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October 8, 2021 – Further to key settlements and Court approval of the Debtors' asset sale to non-debtor affiliate CPSTN Operations, the Debtors have now filed a Combined Plan of Liquidation and Disclosure Statement (the “Combined Document”) and a motion requesting Court approval of (i) the Disclosure Statement element of the Combined Document (conditionally), (ii) proposed Plan solicitation and voting procedures and (iii) a proposed timetable culminating in a November 17 Plan confirmation hearing [Docket Nos. 603 and 604, respectively].
On March 1, 2021, CMC II, LLC and five affiliated Debtors (dba Consulate Health Care, “CMC” or 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.
On October 6th, 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") [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) 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].
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).
Bottom Line? If confirmed, as is mow almost a certainty given the settlements, the Debtors and Consulate will have successfully employed a Chapter 11 proceeding to obviate all (or substantially all) of their liability under $258.0mn of False Claims Act judgments.
The Combined Document notes, “The Debtors filed their voluntary petitions in order to prevent the disruption and harm that might result from any attempts to enforce the FCA Judgments [$258.0mn, see further below] against the Debtors or their assets and to preserve and maximize the value of their assets.
The Combined Plan and Disclosure Statement reflects a complex settlement reached after months of negotiations between and among the Debtors, the United States of America, CPSTN Operations, LLC and its affiliates, the Committee, and Angela Ruckh. The settlement, which is set forth in two related settlement agreements and an asset purchase agreement, was approved by orders entered by the Bankruptcy Court on October 6, 2021 [Docket Nos. 590 -592] (collectively, the ‘CPSTN Settlement Agreements’). Pursuant to the CPSTN Settlement Agreements, CPSTN or its designee shall acquire substantially all of the Debtors’ assets in exchange for the CPSTN Settlement Consideration. The CPSTN Settlement Consideration includes, among other things,
- the credit bid of all outstanding amounts owed by the Debtors under the CPSTN DIP Loan ($5 million),
- additional estate funding payments by CPSTN of $500,000,
- the assumption of substantially all the Debtors’ trade debt relationships, obligations, and Executory Contracts and Leases, including the assumption and payment of cure claims thereunder, other than those specified in the schedules to the CPSTN Settlement Agreements, as may be amended in accordance with the terms thereof,
- the assumption of substantially all liability arising from personal injury, wrongful death, or other tort liability claims against the Debtors, other than those specified in the schedules to the CPSTN Settlement Agreements, as may be amended in accordance with the terms thereof,
- additional direct payments over time by CPSTN to the United States of America and to Angela Ruckh, with such payments subject to certain guarantees by CPSTN corporate affiliates,
- additional direct contingent payments to the United States and Angela Ruckh following the achievement of certain resident census levels, and other contingent payments, and
- the payment of certain additional amounts over time on account of certain professional fees.
The CPSTN Settlement Agreements also provide, among other things, for the assumption by CPSTN or its designee of the Debtors’ provider agreements with CMS, and the satisfaction of ordinary course overpayment claims owed by the Debtors to the Centers for Medicare and Medicaid Services (‘CMS’), the assumption of liability for any additional ordinary course overpayment claims that CMS may assert in the future, and the payment by the Debtors of certain amounts to CMS on account of traditional overpayment liability or COVID-19 Accelerated and Advance Payments, and the offset by CMS of certain amounts which have been subjected to an administrative freeze.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):
- Class 1 (“DIP Facility Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claim is $5.0mn and expected recovery is 100%.
- Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claim is $3.3mn and expected recovery is 100%.
- Class 3 (“Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claim is $938k and expected recovery is 100%.
- Class 4.1 (“FCA Claim”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $258.0mn and expected recovery is TBD%. Holder shall receive seventy-three percent (73%) of the Remaining DIP Funds and Estate Funding, as full and complete satisfaction of such Claim against the Debtors.
- Class 4.2 (“Relator Expense Claim”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $24.0mn and expected recovery is TBD%. Holder shall receive twenty-four percent (24%) of the Remaining DIP Funds and Estate Funding, as full and complete satisfaction of such Claim against the Debtors.
- Class 4.3 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $94.0mn and expected recovery is TBD%. Holder shall receive such Holder’s Pro Rata Share of (i) three percent (3%) of the Remaining DIP Funds and Estate Funding, and (ii) the Other Unsecured Annual Payment Fund.
- Class 5 (“Equity Claims and Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
- “Remaining DIP Funds” means any unused portion of the DIP Facility after paying administrative or priority claims or any other payments set forth in the CPSTN Settlement Agreements.
Asset Sale and Settlements
On 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 affiliate) [Docket No. 590] for consideration that included the entirety of amounts owed by the Debtors to CPSTN under the Debtors’ debtor-in-possession (“DIP”) facility (i.e., $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].
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”).
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Rundell Declaration”), Paul Rundell, the Debtors’ chief restructuring officer, detailed the events leading to CMC’s Chapter 11 filing. The Rundell Declaration provides: “The filing of the Chapter 11 Cases was precipitated by the recent entry of the judgments in the Ruckh Litigation. The Debtors lack the financial capacity to satisfy the Ruckh Judgments and cannot risk an interruption in care to the residents of the Managed SNFs that might result from enforcement of the Ruckh Judgments. Although the Debtors remain open to a constructive dialogue to resolve the Ruckh Judgments, prior efforts have not resulted in a resolution.”
False Claims Act (Ruckh) Litigation
The Debtors’ need to seek bankruptcy follows a final verdict in respect of False Claims Act (or “FCA”) litigation commenced almost a decade ago by Ms. Angela Ruckh (“Ms. Ruckh” or the “Relator”), a former employee of the Operator Debtors’ predecessors-in-interest (including, La Vie Health Care Centers, Inc). Ms Ruckh alleged that those predecessor entities “defrauded Medicare and the Florida Medicaid program between January 2011 and May 2011 through certain improper billing practices, including by ‘upcoding’ for services provided to residents at the Marshall and Governor’s Creek SNFs and artificially timing spikes in treatment to increase Medicare reimbursements."
Following the Government’s decision not to intervene in the Ruckh Litigation in April 2012, the Relator continued to prosecute the case and amended her complaint several times. Following a jury trial in January 2017, on February 15, 2017, the jury awarded verdicts against the Debtors for damages in the amount of $115,137,095; after treble damages and penalties were assessed, the court entered judgments in the total amount of $347,864,285 on March 1, 2017. The judgments were allocated as follows:
After a series of appeals, on February 9, 2021, the District Court affirmed the judgments as to the Medicare awards (ie $257.7mn) noted above.
Liquidation Analysis (see Exhibit A of Combined Document for notes)
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)."
Corporate Structure Chart
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