senior citizens with independent and assisted living accommodations and related healthcare services during their retirement years. The Clare Oaks Campus includes: 164 independent living units (including 10 cottages); 33 assisted living units (including 16 memory care units), and 120 skilled nursing units. Clare Oaks’ business model typically involves a potential resident selling their home and using the proceeds to fund their entrance fee into the community. 

Clare Oaks is an award-winning senior living community. In April 2019, Clare Oaks received a five star rating from Centers for Medicare & Medicaid Services (“CMS”) recognizing the quality of care provided by Clare Oaks. This overall rating is only achieved by approximately ten percent (10%) of all nursing home providers in the United States. Clare Oaks received five star ratings from CMS in all categories (overall, health inspection, staffing and quality measures), which places Clare Oaks in the upper tier of nursing home providers the providers that receive an overall five star rating. The Debtor intends to continue the same level of service during the Chapter 11 Case.

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