CMC II, LLC – Court Approves Sale to Non-Debtor Affiliate and DIP Lender CPSTN Operations LLC and Pair of FCA-Related Settlement Agreements

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October 6, 2021 – The Court hearing the CMC II, LLC cases has issued an order approving the sale of substantially all of the Debtors' assets to CPSTN Operations LLC ("CPSTN" or the "Purchaser," a non-debtor affilate) [Docket No. 590] for consideration that includes the entirety of amounts owed by the Debtors to CPSTN under the Debtors' debtor-in-possession ("DIP") facility (ie $5.0mn) and the assumption of liabilities to trade vendors and "personal injury/tort claimants and the payment of additional amounts to the United States and Relator." The CPSTN APA is attached to the order. 

The non-DIP consideration is the centerpiece of a pair of settlement agreements that have now also been approved by the Court. The two agreements (formerly a single agreement but now bifurcated without, the Debtors claim, impacting the economics) are (i) the "FCA Settlement Agreement" amongst the Debtors, the Purchaser, the United States and the Relator (Angela Ruckh) [Docket No. 591] and (ii) the “Committee Settlement Agreement” amongst the Debtors, the Purchaser and the Debtors' Official Committee of Unsecured Creditors (the “Committee”) [Docket No. 592].

Blacklines of each of the CPSTN APA and the two settlement agreements (and a related seal order, authorizing the Debtors to redact much of the detail in respect of what is to be paid by CPSTN to the United States (and then shared with the Relator) in respect of the settlement of FCA claims that drove the Debtors to file for bankruptcy protection in the first place) are filed at Docket No. 587.

The Court approved sale of the Debtors' assets brings together two asset groups which the Debtors had marketed separately: (i) the assets of Debtor CMC II, which provides back-office support for 100+ non-debtor affiliates (the "Manager and Remaining Assets") and (ii) the assets of two other affiliated Debtors each operating a skilled nursing facility (the “SNF Assets”). 

The Debtors had earlier announced the presumptive sale of the SNF Assets to PLV FL Land Holdco LLC ("PLV," an affiliate of Plainview Healthcare Partners) after an auction at which they beat out an earlier named stalking horse (Assisted 4 Living, Inc.) only to have that $2.1mn sale come under intense scrutiny from stakeholders who ultimately compelled CPSTN to purchase the SNF Assets as well as the Manager and Remaining Assets (CPSTN was an unchallenged credit bidding stalking horse ($3.0mn of the DIP) as to the latter).

The result of the settlements is that of instead of purchasing only the Manager and Remaining Assets for 3/5ths of what it was owed under the DIP (with the added benefit that proceeds from the $2.1mn sale of the PLV would have been used to pay down the balance), CPSTN will be buying substantially all of the Debtors' assets and will be parting with the entirety of a fully drawn $5.0mn DIP as well as inter alia (i) making considerable further payments in respect of expenses related to the FCA action; (ii) settling the FCA action with the United States and the Relator; (iii) contributing $500k to the Debtors' estates; and (iv) making a small contribution to general unsecured creditors ($69k plus 3% of the "Remaining DIP Funds" and "Remaining Estate Funding" on account of their Claims). 

NB: As to the "Remaining DIP Funds" (if any of the $5.0mn remains), general unsecured creditors will sit in line behind the Committee's professionals ($500k) and the Debtors' professionals ($1.2mn) who will hold administrative claims; and share that pie with the United States (73%, which then gets shared with the Relator) and the Relator's professionals (24% earmarked for FCA-related expenses).

On March 1st, the Debtors filed for bankruptcy protection citing the impact of a final $257.7mn judgment in a long-running False Claims Act litigation relating to fraudulent Medicare and Medicaid billing. The Debtors are part of a larger group that operates 140 skilled nursing facilities across six states and does business as Consulate Health Care ("Consulate"). The Debtor entities include CMC II, which provides back-office management services to Consulate facilities, and two of Consulate's nursing facilities. The other 138 facilities are not Debtors in these cases.

The sale order provides in part: "…the Debtors having conducted the Auction with respect to the SNF Assets in accordance with the SNF Bidding Procedures; and no Auction being necessary in respect of the Manager and Remaining Assets because no other Qualified Bids other than the bid by the Purchaser having been received for such Assets; and upon consideration of that certain (x) Settlement Agreement (as may be amended in accordance with the terms thereof, the 'FCA Settlement Agreement') among the Debtors, the Purchaser, the United States, and the Relator (the 'FCA Settlement Parties'), and Settlement Agreement (as may be amended in accordance with the terms thereof, the 'Committee Settlement Agreement' and, together with the FCA Settlement Agreement, the 'Settlement Agreements') among the Debtors, the Purchaser, and the Official Committee of Unsecured Creditors (the 'Committee') in these Chapter 11 Cases (the 'Committee Settlement Parties' and, together with the FCA Settlement Parties, the 'Settlement Parties') providing for, among other things, the settlement and compromise of various contested matters arising under or relating to the Chapter 11 Cases, the sale of the SNF Assets to the Purchaser and the Purchaser’s agreement to assume various liabilities of the Debtors and make certain payments to the Debtors’ creditors, as noted in the Debtors’ Motion for an Order Approving Settlement Between and Among the Debtors, CPSTN Operations, LLC, the Debtors’ Nondebtor Affiliates, the United States of America, the Relator, and the Official Committee of Unsecured Creditors (“9019 Motion”); and the Debtors having determined (after consultation with the Settlement Parties), after an extensive marketing and sale process, that the Purchaser has submitted the highest and best bid for the Assets Following the Auction for the SNF Assets, PLV FL Land Holdco LLC (“PLV”) was designated as the Successful Bid for the SNF Assets. On May 26, 2021, the Debtors filed the Notice of Auction Results [Docket No. 283] identifying PLV as the Successful Bidder for the SNF Assets. 

….Following extensive negotiations among the Settlement Parties, and with the consent of PLV, the hearing to consider approval of the sale of the SNF Assets to PLV was adjourned multiple times to facilitate global discussions. Ultimately, as set forth in the 9019 Motion, the Settlement Parties determined that pursuit of the Settlement Agreements, which each included sale of the SNF Assets to CPSTN as a material term, was in the best interest of the Debtors, and would generate substantial additional value for the Debtors, their estates, and their creditors when compared with the sales of the SNF Assets to PLV and the stalking horse sale of the Manager and Remaining Assets to CPSTN."


[As previously reported] On September 1st, the Debtors filed a stipulation relating to a global settlement that unblocks what has been a turgid, complicated and "highly contested" stay in bankruptcy. The settlement amongst the Debtors, CPSTN Operations, LLC, the Debtors’ Non-Debtor Affiliates, the United States of America, the Relator, and the Debtors' Official Committee of Unsecured Creditors includes a revised bid by CPSTN for substantially all of the Debtors’ assets, including the Debtors' SNF Assets.

Credit bidding CPSTN, a non-debtor affiliate and also the provider of the Debtors' debtor-in-possesion ("DIP") financing, had previously only expressed interest in one of two proposed asset sale groupings, the assets of Debtor CMC II (the "Manager and Remaining Assets") which provides back-office support for 100+ non-debtor affiliates that are part of the Consulate Health Care ("Consulate") nursing home group. The settlement will now see CPSTN also purchase the assets of the two skilled nursing homes that filed for bankruptcy with CMC II (the “SNF Assets”). NB: Consulate has a further 138 nursing home facilities are not Debtors in these cases.

The bidding procedures motion states, “[T]he Debtors commenced these Chapter 11 Cases in response to the recent entry of adverse money judgments in a long-running qui tam action – judgments that dwarf the Debtors’ ability to pay and pose risks to the Debtors’ ongoing operations. The Debtors determined, with the guidance of their independent fiduciaries and advisors, to commence these Chapter 11 Cases in order to expeditiously sell their operating businesses as going concerns, to preserve their ability to care for residents, maximize the value of their assets and save as many jobs as possible. To enable that process, the Debtors sought financing for these Chapter 11 Cases and began an extensive prepetition marketing process. After a thorough canvassing of the market for potential lenders, the Debtors obtained debtor-in-possession financing (the ‘DIP Loan’) from the only willing and available source – an affiliate, CPSTN Operations, LLC (the ‘DIP Lender’ or ‘Capstone’). In connection with obtaining the DIP Loan, the Debtors have agreed to certain milestones (the ‘Milestones’) that provide for the Debtors’ sale of substantially all of their assets within certain deadlines. The proposed Bidding Procedures set forth herein are designed to comply with those Milestones.

Prior to the Petition Date, the Debtors engaged Evans Senior Investments (‘ESI’) to act as their broker for purposes of procuring a buyer or buyers for a potential sale of the Debtors’ Assets. With assistance from ESI, the Debtors, through their Independent Manager and Chief Restructuring Officer, conducted a thorough market analysis in connection with the potential sale of the Debtors’ Assets. ESI created marketing information concerning the Debtors and their assets and set up a data room with diligence information for prospective purchasers. ESI contacted more than 100 entities regarding potential interest in acquiring the Debtors’ Assets. Many of these parties entered into confidentiality agreements with the Debtors. ESI engaged with prospective purchasers and responded to various inquiries from such parties.

The Debtors’ robust prepetition marketing process yielded term sheets for two separate transactions: first, a sale of the SNF Assets to a third party, Assisted 4 Living, Inc. (the ‘SNF Stalking Horse’), and second, a separate sale of the Manager and Remaining Assets to Capstone. The key terms of the proposed transactions are set forth in an asset purchase agreement with the SNF Stalking Horse (the ‘SNF Stalking Horse APA’) attached hereto as Exhibit C and a signed term sheet with Capstone (the ‘Manager and Remaining Assets Term Sheet’) attached hereto as Exhibit B, the terms of which are being incorporated into an asset purchase agreement (the ‘Manager and Remaining Assets Stalking Horse APA’ and, together with the SNF Stalking Horse APA, the ‘Stalking Horse APAs’) that will be filed with the Court upon completion. The terms of the Stalking Horse APAs are subject to higher and better offers in accordance with the Bidding Procedures….

The Debtors believe that the Bidding Procedures, in connection with the Stalking Horse APAs, will provide the best opportunity for value-maximizing transactions that preserve as many jobs as possible while ensuring that the Debtors are able to continue operating their businesses and continue to provide for the uninterrupted care, welfare and safety of their residents.”

About the Debtors

According to the Debtors: “Consulate Health Care is a national leading provider of senior healthcare services, specializing in post-acute care. We offer services ranging from comprehensive short-term rehabilitation and transitional care to Alzheimer’s and dementia care. Consulate Health Care began as a small provider in Cheswick, PA with a strong focus on patient needs. We haven’t waivered from that focus, which has strengthened our family and allows us to sustain jobs in many communities, create rigorous systems of care and deploy technology that makes it easier to understand patient needs. Even as we’ve grown to become the sixth-largest provider in the nation and the largest in the Sunshine State, it’s the little things we do while fulfilling our mission statement of ‘Providing Service with Our Hearts and Hands’ that really make the difference.”

The Declaration adds: “The Debtors are part of a group of Consulate Health Care (or “Consulate”) corporate affiliates that manage and operate 140 skilled nursing facilities (“SNFs”, and such managed facilities, the “Managed SNFs”), which are subject to various master leases between non-Debtor affiliated master tenants and third-party landlords. Generally, the operators of these SNFs (the “Managed SNF Operators”) sublease their respective facilities from master tenants; while, in some cases, the SNFs are leased directly from the landlords. At their facilities, the Managed SNF Operators provide a variety of services that include short-term rehabilitation, comprehensive post-acute care, long-term care, and physical, occupational, and speech therapies. 

The 140 Managed SNFs under the Consulate umbrella are spread across six states in the Mid-Atlantic and Gulf Coast. Importantly, approximately 85-90% of the revenue generated by the Managed SNFs comes from government healthcare programs Medicare, Medicaid, or TRICARE for services provided to residents who rely on such programs for their medical expenses. Three Debtors are active, operating companies (CMC II, Marshall and Governor’s Creek), while the remaining three are not (Sea Crest, Salus, and CMC I).”


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