EXHIBIT 99.1
SILLS CUMMIS RADIN TISCHMAN
EPSTEIN & GROSS, P.A.
Jack M. Zackin (JZ 2540)
Andrew H. Sherman (AS 6061)
One Riverfront Plaza
Newark, New Jersey 07102
(973) 643-7000
Attorneys for the Debtor and Debtor-in-Possession
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW JERSEY
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Chapter 11
In re:
Case No. 00-32578 (NLW)
GRAND COURT LIFESTYLES, INC.,
Hearing Date: November 16, 2000
Debtor. Time: 11:00 a.m.
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DEBTOR'S APPLICATION FOR (I) AUTHORITY TO SELL SUBSTANTIALLY ALL OF THE
DEBTOR'S INTERESTS IN ITS SENIOR LIVING PORTFOLIO TO CAPITAL SENIOR
LIVING, INC. AND TRIAD SENIOR LIVING, SUBJECT TO HIGHER AND BETTER OFFERS,
(II) APPROVAL OF THE SALE PROCEDURES RELATED THERETO, (III) APPROVAL OF
THE FORM OF SOLICITATION TO LIMITED PARTNERS; (IV) REDUCTION OF CLAIMS
HELD BY LIMITED PARTNERS AGAINST THE DEBTOR; AND (V) APPROVAL OF
SETTLEMENT OF CONTROVERSY REGARDING THE MOTION OF THE OFFICIAL COMMITTEE
OF UNSECURED EQUITY INVESTORS TO TERMINATE THE DEBTOR'S PARTNERSHIP AND
MANAGEMENT AGREEMENTS
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TO: THE HONORABLE NOVALYN L. WINFIELD,
UNITED STATES BANKRUPTCY COURT JUDGE:
Grand Court Lifestyles, Inc. as debtor and debtor in possession in this
chapter 11 case (the "Debtor"), respectfully represent as follows:
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Introduction
1. Over the last number of weeks, the Debtor, the Examiner appointed
herein and both official committees have worked together in a diligent and
concerted manner to formulate a methodology to enable the Debtor to emerge from
chapter 11 protection. The parties have been successful in this endeavor and
have composed a two-step exit strategy: (a) the substitution of the Debtor as
the general partner and a sale of substantially all of the Debtor's right, title
and interest in approximately forty-seven (47) senior living communities
identified in Exhibit A hereto, along with a transfer of the management rights
thereof (the "Senior Living Assets"); and (b) a plan and disclosure statement
supported by each committee. The instant motion will initiate the first stage in
the process.
2. As set forth at length herein, the Debtor, the Examiner and both
committees have determined that it is in the best interests of the estate for
the Debtor to sell the Senior Living Assets. Based on this recognized need, the
parties have negotiated an asset purchase agreement (the "CSL Purchase
Agreement") with Capital Senior Living -GC, Inc.("Capital") and Triad Senior
Corporation ("Triad", collectively or in combination with Capital "CSL"),
whereby the Debtor will sell the Senior Living Assets for the total
consideration of seven million dollars ($7,000,000) to CSL, subject to the terms
and conditions set forth at length in the CSL Purchase Agreement , and subject
to higher and better offers.(1) A copy of the CSL Purchase Agreement,
substantially in the form to be executed by the parties, is annexed hereto as
Exhibit B.
3. By this application (the "Sale Motion"), the Debtor requests, pursuant
to sections 105, 363 and 365 of title 11, United States Code (the "Bankruptcy
Code"), and Rules 2002, 3007, 6004, 6006 and 9019 of the Federal Rules of
Bankruptcy Procedure (the "Bankruptcy Rules"), authorization to sell the Senior
Living Assets to CSL or to a higher and better offer. In order to facilitate the
orderly sale of the Senior Living Assets, the Debtor further requests that this
Court
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(1) As set forth at length in the CSL Purchase Agreement, Capital and Triad
have different roles and performance obligations.
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establish sale and bidding procedures (the "Sale Procedures"), guidelines for
the sale and a form of solicitation to enable the limited partners to approve
the proposed transaction.
4. In conjunction with the CSL Purchase Agreement and the proposed sale
transaction, the Debtor further seeks an order pursuant to Rule 3007 of the
Bankruptcy Rules reducing all actual and potential claims held by the
partnerships and all limited partners relating to the Senior Living Assets
against the estate to the aggregate amount of five million dollars ($5,000,000).
5. In addition, upon closing of the CSL Purchase Agreement, Triad or any
higher bidder approved by the Court and the Equity Committee will replace the
Debtor as the general partner in the Owing Partnership and Investing
Partnerships and Capital will replace the Debtor as the manager of the Senior
Living facilities.
6. Accordingly, approval of and closing on the CSL Purchase Agreement will
resolve the issues raised in the Motion filed by the Official Committee of
Unsecured Equity Investors to Terminate the Debtor's Interests in the Management
Agreements and Partnership Agreements (the "Termination Motion"). The Debtor is
therefore also requesting approval of a settlement pursuant to Bankruptcy Rule
9019 and relief under section 365 of the Bankruptcy Code whereby the transfer of
the Debtor's interests in certain Owning Partnership and Investing Partnerships
(as those terms are defined herein) to CSL or a higher bidder and a rejection of
the Management Contracts (as defined herein) will constitute a settlement of the
Termination Motion.
BACKGROUND
7. On March 20, 2000 (the "Petition Date"), the Debtor filed with this
Court a voluntary petition for relief under chapter 11 of the Bankruptcy Code.
8. The Debtor continues to operate its business and manage its properties
as a debtor in possession pursuant to sections 1107(a) and 1108 of the
Bankruptcy Code.
9. On or about April 6, 2000, the Office of the U.S. Trustee appointed an
Official Committee of Unsecured Creditors (the "Creditors Committee") and on
April 6, 2000, the Office
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of the U.S. Trustee appointed an Official Committee of Unsecured Equity
Investors (the "Equity Committee", collectively with the Creditors' Committee,
the "Committees").
10. On or about June 27, 2000, this Court entered an Order directing the
appointment of an examiner. Pursuant thereto, Brian T. Moore was appointed as an
examiner herein (the "Examiner").
11. This Court has jurisdiction over this Motion pursuant to 28
U.S.C.ss.ss.157 and 1334. Venue is proper pursuant to 28 U.S.C.ss.ss.1408 and
1409. This is a core proceeding pursuant to 28 U.S.C.ss.157(b)(2).
DESCRIPTION OF THE BUSINESS
12. The Debtor is a fully integrated provider of senior living
accommodations and services which acquires, develops and manages senior living
communities which offer independent and assisted living services. The Debtor is
a corporation formed in 1996 to consolidate substantially all of the assets of
its predecessors, J&B Management Company, Leisure Centers, Inc. and their
affiliates. The Debtor is one of the largest managers of senior living
communities in the United States, operating communities offering both
independent and assisted-living services. The Debtor's operating objective is to
provide high-quality, personalized living services to senior residents,
primarily persons over the age of 75. The median age of the residents is 82.
13. Historically the Debtor's revenues were primarily derived from sales
of partnership interests ("Syndications") of partnerships it organized to
acquire existing senior living communities ("Syndicated Communities"). The
Debtor also established a development program (the "Development Plan") pursuant
to which it built senior living communities offering independent and assisted
living services ("Development Communities"), which were either wholly-owned by
the Debtor, owned pursuant to joint venture arrangements or operated pursuant to
long-term leases. The Debtor manages both the Syndicated Communities and the
Development Communities.
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14. As of October 31, 1999, the Debtor also held investment notes and
receivables from various partnerships that own 118 multi-family properties
containing approximately 12,897 apartment units, which notes and receivables are
to be repaid from the cash flow and sale or refinancing proceeds these
properties generate. As of October 31, 1999, the recorded value, net of deferred
income, of these notes was $99.6 million and the recorded amount of these
receivables was $55.6 million. In March 1998, in an initial public offering of
its common stock, the Debtor sold 2,800,000 shares of its common stock at a
price of $9.50 per share. The net proceeds, after deducting for all offering
expenses, that the Debtor received as a result of this offering was $22,300,000.
15. As of the Petition Date, the Debtor employed approximately 2,500
persons, including 21 in the Debtor's executive offices in New Jersey, 43 in the
principal executive offices in Florida and the remainder at the various
communities. None of the Debtor's employees are covered by collective bargaining
agreements. For the fiscal year ending January 31, 1999, the Debtor's revenues
were approximately $92 million, and it had assets of approximately $319 million
and liabilities of $284 million.
The Debtor's Syndication of Properties
16. The Debtor arranged for the acquisition of senior living communities
by utilizing mortgage financing and by arranging Syndications of limited
partnerships ("Investing Partnerships") formed to acquire interests in the
partnerships that own the Syndicated Communities ("Owning Partnerships"). The
Syndicated Communities are managed by the Debtor. The Syndicated Communities are
owned by the respective Owning Partnerships and not by the Debtor. In a typical
Syndication, the Debtor identified a senior living community suitable for
acquisition and formed an Owning Partnership (in which a wholly owned Debtor
subsidiary is the managing general partner and the Debtor initially owned all of
the remaining partnership interests) to acquire the community. An Investing
Partnership was also formed (in which a
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wholly owned Debtor subsidiary is also the general partner with a 1% interest)
to purchase from the Debtor a 99% partnership interest in the Owning Partnership
(the "Purchased Interest"), leaving the Debtor's subsidiary with a 1% interest
in the Owning Partnership and the Investing Partnership. The purchase price for
the Purchased Interest was paid in part in cash and in part by a note from the
Investing Partnership with a term of approximately five years (a "Purchase
Note"). Limited partners purchased partnership interests in the Investing
Partnership by agreeing to make capital contributions over approximately five
years to the Investing Partnership. Such capital contributions enable the
Investing Partnership to pay the purchase price for the Purchased Interest.
Limited Partners are typically permitted to pre-pay their scheduled capital
contributions. The limited partnership agreement of an Investing Partnership
provides that the limited partners are entitled to receive distributions equal
to between 11% and 12% per annum of their then paid-in scheduled capital
contributions. In addition, as part of the purchase price paid by the Investing
Partnership for the Purchased Interest, the Debtor receives an approximate 40%
interest in sale and refinancing proceeds after certain priority payments to the
limited partners.
17. The Debtor also entered into a management contract (a "Management
Contract") with the Owning Partnership pursuant to which the Debtor agreed to
manage the Syndicated Community. As part of the management fee arrangements, the
Management Contract required the Debtor, for a period not to exceed five years,
to pay to the Owning Partnership (to the extent that cash flows generated by the
property are insufficient) amounts sufficient to fund (i) any operating cash
deficiencies of such Owning Partnership and (ii) any part of the specified rate
of return to limited partners not paid from cash flow from the related
Syndicated Community (which the Owning Partnerships distribute to the Investing
Partnerships for distribution to limited partners) (collectively, the
"Management Contract Obligations").
18. The Management Contract also rewards the Debtor for successful
management of the property by allowing the Debtor to retain as an incentive
management fee any cash flow
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generated by the Syndicated Community in excess of the amount needed to satisfy
the Management Contract Obligations. After the initial five-year period, the
limited partners are entitled to the same specified rate of return, but only to
the extent there is sufficient cash flow from the Syndicated Community. Any
excess cash beyond the distribution of the specified rate of return is shared
sixty percent (60%) to the Owning Partnership to be distributed to the limited
partners and forty percent (40%) to the Debtor.
Relief Requested
19. The Debtor respectfully requests, pursuant to sections 105, 363 and
365 of the Bankruptcy Code and Rules 2002, 3007, 6004, 6006 and 9019 of the
Bankruptcy Rules, (a) entry of the Sale Procedures Order approving (i) the Sale
Procedures, (ii) the form of solicitation to the limited partners by the Equity
Committee to be used in connection with the sale of the Senior Living Assets,
substitution of general partners, an amendment to the partnership agreements and
transfer of the management of the facilities, (iii) the notice of the sale and
the sale hearing (the "Sale and Hearing Notice") and (iv) certain bidding
protections for CSL including an expense reimbursement agreement and overbid
amount for Triad, and (b) entry of the Sale Order approving, among other matters
(i) the sale of the Senior Living Assets free and clear of liens, claims and
encumbrances, (ii) the CSL Purchase Agreement (iii) settlement of the
Termination Motion, including the rejection of existing management contracts
pursuant to section 365 of the Bankruptcy Code (iv) the substitution of Triad or
its designee as general partner for each of the owning and investing
partnerships; and (v) the reduction and allowance of the claims held by all
limited partners, Owing Partnerships and Investing Partnerships against the
estate to the aggregate amount of five million dollars ($5,000,000) and (c)
authorizing each of the owning partnerships to enter into a new management
agreement with Capital or its designee .
The Proposed Sale of the Debtor's Senior Living Assets
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20. During the pendency of this Chapter 11 case, the Debtor among a number
of other things, considered and evaluated the options available to it in order
to reorganize its operations and maximize the corresponding values to its estate
to benefit all creditors and parties in interest. As the case progressed, it
became apparent to the Debtor that such goals could only be achieved through
some form of outside investment in the company, sale of the majority of the
Debtor's interests in its senior living portfolio or a sale of the business in
its entirety. As a result, the Debtor made extensive efforts to locate potential
investors and/or purchasers during the pendency of this case.
21. Through these efforts the Debtor located CSL. The Debtor, the Examiner
and both Committees engaged in negotiations to determine whether a transaction
with CSL would satisfy their requirements. As a result of these difficult and
extensive negotiations, on or about October 18, 2000, the Debtor, the Examiner,
and both Committees executed an initial term sheet with CSL. After additional
negotiations, the parties agreed to the CSL Purchase Agreement which embodies
the parties' agreement for the sale of the Senior Living Assets.
22. The CSL Purchase Agreement and the sale of the Senior Living Assets to
CSL contemplated thereby is subject to this Court's approval or approval of a
higher and better offer at a sale to be conducted pursuant to Bankruptcy Code
section 363(b).
The CSL Purchase Agreement
23. The following is a brief outline of the salient terms of the CSL
Purchase Agreement(2):
Structure The Senior Living Assets shall include the
Debtor's General Partnership Rights and
General Partnership Interest (as those terms
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(2) The CSL Purchase Agreement defines the precise terms of, and governs, the
relationship between the parties regarding the sale. To the extent that
there is an inconsistency between the terms of the CSL Purchase Agreement
and the following description, the CSL Purchase Agreement shall control.
All creditors, limited partners and parties in interest are encouraged to
read the entire CSL Purchase Agreement.
are defined in the CSL Purchase Agreement),
limited partnership interests, any purchase
notes and related rights, investor notes,
loans and exchanges and other receivables
associated with the Facilities. Capital may
purchase the Debtor's interests in the
Management Contracts, or have the Management
Contracts rejected to allow Capital to enter
into new management agreements.
Sale Price: The sale price shall be seven million
dollars ($7,000,000) payable in cash on
closing (the "Sale Price"). The Sale Price
is paid from a purchase price allocation
among the respective Investing Partnerships
and treated as preferred capital of the
respective Investing Partnerships . Such
preferred capital shall bear a return of
fifteen percent (15%) per annum.
Bank Debt: Triad will guarantee the Debtors'
obligations totalling approximately $13.4
million to various banks, secured by the
Debtor's interest in investor notes having a
face amount of approximately $17.7 million.
Triad will cause the withdrawal of any
claims filed against the Debtor by these
banks.
Bank Debt Escrow The Creditors' Committee shall
establish an escrow account in the amount
$1,700,000 from the $7 million sale proceeds
for the benefit of Triad and to be paid if
Triad is required to pay amounts on the
guarantee.
Claim Reduction All claims (administrative, constructive
trust, priority, etc.) held by limited
partners, Owning Partnerships, Investing
Partnerships
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against the estate relating to the Senior
Living Assets will be reduced to an
aggregate of five million dollars
($5,000,000).
Debt Restructuring Triad will undertake to
negotiate on behalf of the partnerships with
lenders which mortgage loans are in default
or will mature in the near future.
The Sale Procedures
24. In an effort to insure that maximum value is obtained for the Senior
Living Assets, the Debtor requests that this Court approve the following Sale
Procedures. The Debtor believes that a sale of the Senior Living Assets
conducted in accordance with the Sale Procedures will maximize the value of the
Senior Living Assets. The proposed Sale Procedures are follows:
(a) On a date no later than three (3) business days following entry of the
order approving the Sale Procedures (the "Sale Procedures Order"), the Debtor
shall mail the Sale and Hearing Notice by first class mail, postage prepaid, to
(a) all potential purchasers identified by the Debtor, the Examiner or the
Committees (b) the Office of the United States Trustee, (c) counsel to each
Committee, (d) the parties in interest who have requested notice pursuant to
Bankruptcy Rule 2002, (e) all known creditors; (f) all known limited partners in
the Investing Partnerships; (g) all known entities holding or asserting a
security interest in or lien against any of the Senior Living Assets, (h) all
government agencies required to receive notice of proceedings under the
Bankruptcy Rules; and (i) the Securities and Exchange Commission.
(b) The Senior Living Assets shall be sold in a single sale to a single
bidder free and clear of liens, claims and encumbrances. Prior to the sale,
potential bidders will be pre-qualified by the Debtor, Examiner and the
Committees with respect to their financial ability to consummate the sale
transaction. In addition, the Equity Committee will pre-qualify potential
bidders with respect to their qualification to serve as manager and general
partner of the Facilities. Qualified
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Bidders will be allowed to perform reasonable due diligence on the Senior Living
Assets, including reasonable access to the Debtor's due diligence room.
(c) All bids must be in writing and executed by the bidders. All bids must
be submitted in writing so that they are actually received by no later than
11:00 a.m. on December __, 2000 (to be set by the Court) by the attorneys for
the Debtor, the Examiner and each Committee. All bids must be accompanied by a
signed Asset Purchase Agreement substantially in the form of the CSL Purchase
Agreement with any modifications thereto clearly indicated by blacklining or
otherwise.
(d) There shall be no partial bidding and all Bids must be for all the
Senior Living Assets.
(e) Bids must not be contingent upon any due diligence investigation, the
receipt of financing or any further bidding approval, including from any board
of directors, shareholders or otherwise. Bids shall not be shared among the
Qualified Bidders provided however that the Debtor shall distribute all bids
received to CSL within forty-eight (48) hours of receipt and shall provide
telephonic notice within twenty-four (24) hours. All bids are irrevocable until
forty-eight hours after the Closing. All bids shall be accompanied by an earnest
money deposit (the "Earnest Money Down Payment") equal to 10% of the total
proposed purchase price in the form of a certified check or wire transfer
payable to Grand Court Lifestyles, Inc. The Earnest Money Down Payment should
only be sent to the attorneys for the Debtor and not to the other parties to
whom the bids are to be submitted. Within twenty-four (24) hours of the Sale,
the maker of the bid chosen as the highest and best offer and the maker of the
Back-Up Bid must supplement the initial Earnest Money Down Payment (through
certified check or wire transfer), so that the total deposit equals 15% of its
bid. Such deposit shall be held by the Debtor, without interest, until such time
as the bids are officially rejected by the Debtor. Such deposit shall be
forfeited in the event that any bidder for an accepted bid defaults.
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(f) The Sale will be conducted at the offices of Sills Cummis Radin
Tischman Epstein & Gross, One Riverfront Plaza, Newark, New Jersey, on December
__, 2000 at .m. Qualified bidders who have complied with the Sale Procedures may
improve their bids at the Sale in increments of two hundred thousand dollars
($200,000). The bidding shall be continuous and competitive and shall not end
until all Qualified Bidders have submitted their last and best offer, if any.
The Debtor will select the winning bid and Back-Up Bid after consultation with
the Examiner and each Committee at the conclusion of the Sale, subject to Court
approval.
(g) Objections to all relief requested by the Sale Motion shall be in
writing and filed and served so as to be actually received by 4:00 p.m. on
December 6, 2000.
(h) A hearing on the relief requested in the Sale Motion and to confirm
the results of the Sale will be held before the Honorable Novalyn L. Winfield,
United States Bankruptcy Court Judge, at the United States Bankruptcy Court for
the District of New Jersey, Martin Luther King, Jr. Federal Building and the
U.S. Courthouse, 50 Walnut Street, Third Floor, Newark, New Jersey, 07102, on
December 13, 2000, commencing at _____ .m. (to be set by the Court)
(i) The closing of all sales shall occur within ten (10) days after entry
of a final and non-appealable Sale Order, unless otherwise agreed to in writing
by the Debtor, or as otherwise provided by Order of the Court or the CSL
Purchase Agreement.
(j) The Debtor, in consultation with the Examiner and each Committee,
reserve the right to (x) impose additional terms and conditions at or prior to
the Sale in a manner not inconsistent with the CSL Purchase Agreement, (y)
extend the deadlines set forth in the Sale Procedures and/or adjourn the Sale at
the Sale and/or the Sale Hearing in open Court without further notice to a date
not later than December 31, 2000 or otherwise may be agreed to by the Debtor and
CSL.
(k) If for any reason the entity or entities that make(s) the highest or
best bid(s) fails to consummate the purchase of the Senior Living Assets, or any
substantial part thereof, the maker
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of the Back-Up Bid will automatically be deemed to have submitted the highest or
best bid and and the Debtor shall be authorized to effect the sale of the Senior
Living Assets and transfer of management, or any part thereof, to the maker of
the Back-Up Bid as soon as is commercially reasonable without further order of
the Bankruptcy Court. If such failure to consummate the purchase is the result
of a breach by the winning bidder, the Earnest Money Down Payment shall be
forfeited to the Debtor and the Debtor specifically reserves the right to seek
all available additional damages from the defaulting bidder, except as may
otherwise be agreed to between Triad and the Debtor.
25. The Debtor believes that these Sale Procedures provide an appropriate
framework for selling the Senior Living Assets and substituting new management
in a uniform fashion and will enable the Debtor, the Examiner and the Committees
to review, analyze and compare all bids received to determine which bid(s) is
(are) in the best interests of the Debtor's estate and creditors. Therefore, the
Debtor respectfully requests that this Court approve the Sale Procedures.
The Sale and Hearing Notice and Notice of Sale Motion
26. Under Rules 2002(a) and (c) of the Bankruptcy Rules, the Debtor
is required to notify its creditors of the proposed sale of the Senior Living
Assets, including a disclosure of the time and place of the Sale, the terms and
conditions of the sale and the deadline for filing any objections. The Sale and
Hearing Notice complies with Bankruptcy Rule 2002(c) and includes information on
the Sale Procedures necessary to enable interested parties to participate in the
Sale and the Sale Hearing. A copy of the proposed Sale and Hearing Notice is
attached hereto as Exhibit C.
27. The Debtor proposes to serve this Sale Motion within three (3)
business days of the entry of the Sale Procedures Order, by first class mail,
postage prepaid, to (a) all potential purchasers identified by the Debtor, (b)
the Examiner, (c) the Office of the United States Trustee,
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(d) counsel to each Committee, (e) the parties in interest who have requested
notice pursuant to Bankruptcy Rule 2002, (f) all limited partners with an
interest in the Senior Living Communities relating to the Senior Living Assets,
(g) all government agencies required to receive notice of proceedings under the
Bankruptcy Rules and (h) the Securities and Exchange Commission (the "Sale
Motion List").
28. Within three (3) business days of the entry of the Sale
Procedures Order, the Debtor will also serve a copy of this Sale and Hearing
Notice by first class, United States Mail, postage prepaid upon all creditors of
the Debtor's estate.
29. The Debtor submits that the notice to be provided through the
Sale and Hearing Notice, the Sale Motion and the method of service proposed
herein constitutes good and adequate notice of the sale of the Senior Living
Assets and the proceedings to be had with respect thereto. Therefore, the Debtor
respectfully request that this Court approve the foregoing notice procedures.
Approval of Expense Reimbursement and Overbid Amount
30. As part of the CSL Purchase Agreement, the Debtor and CSL
negotiated (i) a fee to reimburse out-of-pocket third party expenses incurred by
CSL if it is not the successful bidder (the "Expense Reimbursement") in amount
not to exceed $250,000 and initial overbid protection ("Overbid Protection") of
$400,000 The Expense Reimbursement covers out-of-pocket expenses incurred, or to
be incurred, by CSL such as professional fees incurred in conjunction with its
offer and will be capped at $250,000.
31. The ability of the Debtor to offer CSL Expense Reimbursement and
Overbid Protection (together, the "Bidding Protections") is beneficial to the
Debtor's estate and creditors to provide CSL the incentive required to submit
its bid prior to any sale. To the extent bids can be improved prior to the Sale,
a higher floor is established for further bidding.
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32. Approval of expense reimbursements and other forms of bidding
protections in connection with the sale of significant assets pursuant to
section 363 of the Bankruptcy Code has become an established practice in chapter
11 cases. The proposed Bidding Protections are fair and reasonable as they may
enable the Debtor to induce one or more potential purchasers to submit a higher
or better bid that might not otherwise be forthcoming and thereby increase the
chances that the Debtor will receive the highest or best price for its Senior
Living Assets, to the benefit of the Debtor, its estate, its creditors and all
parties in interest.
33. Ample support exists for the Debtor's request. Bankruptcy courts
have approved bidding incentives similar to the Bidding Protections under the
"business judgment rule", which proscribes judicial second-guessing of the
actions of a corporation's board of directors taken in good faith and in the
exercise of honest judgment. See, e.g., In re 995 Fifth Ave. Assocs., L.P., 96
B.R. 24, 28 (Bankr. S.D.N.Y. 1989) (bidding incentives may be "legitimately
necessary to convince a white knight to enter the bidding by providing some form
of compensation for the risks it is undertaking") (citation omitted); In re
Marrose Corp., Case Nos. 89 B 12171-12179 (CB), 1992 WL 33848 at *5 (Bankr.
S.D.N.Y. 1992) (bidding incentives are "meant to compensate the potential
acquirer who serves as a catalyst or `stalking horse' which attracts more
favorable offers"). Recently, the Third Circuit Court of Appeals established
standards for determining the appropriateness of bidding incentives in the
bankruptcy context.
34. In Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien
Envtl. Energy, Inc.), 181 F.3d 527 (3d Cir. 1999), the Third Circuit held that
even though bidding incentives are measured against a business judgment standard
in nonbankruptcy transactions, the administrative expense provisions in section
503(b) of the Bankruptcy Code govern in the bankruptcy context. Accordingly, to
be approved, bidding incentives must provide some benefit to a debtor's estate.
Id. at 533. O'Brien identified at least two instances in which bidding
incentives may provide benefit to the estate.
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35. First, benefit may be found if "assurance of a break-up fee
promoted more competitive bidding, such as by inducing a bid that otherwise
would not have been made and without which bidding would have been limited." Id.
at 537. Second, where the availability of bidding incentives induce a bidder to
research the value of the debtor and submit a bid that serves as a minimum or
floor bid on which other bidders can rely, "the bidder may have provided a
benefit to the estate by increasing the likelihood that the price at which the
debtor is sold will reflect its true worth." Id.
36. The Bidding Protections meet both the "business judgment rule"
and the Third Circuit's "administrative expense" standard. The Bidding
Protections are reasonable because (i) they are not excessive compared to fees
and reimbursements approved in other cases in this Circuit and (ii) they will
not diminish the Debtor's estate. Expense reimbursements, such as those proposed
herein, enable a debtor to assure a sale to a contractually committed bidder at
a price the debtor believes is fair and reasonable, while providing the debtor
with the opportunity of obtaining even greater benefits for the estate through a
Sale process. See, e.g. In re Kupp Acquisition Corp., Case No. 96-1223 (PJW)
(Bankr. D. Del. Mar 3, 1997); In re Anchor Container Corp., Case Nos. 96-1434
through 96-1516 (PJW) (Bankr. D. Del. Dec. 1996).
37. The proposed Bidding Protections are reasonable and its
availability to the Debtor will enable it to maximize the value realized for the
Senior Living Assets. Therefore, the Debtor should be authorized to offer such
forms of bid protection to CSL. See In re Integrated Resources Inc., 135 B.R.
746 (Bankr. S.D.N.Y.), aff'd, 147 B.R. 650 (S.D.N.Y. 1992).
Approval of Solicitation Materials and Procedures
38. As described in detail above, the Debtor financed the
acquisition of the Senior Living Assets through Syndications and the Debtor sold
limited partnership interests in the Investing Partnerships through private
placement memoranda.
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39. The proposed transaction and sale to CSL and the proposed
settlement of the Termination Motion (as defined below) will provide for the
modification of the ownership structure for the Senior Living Assets as follows:
a. The Debtor and/or its affiliates will be replaced as the
general partners of the Owning and Investing Partnerships by
Triad or its affiliates;
b. Triad or its affiliate will be admitted as the general
partners;
c. The partnership agreements shall be amended to, among other
matter, require a two-thirds (2/3) vote of the limited
partners to cause a sale of the properties or other capital
transaction;
d. There will be a new management agreement for each property
with Capital for a term of five (5) years with a management
fee equal to four percent (4%) of the gross revenues of such
property; and
e. The Management Contract Obligations will be deleted and any
and all claims by the Owning and Investing Partnerships
against the Debtor, including Management Contract Obligations,
claims for breach of fiduciary duty, claims for the imposition
of a constructive trust or otherwise, will be reduced to an
aggregate general unsecured claim of five million dollars
($5,000,000). Pursuant to the terms of the Partnership
Agreements, certain changes in the ownership structure as
structured by the CSL Purchase Agreement require approval of a
majority in interest of the limited partners in each Investing
Partnership.
40. Pursuant to the terms of the Partnership Agreements, certain changes
in the ownership structure as structured by the CSL Purchase Agreement require
approval of a majority interest of the limited partners in each Investing
Partnership.
<PAGE>
41. The approval of the foregoing modifications from the limited partners
will be solicited through the Solicitation Package to be sent to all limited
partners. Due to the large number of limited partners, the Debtor proposes to
utilize the services of its claims agent, Poorman Douglas, to disseminate the
Solicitation Package (as defined below) prepared by the Equity Committee. In
addition, a ballot agent for the solicitation will be agreed upon by the
parties.
42. Specifically, the following documents have been prepared by the Equity
Committee (the "Solicitation Package") and will be sent to all limited partners
to enable those individuals to evaluate the proposed settlement of the
Termination Motion and the CSL Purchase Agreement:
a. Solicitation letter which outlines the terms of the proposed
transaction;
b. Proposed Amendments to partnership agreements;
c. Proposed Management Agreement; and
d. Form of ballot.
Copies of the solicitation letter, proposed amendments, proposed Management
Agreement and form of ballot are attached hereto as Exhibits "D" through "G"
respectively, and through this application, the Debtor and the Equity Committee
request that this Court authorize and approve the form of those documents and
the process to be utilized for the solicitation. The ballot procedures to be
utilized are set forth in detail in the Solicitation Package.
43. Through the Solicitation Package, the approval of each limited partner
is requested to effectuate the transaction with CSL, i.e. transfer the Debtor's
interests in the Senior Living Assets to CSL, approve Triad or its designee as
the new general partner, approve amendments to the partnership agreement;
approve a new management agreement and agree to the partnerships' waiver of all
claims against the Debtor, directors, officers and employees in consideration
for an aggregate of $5,000,000 general unsecured claim against the estate.
44. The Debtor submits that the Solicitation Package to be disseminated to
the limited partners does not seek solicitation of votes for a plan of
reorganization and does not violate the
<PAGE>
principles articulated by the United States Court of Appeals for the Third
Circuit in the case of Century Glove v. First Am. Bank of New York, 860 F.2d 94,
101 (3d Cir.1988) In Century Glove, the debtor filed its plan and sought
acceptance of the plan from the creditor body, all within its exclusivity
period. At the same time, a plan opponent transmitted a copy of its yet unfiled
plan to one of the debtor's largest creditors. The debtor subsequently argued
that the plan opponent had improperly solicited and procured the rejection vote
of the subject creditor. The Third Circuit disagreed, ruling that a party does
not solicit acceptances when it presents a draft plan for the consideration of
another creditor, so long as the party does not request that creditor's vote.
Century Glove, 860 F.2d at 102.
45. In this matter, the Equity Committee will be soliciting votes to
approve the proposed transaction with CSL. There will be no solicitation of any
issues for a plan and disclosure statement.
46. Further, most courts addressing the solicitation issues have adopted a
narrow reading of "solicitation" proffered by Century Glove. See Duff v. United
States Trustee (In re California Fidelity, Inc.), 198 B.R. 567, 571-72 (9th Cir.
BAP 1996) (recognizing that solicitation has been interpreted as a "specific
request for an official vote" and that "[m]ost courts have reasoned that a
broader construction of the term would curtail free and honest negotiations
among creditors and, therefore, inhibit creditor participation in the debtor's
reorganization."); In re Dow Corning Corp., 227 B.R. 111, 118
(Bankr.E.D.Mich.1998) ("Solicitation, then, is the process of seeking votes for
or against a plan."); In re Pleasant Hill Partners, L.P., 163 B.R. 388, 391
(Bankr.N.D.Ga.1994) (holding that "section 1125 'solicitation' is usually
construed very narrowly."); In re Kellogg Square Partnership, 160 B.R. 336, 340
(Bankr.D.Minn.1993); In re Gilbert, 104 B.R. 206, 214 (Bankr.W.D.Mo.1989)
(agrees with Third Circuit that a broad definition of solicitation would tend to
chill creditor negotiations).
<PAGE>
47. Therefore, the solicitation to be accomplished herein does not run
afoul of the Third Circuit's holding in Century Glove.
Reduction of Claims Held by Limited Partners
and Proposed Settlements With The Owning Partnerships
48. As set forth above, the Owning and Investing Partnerships (and the
non-debtor partners thereof) will be restructured and the limited partners will
be requested to consent to an aggregate claim against this estate of
$5,000,000.00 on account of any and all obligations that the Debtor may owe to
the Owning and Investing Partnerships in connection with the Syndicated
Communities, which shall be treated as all other general unsecured claims filed
against this Estate.
The Limited Partners' Purported Claims
49. The Debtor believes that the only potential claims that could be
asserted by the limited partners against this estate fall into the following 2
categories:
A. Claims asserted as a result of the management contract obligations.
Since the Debtor's contractual obligations, if any, run in favor of the Owning
Partnerships, these claims are derivative of the claims of the Investing
Partnerships against the Owning Partnerships (if such claims actually exist),
and the claims of the Owning Partnerships against the Debtor under the
Management Agreements for the funding of the returns to the limited partners.
Thus, these claims shall be referred to as the "Derivative Claims".
B. Claims against the Debtor arising from the purchase of the limited
partnership interests in the Investing Partnerships under the various private
placement memoranda that were utilized in connection therewith. These claims
will be referred to as the "Securities' Claims".
The Derivative Claims Should be Expunged
50. Most of the Owning Partnerships which could assert claims against this
estate could premise those claims upon the Debtor's alleged management contract
obligations. Thus, the
<PAGE>
Derivative Claims are merely duplicative of the claims asserted by such Owning
Partnerships. To the extent that the Owing Partnerships agree to an aggregate
claim against this estate in the amount of $5,000,000.00, the liabilities
potentially underlying the Derivative Claims will have been resolved by the true
parties in interest.
51. Moreover, the initial injury, if any, upon which the Derivative Claims
are based was caused, if at all, to the Owning Partnerships, in the first
instance, and then to the Investing Partnerships, in the second instance.
Clearly, there was no direct injury suffered by the limited partners (under the
Derivative Claims) that exists independently of the Investing Partnerships and
that would permit such limited partners to assert direct claims against the
Owning Partnerships or the Debtor. See, e.g., Litman v. Prudential-Bache
Properties, Inc., 611 A.2d 12, 15-16 (Del. Ch. 1992) (allegation by limited
partner that, by virtue of another's wrongful conduct, partnership did not
receive income to which it was otherwise entitled, is not a direct injury to the
limited partner sufficient to justify a direct claim against the alleged
wrongdoer); Seaford Funding, L.P. v. M & M Assocs. II, L.P., 672 A.2d 66 (Del.
Ch. 1995) (same).
The Securities' Claims
52. Pursuant to Section 101(49)(xiii) of the Bankruptcy Code, the term
"security" is defined as, among other interests, the "interest of a limited
partner in a limited partnership."
53. The Debtor respectfully submits that the Securities' Claims constitute
claims "arising from rescission of a purchase or sale of a security of the
debtor or of an affiliate of the debtor, [or] for damages arising from the
purchase or sale of such security" under Section 510(b) of the Bankruptcy Code.
See, e.g., Jenkins v. Tomlinson, (In re Basin Resources Corp.), 190 B.R. 824,
826-827 (Bankr. N.D. Tex. 1996) (where parties formed joint venture to search
for oil and gas, and debtor was appointed under management agreements to manage
the properties for the joint venture, an investor who acquires a security of the
joint venture acquires a security of the debtor's affiliate under sections
101(2)(C) and 510(b) of the Bankruptcy Code, which provides
<PAGE>
that an affiliate includes a "person whose business is operated under a lease or
operating agreement by a debtor, or person substantially all of whose property
is operated under an operating agreement with the debtor").
54. As such, section 510(b) directs that the Securities' Claims be
subordinated to all general unsecured claims asserted against this estate. See
Jenkins, 190 B.R. at 826 (Bankruptcy Court has no discretion under section
510(b); if movant demonstrates elements of Section 510(b), application is
mandatory); In re Lenco, 116 B.R. 141, 144 (Bankr. E.D. Mo. 1990) (same).
55. As one court aptly explained:
Subordination [under Section 510(b)] reflects the different risks
allocated between creditors and shareholders under the absolute priority
rule.... While both the shareholder and the creditor bear the risk of the
corporation's insolvency, the shareholder alone bears the risk that his
investment was induced by fraud or other illegality.... Section 510(b)
accomplishes this end by requiring the creditors to be paid in full before
defrauded former and present shareholders may receive a distribution.
TekInsight.Com, Inc. v. Stylesite Marketing, Inc., (In re Stylesite Marketing,
Inc.), 253 B.R. 503, 510 (Bankr. S.D.N.Y. 2000) (citations omitted).
56. Moreover, although the claims that are generally subordinated under
section 510(b) are based on fraud, Courts have determined that "the language of
section 510(b) is broad enough to include breach of contract and related claims
as well." See In re Public Service Co. of New Hampshire, 129 B.R. 3, 5 (Bankr.
D.N.H. 1991); accord In re Granite Partners, L.P., 208 B.R. 332, 337 (Bankr.
S.D.N.Y. 1997) (Section 510(b) should not be read too restrictively to apply
only to claims arising from fraud in the issuance of securities; rather, focus
should be on whether claim arises from the alleged loss of the investment in
question); see also In re NAL Financial Group, Inc., 237 B.R. 225, 234 (Bankr.
S.D. Fla. 1999) (claims breach of contract, breach of fiduciary duty, both of
which arose after sale of securities, as well as claim for fraudulent inducement
should be subordinated under Section 510(b)); In re Lenco, 116 B.R. at 144
(claims
<PAGE>
asserted as a result of alleged violation of ERISA and arising from an ESOP's
acquisition of stock from a third party, fits within purview of Section 510(b)).
57. By virtue of the foregoing, cause exists to subordinate all of the
claims asserted, or to be asserted, by any of the limited partners against this
estate. Notwithstanding the foregoing reduction and allowance of claims, the
limited partners and their assigns shall not waive and hereby reserve securities
claims or otherwise by virtue of the relief requested, any rights, claims and
defenses under applicable law against any third parties other than the Debtor,
its subsidiaries, CSL and its subsidiaries, including any holders of bank debt
obligations. Similarly, the limited partners reserve any claims against any
current or former directors and officers, to the extent of any liability exists,
through the insurance policies as maintained by the Debtor.
The Sale of the Debtor's Senior Living Assets Should Be Approved
58. The Debtor submits that ample authority exists for the approval of the
proposed sale of its Senior Living Assets. Section 363 of the Bankruptcy Code,
which authorizes a debtor to sell assets of the estate other than in the
ordinary course of business free and clear of liens, claims and encumbrances,
provides, in relevant part, as follows:
(b)(1) The trustee, after notice and a hearing, may use, sell, or lease,
other than in the ordinary course of business, property of the estate.
(f) The trustee may sell property under subsection (b) or (c) of this
section free and clear of any interest in such property of an entity other than
the estate, only if -
(1) applicable nonbankruptcy law permits sale of such property free and
clear of such interest;
(2) such entity consents; ...
(5) such entity could be compelled, in a legal or equitable proceeding, to
accept a money satisfaction of such interest.
<PAGE>
See 11 U.S.C.ss. 363(b)(1), (f); see Fed. R. Bankr. P. 6004(f)(1) ("All sales
not in the ordinary course of business may be by private sale or by public
Sale.").
59. Section 363 does not set forth a standard for determining when it is
appropriate for a court to authorize the sale or disposition of a debtor's
assets prior to confirmation of a plan. However, courts in the Third Circuit and
others have required that the decision to sell assets outside the ordinary
course of business be based upon the sound business judgment of the debtor. See
In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143 (3d Cir. 1986); In re
Delaware & Hudson Ry. Co., 124 B.R. 169, 176 (D. Del. 1991); In re Phoenix Steel
Corp., 82 B.R. 334, 335-36 (Bankr. D. Del. 1987) (stating that judicial approval
of a section 363 sale requires a showing that the proposed sale is fair and
equitable, a good business reasons exists for completing the sale and that the
transaction is in good faith); see also Committee of Equity Security Holders v.
Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983); In re
Chateaugay Corp., 973 F.2d 141 (2d Cir. 1992); Stephens Indus. v. McClung, 789
F.2d 386, 390 (6th Cir. 1986) ("bankruptcy court can authorize a sale of all a
Chapter 11 debtor's assets underss.363(b)(1) when a sound business purpose
dictates such action"); In re Titusville Country Club, 128 B.R. 396, 399 (Bankr.
W.D. Pa. 1991); In re Indus. Valley Refrig. & Air Conditioning Supplies, Inc.,
77 B.R. 15, 20 (Bankr. E.D. Pa. 1987). The "sound business purpose" test
requires a debtor to establish four elements to sell property outside the
ordinary course of business, namely, (a) that a "sound business purpose"
justifies the sale of assets outside the ordinary course of business, (b) that
adequate and reasonable notice has been provided to interested persons; (c) that
the debtor has obtained a fair and reasonable price, and (d) good faith. See
Abbotts Dairies, infra; Titusville, 128 B.R. at 399; In re Sovereign Estates,
Ltd., 104 B.R. 702, 704 (Bankr. E.D. Pa. 1989); Phoenix Steel, 82 B.R. at
335-36; Industry Valley, 77 B.R. at 21.
60. Courts have made it clear that a debtor's showing of a sound business
justification need not be unduly exhaustive but, rather, a debtor is "simply
required to justify the proposed
<PAGE>
disposition with sound business reason." In re Baldwin United Corp., 43
B.R. 888, 906 (Bankr. S.D. Ohio 1984).
61. In this case, the Debtor submits that the decision to sell the Senior
Living Assets is based upon its sound business judgment and should be approved.
62. During the early stages of this case, the Debtor examined its business
operations in an effort to compose a strategy to emerge from bankruptcy
protection as a profitable management company. The Debtor faced a significant
challenge to redevelop itself as a property management company due to many
external factors which have plagued the senior living industry and detrimentally
affected the profitability of that industry.
63. As reported in various publications including The New York Times, the
senior living industry has recently experienced a dramatic downturn. The late
1990s represented a period of great expansion for senior living industry and
many companies similar to the Debtor built communities across the country.
Unfortunately, the expansion in the industry overtook the actual demand. Thus,
by 1999, there was an abundance of vacancies in various senior living
communities and many companies in the industry experienced a severe financial
downturn. The public markets, which provided a great source of financing, were
less receptive and companies were forced to look for outside investment or
private capital.
64. In addition, due to the industry overexpansion, the Debtor was forced
to grant either rent concessions or was unable to raise rents to compensate for
increased costs in operating the facilities. When the Debtor's costs of
operations increased due to inflation and other factors, the Debtor was unable
to pass those costs on to the tenants. If the Debtor attempted to pass the costs
to the tenants, the Debtor feared that the tenants would move to other
facilities, thereby increasing vacancies.
65. As this bankruptcy case progressed the market forces which
precipitated the filing continued and the Debtor's senior living portfolio began
to suffer. Many of the Debtor's
<PAGE>
properties which were profitable prior to the Petition Date began to experience
cash difficulties. Similarly, marginal properties experienced significant stress
resulting in mortgage defaults. Based on the lack of cash or the ability to
raise additional capital, the Debtor was unable to renegotiate the mortgages
with the lenders creating a possibility that the Debtor would begin to lose its
core nucleus of properties.
66. As a consequence, the Debtor, the Examiner and each Committee have
come to the realization that it is in the best interests of this estate to
locate a purchaser for the Senior Living Assets.
67. When it was apparent that the Debtor should engage in a sale of
substantially all of the Senior Living Assets, the Debtor, Examiner and each
Committee contacted many parties in the senior living industry to locate a
suitable partner/acquirer. A due diligence room was established and interested
parties were invited to review the due diligence Although many entities
expressed an interest, the Debtor and CSL conducted fruitful negotiations with
CSL which culminated in the negotiation of the CSL Purchase Agreement.
68. The Debtor believes that Capital is well qualified to operate the
facilities related to the Senior Living Assets. Captial is one of the largest
developers and operators of senior living communities in the United States in
terms of resident capacity. As of December 31, 1999, Capital owned interests in
and/or operated 36 communities in 18 states with a capacity of approximately
5,900 residents, including 21 communities in which it owned interests and 15
communities that it managed for third parties pursuant to multi-year management
contracts.
69. As of December 31, 1999, Capital was developing 23 new communities,
which will have a capacity of approximately 3,200 residents, and was expanding
three existing communities to accommodate approximately 300 additional
residents. During 1999, the communities that Capital operated and in which it
owned interests had an average occupancy rate of approximately 94% and its
managed communities had an average occupancy rate of approximately 95%.
<PAGE>
70. Capital and its predecessors have provided senior living services
since 1990. Capital was incorporated in Delaware in October 1996 in anticipation
of its initial public offering. Simultaneously with the consummation of its
initial public offering, Capital and Capital's founders engaged in a series of
transactions which resulted in Capital acquiring certain assets, entities and
partnership interests of its founders and entities affiliated with its founders.
71. Triad is a privately held real estate management organization which
has a long track record in senior living management and ownership. Capital
Senior and Triad jointly own and operate approximately twenty-one (21) senior
living communities serving a capacity of 2,300 residents. Since 1989, Triad
entities have served as the general partner in six senior living partnerships
with aggregate assets valued at more than $200 million. Triad has a present net
worth of approximately $7,000,000. Triad entities are currently operating in
nine states. Triad has been successful in leading the partnerships, creating
value for limited partners through various refinancings as well as disposition
of assets once revenue is stabilized at a marketable level. Further, Triad is
experienced in creating and maintaining successful partner communications so
that investors are made aware of the status of their investments. Triad will
provide investor relations via telephone, standard hard copy and at the
triadseniorliving.com website so that limited partners and other investors can
choose the form or corporate communications that best meet their needs.
72. Therefore, based on the need to sell the Senior Living Assets and
CSL's qualification to operate the Facilities and serve as general partner,
respectively, the Debtor has determined, in the exercise of its reasonable
business judgment, to conduct a sale of the Senior Living Assets to CSL pursuant
to the CSL Purchase Agreement.
Sale Free and Clear of Liens, Claims and Encumbrances
<PAGE>
73. In accordance with section 363(f) of the Bankruptcy Code, a
debtor in possession may sell property under section 363(b) "free and clear of
any interest in such property of an entity other than the estate" if one of the
following conditions is satisfied:
(1) applicable nonbankruptcy law permits sale of such property free and clear of
such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold
is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to
accept a money satisfaction of such interest.
See 11 U.S.C.ss.363(f); In re Elliot, 94 B.R. 343, 354 (E.D. Pa. 1988)
(section 363(f) written in disjunctive; court may approve sale "free and clear"
provided at least one of the subsections is met).
74. The Debtor expects that it can satisfy the first, second, third and
fifth of these requirements. In order to facilitate the sale of the Senior
Living Assets, the Debtor requires authorization to sell those assets free and
clear of any and all liens or interests that may be asserted, with such liens to
attach to the sale proceeds, except to the extent a purchaser agrees to purchase
and take title to such Senior Living Assets subject to such liens. All liens on
the Senior Living Assets will be satisfied or will attach to the proceeds of
sale of the Senior Living Assets with the same force, effect and priority as
such liens have on the Senior Living Assets, subject to the rights and defenses,
if any, of the Debtor and any party in interest with respect thereto.
Accordingly, the Debtors submit that the sale of the Senior Living Assets free
and clear of liens, claims and encumbrances satisfies the statutory
prerequisites of section 363(f) of the Bankruptcy Code.
<PAGE>
75. The Debtors also submit that CSL is a good faith purchaser entitled to
the protections of section 363(m). Section 363(m) provides:
The reversal or modification on appeal of an authorization
under subsection (b) or (c) of this section of a sale or lease
of property does not affect the validity of a sale or lease
under such authorization to an entity that purchased or leased
such property in good faith, whether or not such entity knew
of the pendency of the appeal, unless such authorization and
such sale or lease were stayed pending appeal.
11 U.S.C. 363(m) (1998).
76. A good faith purchaser is not defined in the Bankruptcy Code, however,
it has been addressed by the Courts:
The requirement that a purchaser act in good faith ... speaks to the
integrity of his conduct in the course of the sale proceedings.
Typically, the misconduct that would destroy a purchaser's good
faith status at a judicial sale involves fraud, collusion between
the purchaser and other bidders or the trustee, or an attempt to
take grossly unfair advantage of other bidders.
In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147 (3d Cir. 1986),
quoting In re Rock Industries Machinery Corp., 572 F.2d 1195, 1198 (7th Cir.
1978), citing In re Webcor, Inc., 392 F.2d 893, 899 (7th Cir. 1968).
77. As set forth above, CSL is an entity which is unrelated to any party
herein and it has engaged in no conduct which is questionable in any fashion.
Neither Capital nor Triad are affiliated in any way with the Debtor, its
officers or directors. The transaction with Capital with Triad has been an
arms-length negotiation conducted by Capital and Triad on the one hand, and the
Debtor, the Creditors' Committee and the Equity Committee on the other hand.
Capital and Triad have represented that as of this date neither Capital nor
Triad have offered compensation in any form, including employment, to any of the
Debtor's officers or employees. Triad and/or Capital may offer employment to one
or more of the Debtor's officers or employees if the
<PAGE>
transaction if consummated. The Debtor believes that both Capital and Triad have
acted in good faith at all times..
Settlement of the Termination Motion
78. If the sale to CSL or such higher and better bidder if approved, the
Debtor will effectively be replaced as the general partner of the Owning and
Investing Partnerships and a manager of the Senior Living Facilities. This will
in effect accomplish the relief sought in the Termination Motion. The Debtor
seeks authority, pursuant to section 365 of the Bankruptcy Code and Rule 9019(a)
of the Bankruptcy Rules to enter into a settlement with the Equity Committee
whereby the Management Contracts will be deemed rejected and the Termination
Motion will be withdrawn upon closing of the sale of the Senior Living Assets to
CSL or the maker of a higher or better offer. The non-debtor parties to the
Partnership and Management Agreements will not be allowed claims against the
estate for rejection damages.
79. Bankruptcy Rule 9019(a) provides, in pertinent part, that on motion by
a trustee (or debtor in possession), the Court may approve a compromise or
settlement. Here, the approval of the settlement will in essence require a
finding by the Court that the Debtor should be permitted to reject the
Partnership and Management Agreements pursuant to Section 365(a) of the
Bankruptcy Code.
80. It is well settled that "compromises are a 'normal part of the process
of reorganization.'" Protective Committee for Independent Stockholders of TMT
Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 1163, 20
L.Ed. 2d 1 (1968), on remand, TMT Trailer Ferry, Inc. v. Kirkland, 471 F.2d 10
(5th Cir. 1972) (quoting Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106,
130, 60 S.Ct. 1, 14, 84 L.Ed. 110 (1939)).
81. Accordingly, this Court should approve a compromise where the
compromise is in the best interests of the estates. TMT, 390 U.S. at 424; In re
Heldor Industries, Inc., 131 B.R. 578, 583 (Bankr. D.N.J. 1991); In re Neshaminy
Office Bldg. Associates, 62 B.R. 798, 803 (E.D. Pa.
<PAGE>
1986). In reaching its decision regarding the approval of a compromise, this
Court need not conclusively determine the claims which are the subject of the
compromise, nor find that the compromise constitutes the best result obtainable.
Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608, 613 (2d Cir. 1983),
cert denied, 464 U.S. 822 (1983). This Court need only canvass the issues to
determine that the compromise does not fall "below the lowest point in the range
of reasonableness". Id. at 608; Heldor, 131 B.R. at 583. See also Rivercity v.
Herpel (Matter of Jackson Brewing Co.), 624 F.2d 599, 604 (5th Cir. 1980)
("approval of a proposed settlement does not depend on establishing as a matter
of legal certainty that the subject claim . . . is or is not worthless or
valuable").
82. In making an independent judgment as to whether a particular
settlement or compromise is in the best interests of a debtor's estate and does
not fall below the lowest point in the range of reasonableness, the Court may
consider several factors, including any factor which ultimately bears "on the
wisdom" of the settlement or compromise. Jackson Brewing, 624 F.2d at 602. See
also In re Lion Capital Group, 49 B.R. 163 (Bankr. S.D.N.Y. 1985); Texas
Extrusion Corp. v. Palmer, Palmer & Coffee (In re Texas Extrusion Corp.), 68
B.R. 712, 720 (N.D. Tex. 1986), aff'd, 836 F.2d 217 (5th Cir. 1988), cert.
denied, Texas Extrusion Corp. v. Lockheed Corp., 488 U.S. 926 (1988) (court may
consider difficulties of the matter, or its collection, as well as the paramount
interests of creditors). Courts typically consider such factors as (1) the
probability of success in the litigation, (2) any difficulties to be encountered
in collection, (3) the complexity of the litigation and the expenses,
inconvenience and delay necessarily attending it, and (4) the paramount
interests of the creditors. Heldor, 131 B.R. at 583 (citation omitted);
Neshaminy, 62 B.R. at 803 (citations omitted).
83. In reaching its ultimate decision, the Court should not engage in
second-guessing a trustee's recommendation for compromise, so long as the
compromise is reasonable. Neshaminy, 62 B.R. at 803; In re Bell & Beckwith, 77
B.R. 606 (Bankr. N.D. Ohio 1987), aff'd,
<PAGE>
87 B.R. 472 (N.D. Ohio 1987). In this case, the Debtor submits that approval of
the settlement of the Termination Motion essentially requires the Court to
determine whether grounds exist for the rejection of the Management and
Partnership Agreements in connection with the sale of the Senior Living Assets.
84. Although section 365(a) of the Bankruptcy Code does not provide a
standard for 1. determining when it is appropriate for a court to approve a
debtor in possession's rejection of an executory contract or an unexpired lease,
courts have uniformly deferred to the business judgment of the debtor. See,
e.g., NLRB v. Bildisco & Bildisco, 465 U.S. 513, 523 (1984); Matter of Taylor,
103 B.R. 511, 517 (D.N.J. 1990), aff'd in part, rev'd in part, 913 F.2d 102 (3d
Cir. 1990) (citing Sharon Steel Corp. v. Nat'l. Gas Distributors Corp., 812 F.2d
36, 39-40 (3d Cir. 1989)); In re Wheeling-Pittsburgh Steel Corp., 72 B.R. 845,
846 (Bankr. W.D. Pa. 1987).
85. The "business judgment" test requires the Debtor to demonstrate that
the rejection of a lease will benefit the Debtor's estate. Wheeling-Pittsburgh,
72 B.R. at 846. Application of the "business judgment" test here unequivocally
establishes that the Debtor should be authorized to reject the Management
Contracts.
86. Upon the consummation of the sale of the Senior Living Assets, the
Management Contracts are no longer beneficial to this estate and the burdens
contained therein outweigh any benefit. Accordingly, in the exercise of its
business judgment, the Debtor requests authority to reject the Management
Contracts.
No Prior Request
87. No prior request for the relief sought herein has been requested from
this Court or any other court.
Notice
88. Notice of this application has been provided in accordance with the
notice procedures set forth above.
<PAGE>
WHEREFORE, the Debtor respectfully requests that the Court grant the
relief requested in this application and grant the Debtor such other and further
relief as this Court deems just and proper.
Respectfully submitted,
SILLS CUMMIS RADIN TISCHMAN
EPSTEIN & GROSS, P.A.
Attorneys for the Debtor
By: /s/ Andrew H. Sherman
ANDREW H. SHERMAN
DATED: November 10, 2000
