Relevant Documents:
Voluntary Petition
First Day Declaration
Cash Collateral Motion
South Bay Sale Motion
South Bay Bid Procedures Motion
Futures Sale Motion
Futures Bid Procedures Motion
Summary |
Community Intervention Services is mental health and behavioral services provider with 24 facilities |
Proposes two sale transactions with The Mentor Network to serve as stalking horse bidder: (i) substantially all assets of debtor South Bay for $32 million and (ii) substantially all assets of debtor Futures Behavior Therapy for $7.5 million |
Requested use of cash collateral pending sale process completion “should” cover all administrative expenses of the chapter 11 case |
Attributes filing to operational and regulatory challenges, along with a costly civil action filed against the company by a former employee |
Community Intervention Services, Inc., a Westborough, Mass.-based mental health and behavioral services provider that was formed in 2012 by private equity fund manager H.I.G. Capital, LLC to pursue acquisitions of behavioral health companies, filed for chapter 11 protection today in the Bankruptcy Court for the District of Massachusetts, along with three affiliates. The debtors filed the case with the consent of their senior lenders (Capital One and Fifth Third Bank) to sell certain of their businesses to The Mentor Network, which has agreed to serve as stalking horse for both transactions through affiliates SB Transitional Sub, LLC and FBTC Transitional Sub, LLC through two separate transactions: (i) the sale of substantially all of the assets of debtor South Bay Mental Health Center, Inc., together with certain of Community Intervention Services’ assets “integral” to the South Bay business, for $32 million, and (ii) the sale of substantially all of assets of debtor Futures Behavior Therapy Center, LLC for $7.5 million. The debtors describe Mentor as an “ideal buyer” that is “reputable and well-respected in the industry.”
Continue reading for our First Day team's analysis of the Community Intervention chapter 11 and Request a Trial for access to the linked documents and analysis as well as our coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities.
The debtors have filed sale motions and corresponding bid procedures motions regarding each proposed sale. “The consummation of the sale transactions involving CIS, South Bay and Futures will substantially conclude the winding up of the business operations of all of CIS’s subsidiaries,” says the first day declaration of Community Intervention CEO Andrew Calkins, who adds that “once the two sales are consummated, CIS will wind up its own affairs.”
The debtors request the use of cash collateral, saying that the use of cash collateral pending completion of the sale process “should generate sufficient revenues with which to pay all administrative expenses of Chapter 11 Case.” The sale motions provide that the debtors anticipate that there will be insufficient sale proceeds to pay any unsecured claims.
The first day hearing has been
scheduled for Wednesday, Jan. 6, at 3 p.m. ET.
The company reports $100 million to $500 million in both assets and liabilities, and its prepetition capital structure includes:
- Secured debt:
- Senior secured credit facility: $48.7 million
- Second lien mezzanine loan facility: The debtors along with certain non-debtor entities “borrowed approximately $25,250,000 secured by a second-priority security interest in the assets of the Debtors and the Non-Debtor Entities.”
- Unsecured debt: South Bay, CIS and Futures are largely current with trade payables
- Equity: Holders of at least 10% of the debtors’ equity include H.I.G. Growth Partners-CIS, LLC.
The mezzanine facility, secured by a lien on substantially all assets of the debtors that is junior to the senior secured lenders’ lien, was entered into with Triangle Mezzanine Fund, which subsequently assigned its rights to BSP Agency, LLC. The declaration states that $25.3 million was borrowed under the mezzanine loan. However, according to the Futures sale motion, “The Mezzanine Lenders hold a subordinated security interest in the Debtor’s assets, so their putative secured claim in the amount of approximately $43.7 million is, because the value of the Debtor’s assets is less than the amount owed to the Senior Lenders, effectively an unsecured claim,” adding that no payment will be made to the mezzanine lenders from sale proceeds.
The debtors also obtained emergency funding of $7.8 million from the Commonwealth of Massachusetts in the spring of 2020 that “must be repaid in six installments (each in the amount of $1.3 million)” beginning in January 2021. “The Commonwealth of Massachusetts does not hold liens against the Debtors’ assets, but the Debtors owe the Commonwealth $1,820,000 under the Massachusetts Settlement Agreement [discussed below] and $7,800,000 arising from the emergency funding provided during the initial stages of the COVID-19 pandemic,” the debtors say.
“Because of this payment and lien subordination along with the magnitude of the Senior Secured Claim and the apparent value of the Debtors’ assets subject to the Senior Prepetition Liens, the Debtors believe that the Mezzanine Agent and the Mezzanine Lenders do not and cannot claim an interest in the Debtors’ cash constituting the Senior Lenders’ Prepetition Collateral,” according to the debtors’ cash collateral motion.
The company attributes the bankruptcy filing to operational and regulatory challenges, including significant clinician turnover, revenue cycle management and accounting inconsistencies and interruptions in government funding of certain services. Matters were exacerbated by a
qui tam whistleblower civil action commenced in 2015 by a former employee alleging inadequate training and supervision of certain of its clinical employees. The company entered into a settlement of the state law claims after the Commonwealth of Massachusetts intervened, resulting in certain of the debtors agreeing to pay a total of $4 million through December 2022, of which $1.8 million is currently due. However, the federal claims have not been resolved and thus far, the U,S. has not elected to intervene in the litigation, with unsuccessful settlement efforts. The parties have agreed to “once again” mediate their disputes due to the trial court’s urging, the debtors say. Ensuing costs and “uncertainty” from the litigation led the debtors to the conclusion that “the only way to preserve the Debtors’ businesses as going concerns and to provide for the care and treatment of their patients is through their sale to well-capitalized operator with the expertise to deliver continuing services to the Debtors’ clients,” the debtors say.
The debtors are represented by Casner & Edwards in Boston as counsel, Getzler Henrich & Associates as financial advisor and Duff & Phelps Securities as investment banker. The
jointly administered case number is 21-40002. The case has been assigned to Judge Elizabeth D. Katz.
Background
Community Intervention Services, or CIS, was formed in 2012 by private equity fund manager H.I.G. Capital, LLC to pursue acquisitions of behavioral health companies. H.I.G.’s business plan, implemented by its H.I.G. Growth Partners Fund, was to create a broad-based regional, or possibly national, for-profit behavioral health company, which would be able to deliver, efficiently and cost-effectively, behavioral health services to a chronically under-served population. This strategy was driven in significant part by the passage of the Mental Health Parity and Addiction Equity Act federal legislation enacted prior to the Affordable Care Act, which expanded required public and private health insurers to cover behavioral health. CIS financed its acquisitions and its subsidiaries’ operations with secured financing provided by institutional and private lenders.
The company’s first acquisition was South Bay, which the debtors say has grown into “one of the largest for-profit outpatient and community-based providers of behavioral health services in Massachusetts,” with 22 medical offices to-date providing early intervention counseling, outpatient counseling and in-home community-based counseling for children, adults and families. These services are provided by a staff of more than 930 professionals and paraprofessionals and generated more than $60 million in revenue in 2019. In the first 10 months of 2020, South Bay generated approximately $48.5 million in revenue.
CIS acquired additional subsidiaries operating in the behavioral health field, including Futures, which commenced operations in Beverly, Massachusetts in 2006, initially as a one-room and later as a two-room facility, providing treatment to children and adolescents with autism spectrum disorders. Futures’ revenue for 2019 totaled $8.4 million; of that amount, 40% was received under managed Medicaid programs and 57% was received from commercial insurance providers.
The debtors caution that South Bay’s failure “could well trigger a health care crisis across the state, destabilizing an already vulnerable population during the pandemic.” Futures’ services for children and families are “equally important, and its closure would require those families to seek comparable services in an environment where alternative treatment options are not readily available—or, in the Debtors’ view, of comparable quality.”
The debtors’ largest unsecured creditors are listed below:
10 Largest Unsecured Creditors |
Creditor |
Location |
Claim Type |
Amount |
Benefit Street Partners |
Providence, R.I. |
Loans |
$ 30,616,650 |
OFS Capital Management |
Chicago |
Loans |
13,121,421 |
Capital One National Association |
Bethesda, Md. |
Loans |
9,208,645 |
Massachusetts Executive
Office of Health and Human
Services |
Boston |
Trade Debts |
7,806,697 |
McDermott Will & Emery LLP |
Miami |
Vendor |
6,068,193 |
H.I.G Growth Partners |
Boston |
Fees/Expenses
for PE Sponsor |
5,245,415 |
H.I.G Growth Partners |
Boston |
Junior Debt
Provider |
2,177,837 |
State of MA Office of
Attorney General |
Boston |
Debts |
1,820,000 |
Goodwin Procter LLP |
Boston |
Vendor |
928,841 |
Internal Revenue Service |
Philadelphia |
Taxes |
846,091 |
The case representatives are as follows:
Representatives |
Role |
Name |
Firm |
Location |
Debtors' Counsel |
Michael J. Goldberg |
Casner
& Edwards |
Boston |
A. Davis Whitesell |
Hanna J. Ciechanowski |
Debtors' Financial
Advisor |
David Campbell |
Getzler Henrich
& Associates |
Westborough, Mass. |
Debtors' Investment
Banker |
Eric D. Corburn |
Duff & Phelps
Securities |
New York |
Counsel to the
Stalking Horse Bidder |
Ryan P. Haas |
Quarles & Brady |
Milwaukee |
Counsel to the
Prepetition Agent |
Paul T. Musser |
Katten Muchin
Rosenman |
Chicago |
Cash Collateral Motion
The debtors request the use of cash collateral proposing as adequate protection for the senior lenders monthly cash payments of $615,000, a replacement lien and a superpriority administrative expense claim.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carveout for professional fees is $150,000.
The proposed budget for the use of cash collateral is
HERE.
The use of cash collateral is subject to the following milestones:
- Bid procedures orders: Entered by Jan. 15
- Futures sale order: Entered by Feb. 16
- South Bay sale order: March 10
- Futures sale consummation (with net proceeds forwarded to agent): March 31
- South Bay sale consummation (with net sale proceeds forwarded to agent): May 31
The lien challenge deadline is 45 days from appointment of an official committee of unsecured creditors but in no event later than 60 days from the petition date. The UCC lien investigation budget is $25,000.
Sale Process
The debtors’ sale process began in October 2018 through the retention of Duff & Phelps Securities as investment banker, ultimately leading to the proposed bankruptcy sale process. The debtors seek a “fast track” process for the Futures sale, “reflecting, among other factors, the extent of prior marketing efforts and the heightened risk to the transaction presented by the COVID-19 pandemic.” The debtors note that Futures’ two locations have already been closed during the initial lockdown, and its revenues “have not fully recovered” and also point to the “recent resurgence” of the Covid-19 pandemic in Massachusetts as a reason for a quick sale. The South Bay sale, however, is proposed to be conducted on a “more typical” going concern 363 sale timeframe.
South Bay Sale Motion / Bid Procedures Motion
The sale process for the South Bay assets includes SB Transitional Sub, LLC as stalking horse for $32 million. The debtors seek to market the assets in January and February, with a bid deadline of mid-to-late February, an auction one week later and a sale hearing by the end of February.
The debtors propose a 2% breakup fee ($640,000) Initial overbids must exceed the stalking horse bid by at least $890,000 and subsequent overbids are $250,000.
Futures Sale Motion / Bid Procedures Motion
The debtors seek an expedited sale process for the Futures sale process, which has FBTC Transitional Sub, LLC as stalking horse for a $7.5 million purchase price. The Futures business operates at two locations - in Beverly and West Boylston, Mass.
The debtors propose a breakup fee of $350,000. Initial overbids must exceed the stalking horse bid by $450,000 and subsequent overbids are $100,000.
The debtors seek approval of the motion by Jan. 21, to allow for sale approval by the Feb. 16 deadline imposed by the senior lenders as condition to the consent to the use of cash collateral.
The debtors say that the pursuant to an Oct. 30, 2020, fifth forbearance agreement and amendment to the senior loan agreement, the agent and lenders agreed to the payment of “Qualifying MIP Expenses” to Andrew Calkins (CIS’s Chief Executive Officer), Matthew Lesniewski (CIS’s Chief Financial Officer) and Sara Hart (South Bay’s President) as a carve-out from the proceeds of the proposed sale otherwise payable to the senior lenders. The debtors propose that the proposed sale would be a “Qualifying Disposition (as such term is defined in the Fifth Forbearance Agreement) regardless of when consummated and closed, and all references to the May 31, 2021, deadline in the definition of Qualifying Disposition shall be disregarded.”
Futures has obligations under two leases at which it conducts autism education programs, which lease obligations are current. The debtors say that these leases will likely be assumed and assigned through the sale process with “minimal if any” cure costs.
Other Motions
The debtors also filed various standard first day motions, including the following: