Beneath The Trees, LLC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
BENEATH THE TREES, LLC, 	07-01664-8-JRL
Debtor. 	Chapter 11
______________________________________________________________________________
ORDER
This case is before the court on the following matters: (1) United States’ motion to compel
the debtor to provide audited financial statements and to compel the debtor to hire full-time, HUD-
approved management or, alternatively, to appoint a trustee; (2) debtor’s motion for authorization
to enter into a post-petition management contract; and (3) the court’s consideration of the continuous
employment of Wayne Bryant. On September 25-26, 2007, the court conducted a hearing on these
matters in Wilmington, North Carolina.
The debtor is a limited liability company that owns and operates an assisted living facility
in Brunswick County, North Carolina, known as Corinthian Place. Corinthian Place was funded by
a first mortgage loan of $4,084,200.00 at 5.95% per annum through Love Funding Corporation
(“Love Funding”), which loan was insured by HUD. On November 30, 2004, in consideration for
SO ORDERED.
SIGNED this 04 day of October, 2007.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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HUD guaranteeing the loan, the debtor entered into a Regulatory Agreement for Multifamily
Housing Projects (“Regulatory Agreement”) with HUD, which imposed duties on the debtor related
to the management and financial operations of Corinthian Place. The Regulatory Agreement was
incorporated into the “Deed of Trust and Assignment of Rents, Profits, and Income (Multifamily),”
which was recorded in Brunswick County as a lien on the real property included in the debtor’s
estate.
In the summer of 2007 after the debtor had failed to provide adequate financial information,
had failed to operate under a HUD-approved management company, and had become delinquent on
its mortgage payments, Love Funding assigned the note to HUD. HUD asserts that the debtors have
continued to be in noncompliance with the Regulatory Agreement. Namely, HUD seeks the court
compel the debtor to provide HUD with overdue financial information, including the audited
financial report for the 2006 fiscal year and the cost certification necessary for final endorsement.
HUD also seeks the court to compel the debtor to hire a full-time, HUD-approved management
agent. In addition, HUD requests the court to reconsider the appointment of a Chapter 11 trustee in
this case.
The debtor cannot avoid the terms of the HUD Regulatory Agreement by filing bankruptcy.
In re Capital West Investors, 186 B.R. 497, 500-501 (N.D. Cal. 1995) (bankruptcy court erred when
it modified the HUD Regulatory Agreement in Chapter 11 case); In re EES Lambert Assoc., 62 B.R.
328, 336 (Bankr. N.D. Ill. 1986) (“The regulatory [a]greement . . . is not some slight contractual
undertaking that can be circumvented by the filing of a bankruptcy petition.”). Here, the Regulatory
Agreement specifically states that: “The books and accounts of the operations of the mortgaged
property and of the project shall be kept in accordance with the requirements of the Secretary.”
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Regulatory Agreement, Form HUD-92466 (11/2002) at ¶ 9(d). The Regulatory Agreement further
states:
Within sixty (60) days following the end of each fiscal year the Secretary shall be
furnished with a complete annual financial report based upon an examination of the
books and records of mortgagor prepared in accordance with the requirements of the
Secretary, prepared and certified to by an officer or responsible Owner and, when
required by the Secretary, prepared and certified by a Certified Public Accountant,
or other person acceptable to the Secretary.
Regulatory Agreement, Form HUD-92466 (11/2002) at ¶ 9(e). In addition, in order to go to final
endorsement and receive final payment, the debtor must provide a cost certification that should have
been submitted in March 2006. Neither the audited financial report for the 2006 fiscal year nor the
cost certification have been provided to HUD. At the hearing on September 25, 2007, Mr. Fortner
testified that the delay in completing these documents was a result of poorly kept financial records,
his recent back surgery, and the debtor’s failure to pay him for his services. Mr. Fortner further
testified that he could complete the audited financial report for the 2006 fiscal year and cost
certification within fourteen business days of the hearing date. Accordingly, these documents shall
be submitted to HUD by October 15, 2007 at 5 p.m.
The Regulatory Agreement also requires the debtor to provide HUD-approved management
of Corinthian Place, stating:
Owners shall not without the prior written approval of the Secretary: Convey, assign
or transfer any beneficial interest in any trust holding title to the property, or the
interest of any general partner in a partnership owning the property, or any right to
manage or receive the rents and profits from the mortgaged property.
Regulatory Agreement, Form HUD-92466 (11/2002) at ¶ 6(c) (emphasis added). The Regulatory
Agreement further states:
Any management contract entered into by Owners or any of them involving the
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project shall contain a provision that, in the event of default hereunder, it shall be
subject to termination without penalty upon written request by the Secretary. Upon
such request Owners shall immediately arrange to terminate the contract within a
period of not more than thirty (30) days and shall make arrangements satisfactory to
the Secretary for continuing proper management of the project.
Regulatory Agreement, Form HUD-92466 (11/2002) at ¶ 9(a). The debtor has operated under a
succession of management companies. The most recent management company, Total Solutions, Inc.,
was never approved by HUD, and HUD sought a management change in February 2007 and
formally demanded an acceptable management agent by letter of June 12, 2007. Corinthian Place
has not operated under HUD-approved management since the debtor terminated Total Solutions, Inc.
Wayne Bryant, a relative of the owners of Corinthian Place, has obtained his administrator’s
license and has been managing the facility since termination of Total Solutions, Inc. HUD
disapproves of Mr. Bryant’s involvement in a management capacity, asserting that he fails to meet
management criteria. Moreover, HUD contends that, even when previous management companies
have been employed by Corinthian Place, Mr. Bryant has continued to manage operations.
At a hearing held July 13, 2007, the debtor informed HUD and the court that it intended to
request HUD’s approval of Senior Management, Inc., as the new management company. Marion
Lockamy, the principle of Senior Management, Inc., testified at the July 2007 hearing of his
extensive experience in the assisted living facility industry and explained that he had worked with
assisted living facilities facing financial difficulties. Mr. Lockamy testified that he had no experience
with properties subject to HUD Regulatory Agreements. The debtor presented a proposed contract
between the debtor and Senior Management, Inc., for HUD’s review. The debtor based the language
on a contract with North Carolina Senior Citizens Federation that had been approved by HUD.
To operate, an assisted living facility must have a licensed administrator. N.C. Gen. Stat. §
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90-288.12. Based on the debtor’s representations that it was in the process of obtaining approval
of Senior Management, Inc., on July 23, 2007, the court entered an order approving the continued
employment of Mr. Bryant as administrator for a period of eight weeks.
The debtor asserts that it has undertaken efforts to obtain HUD’s approval of Senior
Management, Inc. The debtor contacted HUD to determine what would be required to formally seek
approval of Senior Management, Inc. On July 25, 2007, HUD responded by letter, stating that the
debtor must submit form HUD-9832, form HUD-2530, and a revised management contract. The
debtor submitted the two forms and proposed contract by email to HUD’s attorney. On August 15,
2007, HUD responded to the email, asserting that the two forms were incomplete and expressing its
concerns with the proposed management contract. On August 21, 2007, the debtor mailed the two
revised forms and proposed management contract to HUD’s attorney.
The debtor contends that HUD has acted unreasonably by withholding approval of Senior
Management, Inc. At the hearing, HUD, through its witnesses Dottie Troxler and Danette
McAllister, established its concerns regarding the proposed arrangement with Senior Management,
Inc. Ms. Troxler testified that the proposed arrangement would allow Senior Management, Inc., to
“assist” the debtor rather than to provide full management of Corinthian Place. Senior Management,
Inc., did not intend to provide forty hours of supervision of the facility; instead, Mr. Bryant would
continue to serve as the licensed administrator of the facility under the supervision of Senior
Management, Inc. HUD finds the proposal objectionable because the debtor has been unable to
timely provide HUD with adequate financial information and adhere to other requirements of the
Regulatory Agreement while Mr. Bryant has served in a management role.
The court does not find HUD’s position regarding the proposed management contract with
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Senior Management Inc., to be arbitrary and capricious or otherwise unlawful. 5 U.S.C. § 706. The
evidence supports that, while Corinthian Place is a clean facility operating at high capacity with
satisfied residents, it has been continually plagued by financial mismanagement. Accordingly, it is
reasonable for HUD to require that Senior Management, Inc., provide full-time management of
Corinthian Place without Mr. Bryant serving in management capacity.
By October 11, 2007, the debtor shall propose a revised management contract to HUD for
approval of Senior Management, Inc., as manager of Corinthian Place. Under the revised contract,
Senior Management, Inc., shall identify one of its own employees as the licensed administrator for
Corinthian Place and identify one of its own employees who will provide forty hours of weekly on-
site supervision of Corinthian Place. Until new management is approved by HUD, Wayne Bryant
may continue to serve as the licensed administrator so that the facility can continue operating. Once
new management is approved, Wayne Bryant may work as an employee of Corinthian Place so long
as his position is not a management role.
Within ten days of receipt of the proposed contract, HUD shall accept and approve the
contract or return the contract to the debtor and the court with redline revisions indicating why it is
rejecting the contract.
END OF DOCUMENT
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