To facilitate the transfer of Welcov Healthcare’s 22 skilled nursing facilities to new operators, the provider’s landlords agreed to take a back seat to vendors in the repayment line, with the goal of resolving an unusual bankruptcy proceeding.
That’s according to court documents and a recorded hearing, which detail the transfer of operations and the dismissal of the involuntary Chapter 7 bankruptcy case filed against the Edina, Minn.-based Welcov Healthcare by three creditors: Medline Industries, Healthcare Services Group, and Monida Healthcare Staffing Solutions.
In the end, the parties came together to ensure the safety of residents and prevent care disruptions, with Welcov and the creditors asking a judge to settle the action as quickly as possible.
“The Welcov transaction is a testament to the professionalism of each and every individual who was involved in what was one of the most difficult situations I’ve ever witnessed,” Joseph Weissglass, managing director at Atlanta-based Configure Partners told SNN in an e-mailed statement; the firm served as financial advisor and investment banker to Welcov.
The court also noted the unusual nature of the entire case.
“We don’t get a lot of these kinds of hearings in Minnesota,” Judge Michael Ridgway said in a hearing held January 31 on the joint motion to approve the settlement agreement and dismiss the bankruptcy petition. “I have had occasion to deal with involuntary petitions in two or three different instances, but none quite the same character and flavor, if you will, of this one.”
Landlords subordinate claims to vendors
The involuntary bankruptcy was filed on January 18 in the U.S. Bankruptcy Court for the District of Minnesota, Minneapolis Division. Welcov — which was insolvent and owed about $17.5 million to unsecured vendors, service providers and other parties — had agreed with its landlords to transfer operations to new parties.
This had the effect of “tapping the brakes” on any transfer activities, according to George Mesires, partner at Faegre Baker Daniels; Mesires was not involved in the case, but agreed to review the court documents on SNN’s behalf to provide an independent analysis. Given the time-sensitive nature of a skilled nursing bankruptcy, with vulnerable residents involved, the parties quickly came together and agreed to a settlement.
“That settlement included a concession by the landlords to subordinate their secured claim (with a limited exception) to all of the trade debt,” Mesires said.
In approving the request, the judge also dismissed the involuntary bankruptcy petition. Instead, the parties involved agreed to a process known as assignment for the benefit of creditors (ABC) under Minnesota law — which Mesires noted is less expensive than a bankruptcy. The assignment will be funded by the senior secured creditor, MidCap Funding IV Trust, up to $170,000.
Lighthouse Management Group, Inc., a Brighton, Minn.-based consulting firm that specializes in corporate turnarounds, is serving as the assignee. In this role, Lighthouse is facilitating the transfer of the properties to the new operator. It will also collect the Welcov accounts receivable and distribute the receipts to MidCap, the trade creditors, the landlord advances if any are made, the unsecured trade creditors, and lastly, the landlord claims.
Specifically, the trade vendors will receive an aggregate amount of $1.25 million before any of the landlord advances, defined in the settlement agreement as funds for health care expenses and accrued payroll expenses due after February 1.
Because Welcov was slated to run out of money on February 1, according to the emergency joint petition, the landlords involved – of which Sabra Health Care REIT (Nasdaq: SBRA) was one – agreed to move to the back of the line.
“We did agree to that as a way to facilitate the transfer of the Sabra Welcov facilities to one of our existing operators,” Sabra CEO Rick Matros confirmed to SNN. “That has since occurred.”
All parties share ‘a little bit of the pain’
By agreeing to the settlement, the landlords are able to install new operators in the facilities without having to shut them down, Mesires noted. This would be a particular consideration given that the 22 facilities had more than 1,300 residents, as David Gordon, shareholder at Polsinelli and counsel for Welcov, noted in the January 31 hearing.
“In order for another operator to take on these facilities in a smooth and organized way, they’re going to have to have vendors,” Alan Schabes, a partner at the law firm Benesch, Friedlander, Coplan & Aronoff LLP with a national health care law practice, told SNN; like Mesires, he reviewed the case at SNN’s request. “And if the vendors were completely zeroed in the bankruptcy, their willingness to engage in the facilities will be extremely undermined.”
Schabes noted that he had not been involved with the case and did not know how the situation developed in real time. But he said that based on the court documents, the facilities’ new operators will now be able to contract with vendors and take care of patients without any interruption – and the landlords will maintain cash flow in the form of rent payments from the new operator.
The deal also allows the trade creditors to receive some measure of relief that they might otherwise not have received.
“This result is in the best interest of all parties,” a representative for MidCap said in the January 31 hearing. “I think everyone is sharing in a little bit of the pain, but the unsecured creditors come out much better, I believe, if the Chapter 7 petition is dismissed and if we go through with the ABC, because otherwise they probably would not have gotten the subordination from the landlords.”