“One pill makes you larger
And one pill makes you small….”
— “White Rabbit” by Jefferson Airplane
Senior Care Centers Inc., a chain of skilled nursing facilities, accomplished the feat of filing once as a complex chapter 11 case in 2018 (“First Case”) and then re-filing as a small business debtor in 2021 (“Second Case”). This success can be attributed to its ability to shed debt in its First Case, as well as in its decision to exclude its operating subsidiaries (and their debt) from its Second Case.
In 2018, the company sought bankruptcy protection in the Northern District of Texas in Case No. 18-33967 and requested complex case status based on having more than $10 million in debt and more than 50 parties in interest. It emerged a year later with a confirmed plan that was substantially consummated in March 2020. Under the plan, it pared back its operations from more than 100 facilities to approximately 22 of its best-performing locations.
In 2021, it filed a new case, along with parent company Abri Health Services, LLC, in Case No. 21-30700, and it elected to be treated as a small business debtor filing under subchapter V of chapter 11.
Some Background on Large and Small Cases
The “complex” case designation is not found in the Bankruptcy Code. It references a series of procedures adopted by local rules in various bankruptcy courts to allow the court to more efficiently deal with larger cases.[1] The complexity of the original Senior Care Centers case is shown by the fact that the case has over 3,000 docket entries.
Subchapter V was added to the Bankruptcy Code and went into effect on Feb. 20, 2020. Initially, subchapter V was only applicable to cases with aggregate debt of $2,725,625.[2] However, just one month later, on March 27, 2020, this debt limit was temporarily increased to $7,500,000 by the CARES Act. The debt limit will revert to the original level on March 27, 2022, unless extended by Congress. Subchapter V includes several provisions designed to make smaller cases more affordable. There is no creditors’ committee,[3] disclosure statements are not required,[4] and the absolute priority rule is replaced by a disposable-income requirement.[5]
How Did the Cases Change?
In the First Case, Senior Care Centers and its affiliates entered bankruptcy with $45.56 million in secured asset-based-lending debt.[6] The debtor had $4.33 million in additional secured debt and owed $35 million to landlords. Finally, the debtor owed $36.7 million in unsecured trade debt. Thus, when Senior Care Centers entered the First Case, it had over $120 million in debt and truly qualified as a “complex case.”
When Senior Care Centers filed the Second Case, it reported just $3,065,730 in debt, nearly all of which was unsecured. The schedules stated that $500,000 of unsecured debt consisted of claims classified as “Holders of Allowed Convenience Class Claims” under the plan in the First Case, and that $2,494,717.62 consisted of rent owed to a landlord with which the debtor had ongoing difficulties. The parent company, Abri, listed $2,676,709.02 in debt consisting primarily of the same rental obligations.
Going from $120 million to $3 million in debt is a major feat. Part of this reduction was accomplished by the deleveraging of the company’s balance sheet, which occurred in the First Case. The substantial amounts of secured debt were refinanced and then paid after the First Case, leaving the parent companies relatively debt-free. However, the second reduction in debt came from the decision of which debtors filed bankruptcy. In the First Case, Senior Care Centers filed along with its operating subsidiaries, which had the unsecured trade debt.
In the Second Case, only the two parent companies filed. TXMS Real Estate Investments Inc., the landlord with the large claim in the Second Case, objected to the debtors’ designation as a small business debtor, claiming that they were seeking “to have their cake and eat it, too.” Apparently Senior Care Centers Inc. and the operating entities were all parties to a master lease with TXMS. When Senior Care Centers filed bankruptcy, it contended that the automatic stay prohibited TXMS from terminating the master lease, thus protecting the nondebtor operating entities. However, because the operating entities did not file, Senior Care Centers sought to have their trade debt excluded from the subchapter V eligibility calculation.
The court has not heard the objection, so it is not known whether Senior Care Centers’ strategy to take advantage of subchapter V will succeed. However, its strategy appears to make financial sense. A complex case has complex costs for the debtor. In the First Case, Senior Care Centers was dealing with a panoply of debt. In the Second Case, it was dealing primarily with a single creditor. By limiting the entities that filed, Senior Care Centers could attempt to achieve a more cost-effective remedy for dealing with what it described as a recalcitrant lessor.
No comments:
Post a Comment