Gulf Coast Health Care, LLC – Debtors’ Motion to Transfer 24 Nursing Facilities to Landlord and DIP Lender Omega Healthcare Investors Draws Flurry of Objections, Insistence that Debtors Properly Market Test Value of Healthcare Assets

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November 18, 2021 – The Debtors' November 3rd motion seeking authority to transition and assign 24 facilities (that they lease from Omega Healthcare Investors, Inc. or "Omega") subject to Management and Operations Transfer Agreements (“MOTA(s)”)  [Docket No. 166] has drawn a flurry of objections including from (i) the "Noteholder Claimants" (defined below) [Docket No. 281], (ii) the U.S.Trustee assigned to the Debtors' cases [Docket No. 276], (iii) CMS, HHS and HRSA [Docket No. 274] and (iv) the Debtors' official committee of unsecured creditors (the "Committee") [Docket No. 273].

Principal amongst the concerns expressed is that the Debtors have not sufficiently (ie not at all) marketed the 24 facilities and that absent a credible market test are offering to hand over the lion's share of the Debtors' assets to landlord and DIP lender Omega; while also throwing in releases for the Debtors' complicit insiders and likely leaving unsecured creditors empty-handed and the Debtors' estates adminsitratively insolvent.

The Noteholder Claimants sum up opposition to the MOTA motion as follows: "The Court must seriously question why the Debtors have made such a limited effort to market check the transaction, and to identify other value-maximizing alternatives for their stakeholders. The MOTA Motion (along with the other RSA transactions) should not be approved because there is simply no evidence that this insider-driven private sale transaction represents the highest and best recovery available for the Debtors and their stakeholders, and because the only real beneficiaries of this transaction appear to be the Omega Landlords and the Debtors’ insiders."

Objection Summaries

Noteholder Claimants

REIT Solutions II, LLC (f/k/a REIT Solutions, Inc.), SJB No. 2, LLC, JJT No. 1, LLC, Wet One, LLC and DLF No. 3, LLC (collectively, the “Noteholder Claimants”) have foolowed up on an an earlier objection to the Plan and RSA, arguing that the Debtors are giving away their crown jewels without otherwise sufficiently exploring "alternative, value-maximizing transactions [including] a meaningful market check." The Noteholder Claimants objection provides: "Through the MOTA Motion and related Restructuring Support Agreement (“RSA”), the Debtors seek to implement an expedited handover of their principal operating assets, along with a comprehensive settlement of claims among and between the Debtors, their equity sponsors, insider DIP Lender New Ark, the Omega Landlords and their respective affiliates. Once the transfers contemplated by the RSA and the MOTA Motion have occurred, these cases will be largely over. The Debtors’ estates will be left with a handful of miscellaneous assets—4 operating facilities, pre-transfer accounts receivable from the transferred facilities and causes of action. And should plan confirmation be denied, the estates will be saddled with ruinous administrative claims that complicate if not preclude any alternative plan or transaction.

The Debtors should not be permitted to surrender the majority of its facilities—for consideration insufficient to fund any distribution to unsecured creditors—without first demonstrating that the entire transaction is fair and equitable, More specifically, the Debtors should be required to show that they have made reasonable efforts to maximize recoveries for all stakeholders, and that they have considered and pursued alternative, value-maximizing transactions.

By their earlier objections to the Debtors’ RSA and DIP credit facility, the Noteholder Claimants have raised a number of serious procedural and substantive concerns about the expedited restructuring transactions proposed by the Debtors, including those proposed in the MOTA Motion….These concerns include the benefits afforded to the Debtors’ affiliates, equity sponsors and Omega Landlords, the lack of a meaningful market check, and the fact that the RSA amounts to a sub rosa plan without the safeguards and statutory compliance of a full plan confirmation hearing….These problems and deficiencies also permeate the MOTA Motion, and strongly counsel against granting the relief requested in that motion

The Court must seriously question why the Debtors have made such a limited effort to market check the transaction, and to identify other value-maximizing alternatives for their stakeholders. The MOTA Motion (along with the other RSA transactions) should not be approved because there is simply no evidence that this insider-driven private sale transaction represents the highest and best recovery available for the Debtors and their stakeholders, and because the only real beneficiaries of this transaction appear to be the Omega Landlords and the Debtors’ insiders."

U.S. Trustee

The U.S. Trustee's objection echoes the Noteholder Claimants' concerns as to lack of marketing efforts and also takes issue with the lack of "any discussion regarding (i) the identity/experience of New Manager and/or New Operator with respect to operating facilities similar to the Debtors’ facilities" and what it perceives as attempts to bypass onligations under its existing cash management order.

The U.S. Trustee argues: "By the Motion, the Debtors seek, inter alia, authorization to transfer the management, operations, and related assets of the Omega facilities free and clear of all liens, claims, encumbrances, and interests to NSPRMC II, LLC ('New Manager') or its assignee(s) ('New Operator'). Initially, as noted in his objection to the Debtors’ motion to assume the restructuring support agreement [D.I. 265], there is insufficient evidence in the record to justify what is, in essence, a private sale of the business proposed to be transferred to New Manager and/or New Operator, without any marketing of same….Second, notwithstanding the fact that the Debtors have repeatedly emphasized that patient care is their key focus presently, the Motion does not contain any discussion regarding (i) the identity/experience of New Manager and/or New Operator with respect to operating facilities similar to the Debtors’ facilities, and (ii) New Manager and/or New Operator’s capitalization and ability to satisfy contractual obligations, including the indemnity obligation in favor of the estates…Finally, the Debtors seek permission in the proposed form of order 'to modify their existing cash management system, including opening and closing bank accounts, as necessary in their business judgment to facilitate the implementation and consummation of the MOTA.' No changes to the existing cash management system should be permitted unless the Debtors comply with the final cash management order previously entered in these cases.”

HHS/CMS/HRSA

The United States of America, on behalf of the Department of Health and Human Services (“HHS”), and its component agencies, the Centers for Medicare & Medicaid Services (“CMS”) and the Health Resources and Services Administration (“HRSA”) argue that the proposed MOTA assignments trample on a number of existing obligations/regulations, including: "The United States objects for seven reasons. First, the Existing Operators seemingly seek to transfer their Provider Agreements free of pre-transfer liabilities owed to CMS, in contravention of the CMS Stipulation, the Medicare Act, and CMS Regulations. Second, the MOTAs propose that the new operators may use the Prior Operators’ provider numbers and Provider Agreements while the new operators seek CHOW approval, also directly contravening Medicare regulations. Third, the MOTAs allow the new manager to receive Medicare Payments instead of the Existing Operators, violating Medicare Act anti-assignment restrictions. Fourth, the MOTAs make the License Transfer Date contingent upon the approval of a Change of Ownership (“CHOW”), which is inherently infeasible because it is impossible to process a CHOW Application prior to the transfer of SNF operations. Fifth, to the extent that the MOTAs seek to transfer the PRF distributions, they cannot, as such a transfer would violate the PRF Terms and Conditions and related HRSA guidance. Sixth, the proposed order impermissibly attempts to confer jurisdiction upon the Bankruptcy Court to resolve disputes arising from the Provider Agreements. Finally, any order approving the transfers must preserve the United States’ rights and defenses, including any rights of set off, recoupment or counterclaims under applicable non-bankruptcy law."

Creditors' Committee

The Committee picks up on the lack of any market test and notes that the whole process, designed to "benefit Omega and not the Debtors' estates," comes with a heightened risk that the Debtors will be left administratively insolvent. The Committee argues:"The  Debtors and their insiders seek to rush the approval of a series of transactions that (a) transfer substantially all of the Debtors’ operations for the benefit of Omega (one of the Debtors’ landlords and the Debtors’ DIP lender), (b) secure releases for insiders, and (c) provide no recovery for unsecured creditors. The MOTA Motion is the third and final step in this plan that all but seals the fate of these cases. 

The Debtors ask this Court to grant this extraordinary, case-determinative relief approximately less than 30 days after the Committee’s appointment. As set forth herein, the MOTA Motion fails for the following reasons. First, the Debtors seek to transfer substantially all of their assets under the MOTA without any market test on an expedited time frame. Second, the requested relief benefits Omega, not the Debtors’ estates. Third, the proposed MOTA transaction does not deliver on the promise of relieving the estates of the administrative costs of operating Omega’s facilities, which increases the risk to the unsecured creditors that the estates will be administratively insolvent.

The MOTA Motion

The Debtors' MOTA motion [Docket No. 166] provides: "Following months of financial and operational analysis with their restructuring advisors, as well as an accelerated period of intense, confidential restructuring negotiations in the weeks leading up to the Petition Date with certain of the Debtors’ key stakeholders, including the Omega Landlords and the Debtors’ senior secured lender, New Ark Capital, LLC (‘New Ark’), the Debtors reached agreement on a Restructuring Support Agreement (the ‘RSA’), by and among the Debtors, OHI Asset Funding (DE), LLC (the ‘DIP Lender’), the Omega Landlords (together with the DIP Lender, the ‘Omega Entities’), New Ark, direct and indirect equity holders of the Debtors (the ‘Equity Sponsors’), and certain affiliated entities that provide services to the Debtors (the ‘Service Providers’ and, collectively with the Debtors, the Omega Entities, New Ark, and the Equity Sponsors, the ‘RSA Parties’).

Because of the substantial operating shortfalls at the Debtors’ Facilities and the need to prioritize resident care, the Debtors must transition the Omega Facilities as expeditiously as possible. In order to implement this transition quickly, in light of the various regulatory waiting periods for licensure, the Debtors and the Omega Landlords have identified NSPRMC II, LLC, to serve as an interim manager (the ‘New Manager’) under certain Management and Operations Transfer Agreements (collectively, the ‘MOTA’)…Under the MOTA, the operating expenses of the Omega Facilities will no longer be borne by the Debtors as of December 1, 2021…but rather by New Manager, which will allow the Debtors to focus their efforts on reaching a similar resolution with the Blue Mountain Landlords, and otherwise winding down their affairs through the Plan.

 …. the MOTA…both offloads substantial operating shortfalls and liabilities and ensures ongoing funding for the Omega Facilities as well as continued care for the residents of each Omega Facility. As the only viable alternative available to the Debtors, entering into the MOTA, subject to Court approval, is the only way for the Debtors to ensure that the critical and life-sustaining care that the Debtors provide their residents continues without interruption. Without the MOTA, the Debtors will lose access to their DIP Financing (which is funding the vast majority of the Debtors’ operational losses until the Management Transfer Date) and will be unable to provide the enhanced recoveries to general unsecured creditors provided for under the RSA. Accordingly, the Debtors request that the Court (i) authorize the Debtors to transfer the Omega Facilities and related assets through the transactions contemplated by the MOTA, (ii) authorize the Debtors to take all actions reasonably necessary or desirable to implement the transactions, including rejecting and terminating the Master Lease (as defined herein) and assuming and assigning the Assumed Contracts pursuant to procedures approved by the Court, and (iii) approve the MOTA substantially in the agreed form attached as Exhibit 2 to the Proposed Order."

Background 

On October 22nd, the Debtors sought approval of a Restructuring Support Agreement, dated October 14, 2021 (the “RSA”) with OHI Asset Funding (DE), LLC (the “DIP Lender”), certain affiliates of the DIP Lender (the “Omega Landlords” and, together with the DIP Lender, the “Omega Entities”), New Ark Capital, LLC (“New Ark”), certain direct and indirect equity holders of the Debtors (the “Equity Sponsors”) and certain affiliated entities that provide services to the Debtors (the “Service Providers” and, collectively with the Debtors, the Omega Entities, New Ark, and the Equity Sponsors, the “RSA Parties”) [Docket No. 107]. The RSA is attached to this motion as Exhibit 1 [Docket No. 107-2].

On October 14, 2021, Gulf Coast Health Care, LLC and 61 affiliated debtors (“GCHC” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 21-11336 (Judge Owens). At filing, the Debtors’ lead petition noted estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $100.0mn and $500.0mn.

On October 18, 2021, the Court hearing the Gulf Coast Health Care cases issued an order authorizing the Debtors to access $15.75mn in new money, debtor-in-possession (“DIP”) financing on an interim basis and (ii) use cash collateral [Docket No. 72]. The balance of what is in total $25.0mn of requested DIP financing being provided by OHI Asset Funding (DE), LLC (“Omega”) is to be made available on the issuance of a final DIP order. A DIP term sheet is filed at Docket No. 72.1.

About the Debtors

According to the Debtors: “At Gulf Coast Health Care, we are on a mission to create a legacy of unsurpassed care that evolves to meet changing healthcare needs for all of our patients and their families.

Our skilled nursing, assisted-living, and long-term care centers—and our teams of compassionate healthcare professionals—enjoy a reputation for excellence among centers in the southeastern US. We are people with passion and purpose who take a proactive approach to meeting the needs of residents and patients. Our goal is to achieve the highest level of satisfaction, and our ongoing surveys tell us that we’re doing well and how to continue to evolve and remain the provider of choice. We’re committed to always doing what is right, best and most appropriate for each individual.

With 27 skilled nursing centers and two assisted living locations throughout Florida, Georgia and Mississippi, we offer not just choice and convenience, but also a full range of skilled nursing care and services. Our 6,000-plus team members share our commitments and adhere to our code of conduct to ensure and maximize the safety, dignity, health, quality of life, and development of all of our patients.

At Gulf Coast Health Care, we are cultivating a new generation of care that’s marked by forward thinking, interdisciplinary clinical excellence and a culture that’s people-centric. We are true hands-on caregivers devoted to elevating life, and the soul of our company is relationships, caring, thoroughness, promptness, responsiveness and treating everyone in our care like members of our own family.”

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