Hermitage Club revised financing plan scrutinized
RUTLAND — The Hermitage Club is meeting opposition again in its second attempt to get court approval to borrow $1.75 million from Restructured Opportunity Investors Inc.
Hermitage founder Jim Barnes hopes to reorganize his companies and reopen the club in time for the winter season rather than be forced to sell the assets. Hermitage establishments — including a private ski resort at Haystack Mountain, a golf course and several inns — were shut down by the Vermont Department of Taxes last year after financial struggles plagued the companies.
On July 12 in the United States Bankruptcy Court for the District of Vermont, Judge Colleen A. Brown denied approval for a debtor-in-possession or DIP financing plan proposed by Hermitage Inn Real Estate Holding Company LLC and Hermitage Club LLC after objections from several parties caused the Hermitage to request for the hearing be continued. She instead allowed the Hermitage to make a new motion to be heard Friday in a Rutland courtroom.
Berkshire Bank, which claims to be owed more than $20 million after the Hermitage defaulted on loans and triggered a foreclosure process to begin in February 2018, objects to the new motion.
"In short, the debtors don't have the funds necessary to stay in Chapter 11 [reorganization] and pay their post-petition obligations and they cannot provide the bank and the other secured creditors adequate protection as required by the [U.S.] Bankruptcy Code," wrote attorney Elizabeth Glynn of Ryan, Smith & Carbine Ltd. in Rutland.
Glynn said the proposed professional services allocation went from $300,00 to $150,000 only to move the funding to another line item "but these cases did not get less expensive to prosecute over the past week so the estates will likely incur more expenses than they have funds available to pay."
"How the debtors can propose that their maintenance obligations are 50 percent of the receiver's actual expense over the past year is unclear and can only reflect the plain fact that the proceeds available to the debtors under the DIP financing facility are insufficient to cover their most basic ongoing expenses," she wrote, referring to the receiver appointed in state court in May to preserve and maintain foreclosed Hermitage properties. "Indeed, each successive budget circulated by the debtors does not add any additional funds, or eliminate any expenses, but just moves money from one category to another, simply changing the category of expense for which they will have a shortfall."
The proposed budget would provide the bank with $42,500 per month, Glynn wrote, but interest owed to the bank accrues at a rate of $84,396 per month.
Like other parties in the case, the bank raised concerns about a benchmark laid out in the agreement: A meeting of club members must be held by Aug. 7 with 65 percent of them agreeing to pay 100 percent of their monthly dues by Aug. 19, and failure to collect the dues would trigger a sale of the assets.
Glynn called it "highly unlikely" that the benchmark would get met.
"Without open facilities, it is inconceivable that members would agree to tender any membership dues to the debtors, let alone 100 percent of their dues," the Ad-Hoc Committee of Members' attorney Paul F. O'Donnell. of Hinkley, Allen & Snyder in Boston wrote in a court filing cited by Glynn.
The committee has been granted permission by the court to participate in the bankruptcy proceedings. It had opposed the original motion but no new filings were available as of Wednesday afternoon.
Glynn said the court should not allow the proposed lender's lien against Hermitage properties to take priority over previous liens.
"This is the debtors' management/principal attempting a last ditch effort to hold off the inevitable, and the court should not allow the debtors to continue these efforts," she wrote.
Attorney David Dunn of Dunn, Shriver & Carroll in Brattleboro said the Barnstormer Summit Lift LLC objects to the financing because there is not enough protection for its group, which is made up of members who are owed for an investment made in a new chairlift at the ski resort.
The chairlift is not included in the lender's lien but there is no evidence any insurance has been obtained for it, wrote Dunn. The lift "has been mothballed since March 2018, and only minimal preventative maintenance has been performed. It is uncontested that significant funds will be necessary to make the lift operational again."
Dunn said the proposed budget provides no funding for such work.
Reinhart Foodservice LLC "remains concerned that these administrative obligations are a disguised way to funnel cash to Barnes, a judgment debtor that owes Reinhart over $1.5 million and has made no effort to pay this debt, and who also appears to be singularly responsible for leading the debtors into their existing financial state," wrote Reinhart's attorney Adam Mordecai of Primmer Piper Eggleston & Cramer in Manchester, N.H. "Therefore, before any financing can be approved, more detail must be provided and, at a minimum, assurances must be made that Barnes will not be compensated."
Reinhart's liens against the Hermitage "still lack adequate protection under the proposed financing and the debtor's revised budget remains woefully inadequate to maintain operations let alone restart them," Mordecai wrote. "Further, the financing fails to provide sufficient funds for or detail relating to the debtors' possible sale process."
Mordecai said the proposed budget went from covering 10 weeks to 16 weeks, taking the Hermitage up to the end of November and the start of the ski season. The Hermitage "will have an ending cash balance of under $25,000, having spent only $7,500 on mountain operations and nothing on snowsports, club amenities, or food and beverage supplies," he wrote. "In addition, the operations payroll remains constant throughout the budget at $8,000 a week, the same amount for the existing five maintenance employees. In other words, the debtors utterly fail to explain how this financing and this budget will allow them to have a fully staffed, stocked and operational, top-of-the-line, private resort, when the payroll will still be barely enough to cover ongoing maintenance of the resort in a mothballed state, and no money has been spent on guest and member operations or food and beverage inventory."
Mordecai questioned why administrative payroll in the proposed budget went from about $100,000 to $220,000, or about $60,000 a month.
"As with the prior budget, there is no detail about who is on the administrative payroll and why this expense is necessary," he wrote. "The debtors have indicated that there are only five employees that maintain the resort, and those are presumably included in operational payroll expenses which was allocated approximately $32,000 per month in the budget."
Mordecai said the Cold Brook Fire District, a local municipality running a water and sewer system, is owed about $850,000 in the next three months but the lender is "still slated to collect over $150,000 in fees, use its borrowed funds for a $280,000 interest reserve solely for its own benefit, and otherwise obtain a priming lien for itself with virtually no benefit to the estate or the creditors."
The motion "should be denied in all respects and this case converted to a case under Chapter 7," wrote Cold Brook's attorney John Kennelly of Pratt Vreeland Kennelly Martin & White in Rutland.
Under Chapter 7, a sale of the assets would be expected. On Friday, the court also will hear a separate motion from U.S. Trustee William Harrington to convert the cases to Chapter 7.
Wilmington on Wednesday joined Berkshire Bank, the Ad-Hoc Committee and the Barnstormer Summit Lift LLC in supporting Harrington's motion. The town believes Chapter 7 bankruptcy would "provide the most benefit to the greatest number of people, in the most expedient way possible, in getting the debtors' properties operational once again and consequently paying the associated real estate taxes in a manner that is not chaotic and ad hoc," wrote Town Attorney Edward Adrian of Monaghan Safar Ducham in Burlington. He said the town opposes the Hermitage's motion for financing.
Reach staff writer Chris Mays at firstname.lastname@example.org, at @CMaysBR on Twitter and 802-254-2311, ext. 273.
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