In re Passage Midland Meadows Operations, LLC

• Citation: 578 B.R. 367
• Decision Date: 01 December 2017
• Docket Number: A.P. NO. 3:17–ap–3010,CASE NO. 3:17–bk–30092
• Court: U.S. Bankruptcy Court — Southern District of West Virginia
• Parties: IN RE: PASSAGE MIDLAND MEADOWS OPERATIONS, LLC, Passage Village of Laurel Run Operations, LLC, Passage Longwood Manor Operations, LLC, and Passage Healthcare Property, LLC, Debtors-in-Possession.

578 B.R. 367

IN RE: PASSAGE MIDLAND MEADOWS OPERATIONS, LLC, Passage Village of Laurel Run Operations, LLC, Passage Longwood Manor Operations, LLC, and Passage Healthcare Property, LLC, Debtors-in-Possession.

CASE NO. 3:17–bk–30092

A.P. NO. 3:17–ap–3010

United States Bankruptcy Court, S.D. West Virginia, At Charleston.

Signed December 1, 2017

Elizabeth A. Amandus, L. Jill McIntyre, Jackson Kelly PLLC, William F. Dobbs, Jr., Charleston, WV, for Debtors-in-Possession.

Michael L. Bernstein, Charles A. Malloy, Arnold & Porter Kaye Scholer LLP, Washington, DC, Benjamin Mintz, Arnold & Porter Kaye Scholer LLP New York, NY, and Julia A. Chincheck, Bowles Rice LLP Charleston, WV, for Creditor

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Frank W. Volk, Chief Judge United States Bankruptcy Court

Pending are (1) the Motion Filed by Creditor Welltower Inc. to Determine that the Automatic Stay Does Not Apply to Recovery of Possession or for Stay Relief ("stay relief motion") [Dckt. 73], (2) the Motion by Passage Healthcare Property, LLC, Passage Longwood Manor Operations, LLC, Passage Midland Meadows Operations, LLC, Passage Village of Laurel Run Operations, LLC, (collectively "Passage") for a Final Order Authorizing the (a) Use of Cash Collateral, and (b) Grant of Adequate Protection ("cash collateral motion") [Dckt. 6], (3) the Motion of PHSG, LLC, for Relief From Stay or, Alternatively, for Adequate Protection ("adequate protection motion") [Dckt. 126], and (4) Passage's Motion (in the adversary proceeding) to Extend the Automatic Stay Under 11 U.S.C. § 362(a) and for Preliminary Injunction Under 11 U.S.C. § 105, Adv. Pro. No. 17–03010 (Adv. Dckt. 2) (the "application for a preliminary injunction").¹

On April 26, 2017, the Court held a preliminary hearing on the stay relief motion and the adequate protection motion. On May 23 and 24, 2017, the Court held a final evidentiary hearing on the stay relief motion, the cash collateral motion and the application for a preliminary injunction.

Based upon the admissible evidence received, the Court now enters its findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.

I.

Passage leases and operates three healthcare facilities owned by Welltower. The facilities are (1) Midland Meadows in West Virginia, (2) The Village of Laurel Run, and (3) Longwood Manor, both of which are in Pennsylvania ("facilities"). The facilities provide assisted living, skilled nursing, independent living and dementia care for over 400 residents.

On August 4, 2015, Welltower and Passage Healthcare Property, LLC ("Passage Property"), entered into the Amended and Restated Master Lease ("Master Lease") that is central to this dispute. In sum, Welltower leased the facilities to Passage Property, the tenant, which in turn subleased them to the three affiliated subtenants, (1) Passage Midland Meadows Operations, LLC, (2) Passage Village of Laurel Run Operations, LLC, and (3) Passage Longwood Manor Operations, LLC. The Master Lease is representative of the customary leases found in the senior living industry.

The four aforementioned Passage entities are owned by Passage Healthcare LLC ("Passage Healthcare"). The members of Passage Healthcare, a non-debtor, are Andrew Turner and William F. Lasky. Passage Healthcare's sole business is its ownership of Passage and managing the facilities pursuant to the subleases with the three Passage subtenants. Each of the Passage subtenants is a guarantor of Passage Property's Master Lease obligations. The principals of Passage are savvy and possessed of exceptional expertise in the senior care health industry. Mr. Lasky has more than thirty years of experience. He previously operated over 500 senior-care facilities nationwide and served as Chairman of the Assisted Living Federation of America. Mr. Turner has more than forty-three years of experience, operating over 1,600 senior care facilities in nine countries during his career. Throughout their negotiations with Welltower, which are detailed within, Mr. Turner and Mr. Lasky were represented by well-qualified legal counsel.

Mr. Lasky identified Welltower as a real estate investment trust following a pleasant twenty-year relationship with Welltower. For example, during the 1980s, a company owned by Mr. Lasky had leases with Welltower. Welltower is a Delaware corporation headquartered in Toledo, Ohio. HCRI Pennsylvania Properties Holding Company ("HCRI") is a Delaware statutory trust. Welltower is the HCRI trustee, with its principal place of business in Ohio. Joe Weisenburger, the Vice President of Business Development at Welltower, testified at the evidentiary hearing and in certain declarations. He has served Welltower for two decades. Mr. Weisenburger's written and oral testimony is deemed credible and consistent with other evidence in the record. He provided prompt and thorough answers demonstrating both a depth of knowledge of the course of dealing with Passage without so much as a hint of structuring or reaching. His behavior on the stand was characteristic with one accurately recounting a series of material events.

At some point in 2015, Welltower learned the facilities were being marketed by a broker on behalf of their former owner. Although Welltower and Passage later entered the Master Lease as to these facilities, neither Mr. Lasky nor Mr. Turner were responsible for Welltower learning of the purchase opportunity. Welltower was hesitant to pay the asking price for the facilities. In the end, Welltower paid $66.5 million to acquire the facilities, along with the $2.7 million contingent payment amount used for subsequent renovations to the Laurel Run Facility, as set forth below:

Date Welltower Funding Transaction
                07/10/2015                 $49,180,000         Pennsylvania acquisitions
                08/04/2015                  17,320,000         West Virginia acquisition
                09/04/2015 to 07/01/2016     2,700,000         Laurel Run capital improvements
                                           $69,200,000 TOTAL
                

Mr. Lasky testified that he, Mr. Turner and Passage "paid almost $5.7 million toward the purchase of three Senior Care Facilities." That contention finds scant support in the record when the particular elements of that alleged contribution are analyzed. Those components are (1) seller notes ($4.195 million), (2) transaction costs and legal fees ($692,000 and $330,000 respectively), and transfer taxes ($470,000).

First, the $4.195 million in seller notes were issued to the sellers either by the nondebtor Passage Healthcare and guaranteed by Mr. Lasky and Mr. Turner or, alternatively, by those two gentlemen individually. In either eventuality, the contribution was made of their own volition, without encouragement from Welltower, and designed to nudge Welltower to accomplish the acquisition. Second, the combined $1,022,000 transaction costs and legal fees were, in actuality, paid at closing by Welltower. Third, the $470,000 in transfer taxes were paid by the seller, a somewhat unusual but apparent outcome. Indeed, Salvador Ramos, Passage Healthcare's Chief Financial Officer, was unable to identify a transfer tax payment. Thus, all acquisition costs and related transaction expenses were funded by Welltower, other than the amounts financed through certain seller notes. All amounts paid, if any, under the seller notes originated from Passage funds, without personal contribution by either Mr. Lasky or Mr. Turner. It is further the case that the improvement costs for the Laurel Run renovations were paid entirely by Welltower.

The next set of findings deals with the events of default under the Master Lease. These events of default consist of the following: (1) failing to pay rent according to the terms of the Master Lease since August 2015, (2) breaching every financial covenant under the Master Lease since August 2015, (3) accomplishing impermissible distributions and payments to affiliates and insiders during the events of default, beginning in 2015, continuing throughout the Master Lease, and post-petition, (4) defaulting under the PHSG loan, a default on a "Material Obligation" under the Master Lease; (5) failing to provide required financial reports and certifications under Section 15.3 of the Master Lease since 2015 and continuing post-petition, (6) failing to provide requested information in connection with the necessary transition of operations, and (7) failing to provide a replacement letter of credit. These events of default are more fully described in Welltower's Proposed Findings of Fact and Conclusions of Law, which description the Court adopts herein.

The next set of findings involves Welltower's termination of the Master Lease following the largely undisputed events of default. In June 2016, Welltower entered into a Forbearance Agreement with Passage ("Forbearance Agreement") following Passage's many breaches. In the Forbearance Agreement, Passage acknowledged the events of default, including (1) the failure to pay rent and (2) the disregard of the financial covenants. Passage admitted these events of default authorized Welltower to terminate the Master Lease or exercise its additional remedies thereunder. The Forbearance Agreement relieved Passage from certain payment and covenant obligations, thus providing Passage an opportunity to demonstrate going forward its ability to comply with the Master Lease obligations, avoid default, and a Master Lease termination by Welltower. Passage soon breached its payment obligations, however, and committed a "Forbearance Default." This resulted in Welltower being immediately vested with the right to terminate the Master Lease. Despite this authorization, and without waiving its remedies, Welltower again provided Passage the opportunity to comply. In sum, the Forbearance Agreement expired on October 1, 2016, and Welltower explored with Passage the possibility of remediating the repeated rent shortfalls and other financial defaults.

On January 11, 2017, Welltower met...