Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 1 of 9

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1 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 1 of 9 Vickie L. Driver Texas Bar No Christina W. Stephenson Texas Bar No HUSCH BLACKWELL LLP 2001 Ross Avenue, Suite 2000 Dallas, Texas Phone: (214) Fax: (214) vickie.driver@huschblackwell.com crissie.stephenson@huschblackwell.com COUNSEL FOR GRANITE LANDLORDS UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: SENIOR CARE CENTERS, LLC, et al., i DEBTORS. CHAPTER 11 CASE NO bjh11 Lead Case Complex Case Designated Joint Administration Requested BRIEF IN SUPPORT OF GRANITE LANDLORDS LIMITED OBJECTION AND LIMITED JOINDER IN KEYBANK NATIONAL ASSOCIATION S LIMITED OBJECTION TO MOTION OF DEBTORS FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING THE USE OF CASH COLLATERAL, (II) GRANTING ADEQUATE PROTECTING, (III) MODIFYING THE AUTOMATIC STAY, (IV) SETTING A FINAL HEARING, AND (V) GRANTING RELATED RELIEF [Related to Docket Nos. 24, 174] Granite Round Rock LLC, Granite Corpus Christi LLC, Granite Western Hills LLC, Granite Marlandwood East LLC, Granite Weston Inn LLC, Granite Regency LLC, Granite Marlandwood West LLC, Granite Windcrest LLC, Granite Wurzbach LLC, Granite Meadow Creek LLC, Granite Master Partners LP, Granite Bonita Glen, LLC, Georgetown Park Place, LLC, Granite Momentum LLC, Granite Valley Grande LLC, Beltline Senior Care Center, LLC, 1

2 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 2 of 9 Brinker Senior Care Center, LLC, Fairpark Senior Care Center, LLC, HG Senior Care Center, LLC, Lakepointe Senior Care Center, LLC, Mullican Senior Care Center, LLC, Pleasantmanor Senior Care Center, LLC, RW Senior Care Center, LLC, Vintage Senior Care Center, LLC, Whitesboro Senior Care Center, LLC, Crestwood Senior Care Center LLC, Rowlett Senior Care Center, LLC, Granite Stonebridge Health Center LLC, Granite Sagebrook Health Center, LLC, Granite Park Bend Health Center LLC, and Granite Hearthstone Health Center, LLC (the Granite Landlords ) hereby submit this brief (the Brief ) in support of limited objection and joinder in KeyBank National Association s Limited Objection (the Joinder ) to Motion of Debtors for Entry of Interim and Final Orders (I) Authorizing the Use of Cash Collateral, (II) Granting Adequate Protecting, (III) Modifying the Automatic Stay, (IV) Setting a Final Hearing, and (V) Granting Related Relief (the Motion ). In support of this Brief, the Granite Landlords state as follows: BACKGROUND 1. Prior to the Petition Date (as defined below), the Granite Landlords entered into leases with Debtors for 34 separate Texas locations (the Leases ). An example of the Leases entered into by and between the Granite Landlords and Debtors is attached hereto and incorporated herein as Exhibit A. 1 Pursuant to the Leases, Debtors were responsible for paying minimum rent on the leased premises in the aggregate amount of $3,337,829 per month plus tax, insurance, and replacement reserve impounds. 2. The Leases provide that any failure to pay any minimum rent, taxes or assessments, utilities, insurance premiums or any other charge or payment required within three 1 All of the Leases entered into between the Granite Landlords and the Debtors are substantially similar, and Exhibit A is an exemplar of the Leases. The Granite Landlords will make copies of all Leases available upon request to any party-in-interest. 2

3 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 3 of 9 business days of the date the obligation became due would be considered an event of default. See Exhibit A, at The Leases further provide that upon an event of default the landlord had the right to terminate the lease and enter upon the premises. See Exhibit A, at The Leases further specify that should the tenant remain in possession of the leased premises that such tenancy shall be a month-to-month tenancy during which time period the tenant shall be responsible for paying rent at one and a half times the aggregate of the Minimum Rent payable with respect to the last Lease Year plus any additional charges accruing during the month. See Exhibit A, at Prior to the Petition Date, Debtors failed to perform under the Leases by, among other things, failing to make certain rental payments due and owing to the Granite Landlords. 6. On or about November 11, 2018, the Granite Landlords provided Debtors with notices of the defaults and termination of certain Leases (the Notices ) for certain Lease locations (the Terminated Leases ). For purposes of this Brief, the Terminated Leases are comprised of all locations under the Leases except for the following locations: (i) Rowlett Health Center; and (ii) Valley Grande Manor. True and correct copies of the Notices are attached hereto and incorporated herein as collective Exhibit B. 7. On December 4, 2018 (the Petition Date ), Debtors filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code ). 8. On December 5, 2018, Debtors filed the Motion requesting, among other things, authority to use Debtors cash collateral. [Docket No. 24]. With the Motion, Debtors submitted their Budget indicating itemized expenditures for which the cash collateral could be used. The 3

4 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 4 of 9 Budget indicates that the Debtors will require only $3,084,099 for facility rent for each month commencing January [Docket Nos. 24, 50]. 9. On December 21, 2018, the Granite Landlords filed their Joinder and thereby raised certain issues concerning the relief sought in the Motion. [Docket No. 174]. 10. To date, Debtors remain in possession of the premises for all locations under the Leases, including the Terminated Leases, and have failed to make any rental payments for November 2018, December 2018, and January ARGUMENT AND AUTHORITIES i. Debtors Hold Only Naked Possessory Rights in the Terminated Lease Locations. 11. In Texas, a tenant who continues to occupy leased premises following the termination of the tenant s lease is considered a holdover tenant. Coinmatch Corp. v. Aspenwood Apartment Corp., 417 S.W.3d 909, 915 (Tex. 2013). A terminated lease agreement may require that its terms apply to a holdover tenant. See id. 12. Once a lease is properly terminated, the tenant holds no legal interest in the premises, only a possessory interest in the property. In re Trang, 58 B.R. 183, 188 (Bankr. S.D. Tex. 1985). 13. Here, the Granite Landlords properly provided Debtors with the Notices pursuant to the lease agreements thereby terminating the Terminated Leases. Upon providing Debtors with the Notices, Debtors occupied and continue to occupy the premises of the Terminated Leases as holdover tenants and only hold a possessory interest in the premises under the Terminated Leases. 4

5 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 5 of 9 ii. Debtors Are Not Entitled to Assume and Assign the Terminated Leases. 14. Section 365(c) of the Bankruptcy Code prohibits a debtor-in-possession from assuming or assigning a nonresidential real property lease that was terminated prior to the petition date. See 11 U.S.C. 365(c)(3) (stating that the trustee may not assume or assign any executory contract if... such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief ). 15. Moreover, courts in the Fifth Circuit and elsewhere have held that a properly terminated nonresidential lease may not be assumed or assigned when the termination occurred prior to entry of the order for relief. See e.g., In re Trang, 58 B.R. at 189; In re Seven Stars Rest., Inc., 122 B.R. 213, 218 (Bankr. S.D.N.Y. 1990); see also 3 Collier on Bankruptcy [3] (16th ed. 2018). 16. Here, the Granite Landlords properly terminated the Terminated Leases prior to the Petition Date by sending the Notices to Debtors. Accordingly, Debtors do not have authority to assume or assign the Terminated Leases. iii. Debtors Are Not Entitled to Revive the Terminated Leases. 17. Absent extenuating circumstances, courts in the Fifth Circuit and elsewhere have held that a non-residential real property lease that was properly terminated prior to the petition date may not be revived post-petition upon request of the debtor. See In re Trang, 58 B.R. at 189; In re Shull Enter., 1993 WL , at *4 5 (Bankr. S.D. Iowa Dec. 6, 1993) (stating that the Court would not resurrect a terminated lease because the default was due to unpaid rent and was substantial in nature); see also In re Seven Stars Rest., Inc., 122 B.R. at 218 (stating that the filing of a bankruptcy case does not resurrect a validly terminated executory contract or lease). 5

6 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 6 of Here, because the Terminated Leases were properly terminated prior to the Petition Date, Debtors are not entitled to revive the Terminated Leases following the Petition Date by continuing to occupy the premises. iv. Debtors Must Pay Post-Petition Rent on a Timely Basis. 19. The plain language of the Bankruptcy Code compels Debtors to pay post-petition rent and related charges to the Granite Landlords. Section 365(d)(3) of the Bankruptcy Code provides in relevant part: The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title. 11 U.S.C. 365(d)(3). 20. The objective of Section 365(d)(3) of the Bankruptcy Code is straightforward it requires that the Granite Landlords receive timely compensation for the post-petition, prerejection use and occupancy of the Granite Landlords property at the contract rate specified in the Leases. See In re Imperial Beverage Group, LLC, 457 B.R. 490, 497 (Bankr. N.D. Tex. 2011) (citing 11 U.S.C. 365(d)(3)); In re Manis Lumber Co., 430 B.R. 269, 277 (Bankr. N.D. Ga. 2009) (citing In re NETtel Corp. Inc. & NETtel Comm., Inc., 289 B.R. 486, 487 (Bankr. D.C. 2002)). The fundamental principle of Section 365(d)(3) is that the Granite Landlords, like other post-petition creditors, should receive full and timely payment for post-petition services. When a debtor chooses to continue to occupy and use the premises, it must continue to pay rent that becomes due under the lease. See In re Rhodes, Inc., 321 B.R. 80, (Bankr. N.D. Ga. 2005). The Granite Landlords are not required to provide post-petition services without current payments for those services. See In re Rhodes, Inc., 321 B.R. 80, (Bankr. N.D. Ga. 2005). 6

7 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 7 of Debtors failure to pay post-petition rent and related charges under the Leases violates Section 365(d)(3) of the Bankruptcy Code. There is no legal basis that excuses Debtors failure to pay while remaining in possession of the premises. To date, the Granite Landlords have not received stub rent for December 2018 or January In addition, because the Granite Landlords hold a security deposit related to the Terminated Leases in the form of a letter of credit, the Granite Landlords intend to request that any deposit securing the Leases be hereby returned to the Granite Landlords for failure to pay the stub rent due and owing. v. Granite Landlords Terms for Entering into a New Agreement with Debtors. 22. The Granite Landlords would consider entering into a new arrangement with Debtors that would permit the Granite Landlords to continue to occupy the premises under the Leases, if, and only if, the following conditions were met: (i) payment in full of the pre-petition amount owed under the Leases; and (ii) payment of stub rent owed pursuant to the Leases for both December 2018 and January Notably, both of the conditions required by the Granite Landlords would also be required for the Debtors to assume and assign any of the Leases. 23. For every month that Debtors occupy the premises under the Leases, Debtors continue to incur additional administrative expenses that, according to Debtors Budget, cannot be paid. Moreover, rent obligations incurred by Debtors during the pendency of the bankruptcy case should be paid in the ordinary course, not in lump sum at the end of the bankruptcy case. 24. Accordingly, the Granite Landlords request that Debtors immediately pay all rent due and owing under any Lease that Debtors do not agree was either (i) terminated prior to the Petition Date, or (ii) rejected prior to the final hearing on Debtors Motion 2 For discussion purposes only, Granite Landlords estimate that the amount due under the Leases prior to the Petition Date was an amount of $5 million, and that the Granite Landlords are owed stub rent in the total amount of $10 million for the period between December 2018 and January Granite Landlords expressly reserve the right to increase or decrease these amounts upon further review of the Lease terms. 7

8 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 8 of 9 WHEREFORE, the Granite Landlords respectfully request that any relief granted by the Court regarding the Motion be entered subject to the limitations set forth in the Granite Landlords Joinder and this Brief, and for such other and further relief as the Court may deem just and proper. Dated: January 10, Respectfully submitted, /s/ Vickie L. Driver Vickie L. Driver Texas Bar No Christina W. Stephenson Texas Bar No HUSCH BLACKWELL LLP 2001 Ross Avenue, Suite 2000 Dallas, Texas Phone: (214) Fax: (214) vickie.driver@huschblackwell.com crissie.stephenson@huschblackwell.com COUNSEL FOR THE GRANITE LANDLORDS 8

9 Case bjh11 Doc 315 Filed 01/10/19 Entered 01/10/19 17:17:44 Page 9 of 9 CERTIFICATE OF SERVICE I hereby certify that on the 10th day of January 2019, a true and correct copy of the foregoing was served via the Court s ECF system to the parties registered to receive electronic service. /s/ Vickie L. Driver Vickie L. Driver i Brownwood SCC LLC (33968); Community SCC LLC (33969); Crowley SCC LLC (33970); Green Oaks SCC LLC (33971); Harbor Lakes SCC LLC (33972); Hewitt SCC LLC (33973); Holland Lake SCC LLC (33974); Mission SCC LLC (33975); Redoak SCC LLC (33976); Stallings Court SCC LLC (33977); Stonegate SCC LLC (33978); PM Management Garland NC LLC (33979); PM Management Golden Triangle NC I LLC (33980); PM Management Golden Triangle NC II LLC (33981); PM Management Golden Triangle NC III LLC (33982); PM Management Golden Triangle NC IV LLC (33983); PM Management Killeen I NC LLC (33984); PM Management Killeen II NC LLC (33985); PM Management Killeen III NC LLC (33986); Alief SCC LLC (33987); PM Management Lewisville NC LLC (33988); Bandera SCC LLC (33989); PM Management New Braunfels NC LLC (33990); PM Management Park Valley NC LLC (33991); Baytown SCC LLC (33992); PM Management Pflugerville AL LLC (33993); PM Management Portland AL LLC (33994); PM Management Portland NC LLC (33995); Beltline SCC LLC (33996); PM Management Round Rock AL LLC (33997); PM Management San Antonio NC LLC (33998); Booker SCC LLC (33999); Presidential SCC LLC (34000); Riverside SCC LLC (34001); Round Rock SCC LLC (34002); Bossier SCC LLC (34003); Bradford SCC LLC (34004); Brinker SCC LLC (34005); Capitol SCC LLC (34006); Rowlett SCC LLC (34007); CapWest-Texas LLC (34008); Ruston SCC LLC (34009); Cedar Bayou SCC LLC (34010); RW SCC LLC (34011); Clear Brook SCC LLC (34012); Sagebrook SC LLC (34013); Colonial SCC LLC (34014); San Angelo SCC LLC (34015); Corpus Christi SCC LLC (34016); Crestwood SCC LLC (34017); CTLTC Real Estate, LLC (34018); SCC Edinburg LLC (34019); Fairpark SCC LLC (34020); SCC Hospice Holdco LLC (34021); Gamble Hospice Care Central, LLC (34022); SCC Senior Care Investments LLC (34023); SCC Socorro LLC (34024); Gamble Hospice Care Northeast, LLC (34025); Senior Care Center Management II LLC (34026); Gamble Hospice Care Northwest, LLC (34027); Senior Care Center Management LLC (34028); Gamble Hospice Care of Cenla, LLC (34029); Senior Care Centers Home Health LLC (30430); Senior Rahab Solutions LLC (34031); Harden HUD Holdco LLC (34032); Senior Rehab Solutions North Louisiana LLC (34033); Shreveport SCC LLC (34034); Harden Non-HUD Holdco LLC (34035); Harden Pharmacy LLC (34036); Hearthstone SCC LLC (34037); Solutions 2 Wellness LLC (34038); South Oaks SCC LLC (34039); HG SCC LLC (34040); Springlake ALF SCC LLC (34041); Harden HUD Holdco LLC (30432); Senior Rehab Solutions North Louisiana LLC (34033); Shreveport SCC LLC (34034); Harden Non-HUD Holdco LLC (34035); Harden Pharmacy LLC (34036); Hearthstone SCC LLC (34037); Solutions 2 Wellness LLC (34038); South Oaks SCC LLC (34039); HG SCC LLC (34040); Springlake ALF SCC LLC (34041); Springlake SCC LLC (34042); Hill Country SCC LLC (34043); Stonebridge SCC LLC (34044); Hunter Pond SCC LLC (34045); Jacksonville SCC LLC (34046); Summer Regency SCC LLC (34047); TRISUN Healthcare LLC (34048); La Hacienda SCC LLC (34049); Lakepointe SCC LLC (34050); Valley Grande SCC LLC (34051); Major Timbers LLC (34052); Vintage SCC LLC (34053); Marlandwood East SCC LLC (34054); West Oaks SCC LLC (34055); Western Hills SCC LLC (34056); Weston Inn SCC LLC (34057); Marlandwood West SCC LLC (34058); Weestover Hills SCC LLC (34059); Whitesboro SCC LLC (34060); Windcrest SCC LLC (34061); Windmill SCC LLC (34062); Wurzbach SCC LLC (34063); Meadow Creek SCC LLC (34064); Midland SCC LLC (34065); Mill Forest Road SCC LLC (34066); Mullican SCC LLC (34067); Mystic Park scc LLC (34068); Normandie SCC LLC (34069); Onion Creek SCC LLC (34070); Park Bend SCC LLC (34071); Pasadena SCC LLC (34072); Pecan Tree SCC LLC (34073); Pecan Valley SCC LLC (34074); Pleasantmanor SCC LLC (34075); PM Management Allen NC LLC (34076); PM Management Babcock NC LLC (34077); PM Management Cedar Park NC LLC (34078); PM Management Corpus Christi NC II LLC (34079); PM Management Corpus Christi NC III LLC (34080); PM Management Corsicana NC II LLC (34081); PM Management Corsicana NC III LLC (34082); PM Management Corsicana NC LLC (34083); PM Management Denison NC LLC (34084); PM Management El Paso I NC LLC (34085); PM Management Fredericksburg NC LLC (34086); PM Management Frisco NC LLC (34087). 9

Official Form 201 Voluntary Petition for Non-Individuals Filing for Bankruptcy 04/16

Official Form 201 Voluntary Petition for Non-Individuals Filing for Bankruptcy 04/16 Case 18-33996-11 Doc 1 Filed 12/04/18 Entered 12/04/18 17:53:25 Page 1 of 31 Fill in this information to identify the case: United States Bankruptcy Court for the: Northern District of Texas (State) Case