STATE OF WISCONSIN CIRCUIT COURT MILWAUKEE COUNTY. Plaintiffs, Case No. 17CV5769 MOTION TO APPROVE TRANSITION OF FACILITIES TO NEW OPERATORS

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1 SRF FILED John Barrett Clerk of Circuit Court 2017CV STATE OF WISCONSIN CIRCUIT COURT MILWAUKEE COUNTY AAT RE 1 LLC, ET AL., vs. Plaintiffs, Case No. 17CV5769 FORTIS MANAGEMENT HOLDINGS, INC., ET AL., Defendants. MOTION TO APPROVE TRANSITION OF FACILITIES TO NEW OPERATORS Michael S. Polsky, Esq., WIS. STATS. Chapter 128 Receiver (the "Receiver") for the abovecaptioned Defendants ("Fortis"), and the above-captioned Plaintiffs (the "Plaintiffs", and along with the Receiver, the "Movants") hereby move the Court for entry of an order: (1) authorizing the transfer of the operations and certain related assets of sixty-four (64) skilled nursing and long term care facilities to the New Operators (as defined below) free and clear of any liens, claims and encumbrances other than those explicitly assumed by the New Operators; (2) approving the terms of the form of Agreement to Transfer Operations and Related Assets (the "OTA") to be entered into between the Receiver and the New Operators as described below; and (3) granting related relief (the "Motion"). In support of this Motion, the Movants respectfully allege as follows: PRELIMINARY STATEMENT Fortis manages and operates sixty-five (65) skilled nursing and long term care facilities located in Wisconsin, Michigan, Oregon, Washington, Minnesota, and Idaho. Fortis is insolvent, and this action was commenced with the consent of Fortis and its existing lenders to stabilize Fortis'

2 operations and ensure adequate financing for the continuation of quality patient care until the facilities can be transitioned to new operators. It is now time to begin the process of transitioning the operations of the Facilities from the Receiver to financially sound operators who can care for over 6,000 patients who reside therein. The Movants have identified four new operators -- North Shore Healthcare, Prestige Care, Villa Healthcare, and PNW (collectively, the "New Operators") who, between them and through their affiliated entities, are willing to take possession and control of 64 of the 65 facilities (the "Facilities"), 1 assume the financial responsibility for their future operations, and assume the clinical responsibility for caring for the residents. Importantly, these New Operators have agreed to hire substantially all of the approximately 6,000 employees of the Facilities, who provide quality care to their residents. The New Operators have separately submitted the necessary regulatory filings in each state in which the Facilities they will acquire are located, and regulatory approval for the transition is expected to be achieved on a state-by-state basis beginning as soon as October 1, By this Motion, the Movants request that the Court enter an Order authorizing the transfer of operations of the Facilities to the New Operators, approving the terms of the form of OTA to be entered into between the Receiver and the New Operators, and granting related relief so that the receivership estate can be relieved of its duty to operate the Facilities and care for its residents. The Receiver recommends approval of the transfer of the Facilities' operations as it is in the best interests of the receivership estate in that the Facilities are operated at a substantial loss and the transfer reduces the liabilities of the estate, thereby maximizing the value of Fortis' assets for the benefit of all creditors and parties in interest. 1 Movants will separately request approval of the transfer of the operations of a facility known as the Pacific Specialty and Rehabilitative Care that Plaintiff FCE Pacific Specialty, LLC leases from a third party. 2

3 BACKGROUND The Receivership Proceeding 1. On July 12, 2017 (the "Filing Date"), the Plaintiffs commenced the above-captioned receivership proceeding under Chapter 128 of the Wisconsin Statutes. The Plaintiffs, collectively, own the real property for sixty-three (63) of the Facilities and lease real property occupied by two of the Facilities from unrelated third parties. Fortis leases all Facilities from the Plaintiffs pursuant to three master leases and numerous subleases. 2. Prior to the Filing Date, Fortis was in default of its obligations to the Plaintiffs under the master leases and owed Plaintiffs nearly $7 million for unpaid rent and other charges. Fortis and the Plaintiffs agreed to the appointment of a receiver to enable Fortis to maintain normal business operations while the management and operations of the Facilities are transferred to new operators. 3. On the Filing Date, the Court entered the Order Appointing Receiver and Granting Injunctive Relief (the "Receivership Order") appointing Michael S. Polsky, Esq. as WIS. STATS. Chapter 128 Receiver of Fortis. 4. Also on the Filing Date, the Court entered the Order Authorizing Receiver to Borrow Funds and to Grant Additional Liens and Security Interests (the "Financing Order") granting the Receiver's emergency financing motion. The Financing Order approved the terms of the Financing and Security Agreement attached as Exhibit A thereto (the "Financing Agreement"), pursuant to which, among other things, MidCap Funding IV Trust (as successor-by-assignment to MidCap Financial Trust) ("MidCap"), in its capacity as Agent under the Financing Agreement and on behalf of the Lenders (as defined in the Financing Agreement), agreed to provide post-receivership financing to the Receiver to finance the receivership proceeding under the terms and conditions set forth in the Financing Order and the Financing Agreement, which terms and conditions included, among other things, that MidCap would have a first priority security interest in and lien on the assets of Fortis to secure such financing. 3

4 5. Fortis stipulated and agreed to the appointment of the Receiver, the entry of the Receivership Order and the entry of the Financing Order. 6. Since the Receiver's appointment, he and his professionals have spent time on site at Fortis' headquarters in Milwaukee, have reviewed Fortis' operational and financial status, and assessed the best course of action to be taken with respect to Fortis' ongoing operations. The Receiver believes that the transfer of operations of the Facilities is in the best interests of the receivership estate. The Facilities 7. Plaintiffs, collectively, own the real property for sixty-three (63) of the sixty-five (65) Facilities. Plaintiffs lease real property for two of the Facilities. 8. Plaintiffs lease the Facilities to Defendants Fortis Management Leasing NH, LLC, Fortis Management Leasing Z, LLC, and Fortis Management Leasing WD, LLC (each, a "Fortis Lessee" and, collectively, the "Fortis Lessees"), pursuant to those certain Master Lease and Security Agreements, dated as of July 1, 2015 (collectively, the "Fortis Master Leases"), by and among the applicable Fortis Lessee and the applicable Plaintiff. 9. The Fortis Lessees sublease the Facilities to the Defendants who are owned and controlled, directly or indirectly, by the Fortis Lessees, and named as subtenants (each, a "Fortis Sublessee" and, collectively, the "Fortis Sublessees"), under certain sublease agreements, dated as of July 1, 2015 (collectively, the "Fortis Subleases"), by and among the applicable Fortis Sublessee and the applicable Fortis Lessee. 10. The Fortis Lessees and the Fortis Sublessees manage and operate the Facilities as skilled nursing and assisted living facilities by providing nursing care and related healthcare services to the patients who reside therein. 11. It is necessary for the Fortis Lessees and the Fortis Sublessees (collectively referred to as the "Existing Operators") to cease operating the Facilities. The Facilities are operating at a 4

5 substantial loss. The Facilities lost approximately $3.7 million in July. August losses are projected at approximately $3.6 million. Each day the Receiver continues to operate the Facilities, the receivership estate incurs additional indebtedness. 12. Pursuant to the terms of the OTA, the New Operators desire to acquire, and the Existing Operators desire to transfer to the New Operators, the business and operations of the Facilities and, in connection therewith, the Operations Assets (as defined in Section 2.2 of the OTA). Upon execution of the OTA, (i) the Plaintiffs will enter into new master leases with affiliates of Cascade Capital Group (the Cascade Master Tenants ) for the lease of the Facilities (the "New Master Leases"), which shall automatically become effective upon the closing of the transfer of Operations Assets (the "Closing"), (ii) the Cascade Master Tenants will enter into new master subleases with the New Operators' master sublessees (the "New Master Subleases"), which shall become effective upon the Closing, and (iii) the Cascade Master Tenants will enter into subleases for the Facilities with the New Operators (the "New Subleases"), which shall become effective upon the Closing. 13. Upon the Closing, (i) the Fortis Master Leases shall be terminated with respect to the Facilities, (ii) the New Master Leases, the New Master Subleases and the New Subleases shall automatically become effective, and (iii) the transactions contemplated by the OTA shall be consummated. The OTA 14. The form of OTA to be entered into between the Receiver and the New Operators is described herein. The OTA will be entered into between the New Operators and the Fortis Sublessees. The OTA provides for the transfer of the Facilities' operations and the Operations Assets from the Existing Operators to the New Operators. 15. The OTA outlines the terms and conditions agreed to by the New Operators and the Receiver, subject to court approval, with respect to the transfer of operations and the Operations 5

6 Assets. Importantly, the OTA provides that: (1) the New Operators will pay to the Receiver in cash the fair market value of any Fortis-owned personal property conveyed to them; (2) the New Operators will hire substantially all of the employees of the Existing Operators; and (3) the New Operators will assume financial responsibility for the operation of the Facilities. The key terms of the form of OTA to be entered into between the Receiver and the New Operators are as follows: 2 a. Transfer of Operations. As of the effective time of the Closing (the "Effective Time"), the Receiver, on behalf of the applicable Existing Operators, shall transfer, and the applicable New Operator shall assume, operations of the business and the operations of the respective Facilities pursuant to applicable Legal Requirements (as defined in the OTA) and the terms of the OTA, including financial management, resident care, supervision of employees, and regulatory and licensure responsibility. OTA, at 2.1. b. Operations Assets. At the Effective Time, and upon the terms and subject to the conditions of the OTA, the Receiver, on behalf of the applicable Existing Operators, shall transfer, convey, assign and deliver to the applicable New Operator, and the applicable New Operator shall acquire from the Receiver, free and clear of all Encumbrances, other than Permitted Encumbrances, all right, title and interest of the respective Existing Operators in and to the Operations Assets, meaning all assets of the Existing Operators that are owned or used by the Existing Operators in connection with the operations of the Facilities including, but not limited to, Records, Assumed Contracts, 2 The form of OTA agreed to by the Receiver and the New Operators is the master form that will serve as basis for each of the transitions to the New Operators. While the individual OTAs actually executed by the parties may vary to accommodate state-specific issues or issues unique to one of the New Operators, the OTAs actually executed will be substantially similar to the agreed upon master form of OTA and described in this Motion. The form OTA is a voluminous document and is not being attached to this Motion or served on the more than 15,000 creditors and parties in interest in this case. Parties in interest who wish to review a copy of the form of OTA may obtain a copy free of charge by contacting Prime Clerk at fortisinfo@primeclerk.com or by telephone at (toll free) or (646)

7 Licenses, interests in Medicare Provider Agreements, the Transferred IP, certain warranties and guaranties, Proprietary Policies and Procedures, Supplies, Personal Property, and all other assets necessary to operate the Facilities as skilled nursing or assisted living facilities. Id. at 2.2. See also id. at 2.5 (Transfer of Patient Trust Funds and Resident Inventory); 5 (Conveyance of Supplies and Personal Property). c. Payments at Closing. At the Closing, the New Operators shall pay in cash to the Receiver the fair market value of any personal property owned by the Existing Operators that is included in the Operations Assets. 3 See id. at 3. d. Assumed Liabilities; No Assumption of Other Liabilities. Except for the Assumed Liabilities set forth in the OTA, no New Operator or any of its Affiliates shall in any manner become responsible or liable for any of the Liabilities of the Existing Operators or any of their respective Affiliates, or otherwise arising from or related to the Business, Facilities or Operations Assets prior to the Effective Time (collectively, and as further described in the OTA, the "Excluded Liabilities"). Id. at 2.7(a). As of the Effective Time, the applicable New Operator shall assume the Assumed Contracts (the "Assumed Liabilities"), excluding the Excluded Liabilities. Id. at 2.7(b). e. Transfer of Health Care Licenses and Provider Agreements. Each New Operator and the New Operator's Master Tenants shall, jointly and severally, use Commercially Reasonable Efforts to obtain, among other things, all Licenses, health care licenses, permits, registrations, certifications, payor agreements, 3 The Receiver has commissioned an appraisal from the Ettin Group that will establish the actual fair market value of the personal property located at the Facilities broken down by Facility (the Appraised Value ). Each OTA will provide that the New Operators must pay to the receivership estate in cash the Appraised Value of any personal property owned by the Existing Operators that is included in the Operations Assets. 7

8 Medicare Provider Agreements and Medicaid Provider Agreements, as applicable, necessary to operate its respective Facility for its current use from all appropriate Governmental Authorities without materially interrupting the business or operation of the Facility (collectively, the "Health Care Licenses"), as soon as is reasonably practicable and in any event effective as of the Effective Time. Id. at 8.1(a). Notwithstanding the foregoing: (i) to the extent permitted under applicable Legal Requirements and by applicable Governmental Authorities, each Existing Operator shall assign, effective as of the Effective Time, all such Health Care Licenses, as applicable, permitted to be so transferred, to the applicable New Operator, and such New Operator will accept such assignment; and (ii) to the extent that any such Health Care Licenses cannot be transferred to such New Operator under applicable Legal Requirements, the applicable Existing Operator shall surrender or terminate, as applicable, to the extent permitted by applicable law, and cooperate with such New Operator as addressed in Section 8.1(c), such Health Care Licenses with the appropriate Governmental Authority. Id. f. Collection of Accounts Receivable. The Receiver, on behalf of the Existing Operators, shall retain the right, title and interest in and to all unpaid accounts receivable with respect to the Facilities that relate to the period prior to the applicable Effective Time. Id. at 9.3(a). If payments are received by the New Operator on or after the Effective Time from Third Party Payors that relate to the period prior to the Effective Time, they will be forwarded to the Receiver, on behalf of the Existing Operators, within five Business Days of receipt. Id. at 9.3(b)(1). The New Operator and the Existing Operators will coordinate and provide information in connection with the billing and 8

9 collection of accounts receivable relating to the period prior to the Effective Time. See id. at 9.3(d)-(f). g. Employees. On or before the Effective Time, the New Operator shall offer employment to such numbers of Employees on such terms and conditions that are sufficient to not give rise to any Liability under the Worker Adjustment and Retraining Notification Act of 1988 or any similar state or local Legal Requirement. 4 Id. at h. Union Contracts. The New Operator will not assume the collective bargaining agreement with respect to any of the Facilities or the Employees (the "Union Contracts" and each a "CBA"). Id. at The New Operator shall comply with all applicable Legal Requirements with respect to the Union Contracts and CBAs. Id. i. Termination of Fortis Master Leases and Fortis Subleases. At or prior to the Closing, the Existing Operators shall have delivered to the New Operator a duly executed termination agreement, terminating the Fortis Master Leases as they relate to the Facilities and the Fortis Subleases. Id. at 12.1(f). 16. The OTA is the result of arm's length, commercially reasonable, good faith negotiations between the Receiver, on behalf of the Existing Operators, the New Operators, and the New Master Sublessees. 17. Under the circumstances, due to the ongoing operating losses incurred by the receivership estate from the operations of the Facilities, the Receiver believes the transfer of these 4 The terms of employment for all Employees hired by a New Operator shall be to perform similar services, in a position similar to the position such Employee held with an Existing Operator immediately prior to the date of hire by the New Operator. Id. at

10 operations to the New Operators as soon as possible is in the best interests of all creditors and parties in interest and recommends court approval of the entry into the OTAs. RELIEF REQUESTED 18. By this Motion, the Movants request entry of an order authorizing the transfer of the operations of the Facilities to the New Operators, approving the form of OTA to be entered into with the New Operators, and granting related relief. BASIS FOR RELIEF REQUESTED 19. Chapter 128 of the Wisconsin Statutes affords the Court expansive powers to manage complex, multifaceted creditor actions. The statute provides, in pertinent part, that "the circuit courts shall have supervision of proceedings under this chapter and make all necessary orders and judgments therefor...." WIS. STAT Thus, the Court has broad equitable authority in this receivership proceeding. 20. Chapter 128 is considered to be a state law alternative to federal bankruptcy that accomplishes the same goal - maximizing value for all creditors of the estate. See BNP Paribas v. Olsen's Mill, Inc., 335 Wis. 2d 427, 442, 799 N.W.2d 792 (2011). The purpose of Chapter 128 is "to conserve corporate assets within the jurisdiction of the court for the benefit of creditors in, or that may come into, such jurisdiction." Lehr v. Murphy, 136 Wis. 92, 100, 116 N.W. 893 (1908). The statute provides, in pertinent part, that "the property of the debtor shall be administered for the ratable benefit of all of the debtor's creditors under the direction of the court by the assignee or by a receiver." WIS. STAT (3)(b) (emphasis added). As evident from the express language of the statute, "[t]he object and purpose of assignment law is to afford an equal distribution of the assignor's estate to all creditors in proportion to their claims." Linton v. Schmidt, 88 Wis. 2d 183, 198, 277 N.W.2d 136 (1979) (citing In re Assignment of Sherry, 101 Wis. 11, 18, 76 N.W. 611 (1898)). To accomplish this objective, receivers and supervising courts have an affirmative "duty to administer the trust property so as to pay the creditors, as far as possible, their just claims, and then to account to 10

11 the debtor for [any] surplus." Linton v. Schmidt, 88 Wis. 2d at 198. This duty exists throughout the proceedings, carrying the obligation "to look primarily to the interests of the creditors." Id. (citing Geisse v. Beall, 3 Wis. 330 (1854)); see also Admanco, Inc. v. 700 Stanton Drive, LLC, 326 Wis. 2d 586, 622, 786 N.W.2d 759 (2010). 21. With the permission of the court, the Chapter 128 receiver may sell assets and distribute proceeds of the sale to satisfy the debtor's obligations. See BNP Paribas v. Olsen's Mill, Inc., 335 Wis. 2d at 443. See also Wisconsin Brick & Block Corp. v. Vogel, 54 Wis. 2d 321, 195 N.W.2d 664 (1972). Here, the Court entered the Receivership Order permitting the Receiver to sell Fortis' property by expressly authorizing the Receiver "to sell any and all property of Fortis free and clear of all liens, with all liens attaching to the proceeds of the sale in the order of their priority, through public or private proceedings, in any commercially reasonable manner, subject to the prior approval of this Court, the prior written consent of Agent, and compliance with the HUD Loan Documents... and HUD Program Obligations, and subject in all respects to the terms, priorities and conditions stated in the Intercreditor Agreements, and subject to the prior approval of this Court." Id. at I(A)(s). 22. In addition, the Receivership Order empowers the Receiver to transfer the operations of the Facilities from the Existing Operators to the New Operators by expressly providing that the Receiver is authorized "to transfer, on behalf of Fortis and at the request of Plaintiffs, any such licenses, permits, provider agreements, or approvals necessary to the operation of the Facilities to any new operator or operators of the Facilities selected by Plaintiffs, subject to the prior approval of this Court and the prior written consent of Agent, and subject to the HUD Loan Documents... and HUD Program Obligations... and all subject in all respects to the terms, priorities and conditions stated in the Intercreditor Agreements [as defined in the Receivership Order]." Receivership Order, I(A)(r). 23. While Wisconsin law and the Receivership Order authorize the transfer of the operations of the Facilities to the New Operators, ultimately the goal of a receiver under Chapter

12 is to obtain the best value for the estate available under the circumstances. Here, the overarching purpose of Wisconsin receivership law to achieve equality of distribution among creditors and the best interests of the receivership estate require that the Facilities be transferred promptly to preserve limited assets for creditors. The Facilities have been and are being operated at a substantial loss to the detriment of the receivership estate. These costs and expenses will continue to accrue during the pendency of this receivership unless the operations of the Facilities are transferred to the New Operators. The sooner the Receiver can wind down Fortis' operations, the less assets will need to be spent from the receivership estate on payroll obligations, utilities and other administrative expense items. 24. To relieve the receivership estate of the financial burden of operating the Facilities, the Movants request entry of an order approving the form of OTA to be entered into with the New Operators, authorizing the transfer of the operations of the Facilities to the New Operators, and granting related relief. 25. A hearing for the Court to consider this Motion is to be held on September 18, 2017, at 10:30 a.m. 26. Notice of this Motion is being provided to all creditors of the Existing Operators, all employees of the Facilities, and all counsel who have appeared in this matter. 12

13 WHEREFORE, the Movants respectfully request entry of an order authorizing the transfer of the operations of the Facilities to the New Operators, approving the form of OTA to be entered into with the New Operators, and for any other or further relief which is appropriate under the circumstances. Dated this 1st day of September, /s/ Michael S. Polsky Michael S. Polsky, Esq. Wisconsin Bar No Beck, Chaet, Bamberger & Polsky, S.C. 330 E. Kilbourn Avenue, Suite 1085 Milwaukee, WI (414) Court-Appointed Receiver - and- /s/ David E. Gordon David Gordon (admitted pro hac vice) Georgia Bar No Alison Elko Franklin Dentons US LLP 303 Peachtree Street, NE, Suite 5300 Atlanta, GA (404) david.gordon@dentons.com alison.franklin@dentons.com Seth E. Dizard Wisconsin Bar No O Neil Cannon Hollman DeJong & Laing SC 111 E Wisconsin Ave, Suite 1400 Milwaukee, WI (414) seth.dizard@wilaw.com Attorneys for Plaintiffs 13