6/28/19 Update Letter

June 28, 2019

Dear Members & Creditors,

We are providing this update on our Chapter 11 Bankruptcy filing.  This information will remain posted on the Reorganization Update area of the website during the Chapter 11 case.

We have kept previously published questions and answers in the Reorganization Update area and ask that you continue to post questions on the FAQ’s tab on lower center of our main webpage at www.hermitageclub.com

Update 6-28-19

  1. Process: The Hermitage Club was in Federal Bankruptcy Court in Burlington, VT this past Tuesday June 25th to seek approval for the financing for the insurance policy which has been in place since filing May 28th. We also asked to consolidate the Chapter 7 case into the Chapter 11 cases and asked for a hearing to approve the DIP loan.  The judge asked us to file the motion granting the consolidation into Chapter 11 reorganization and has set a hearing date of July 12, 2019 to hear arguments for the DIP loan request and insurance financing. This is an important step as it will allow the Club to access funds to advance the Chapter 11 process. This includes funding for payroll, property taxes, insurance and protective maintenance. It also funds professional fees to the Creditors Committee for their selection of legal and financial counsel.

 

  1. Costs: Until the DIP loan is approved and funded, the Club has had to rely on loans made by members filed as administrative priority claims along with additional funding by the founder. Filing the case to this point has been an exhausting and expensive process which is now extending into six months. To get to this point, the Club has had to incur fees for general administrative, legal, filing fees, payroll, IT, insurance, financing commitment fees, survey work, inspections and title work with costs now exceeding $325,000. There is a significant investment behind the Club reorganization and it is important to move a plan forward soon.

 

  1. Delays- Costly in Time and Money: The Club filed May 28th with an emergency motion to approve DIP financing within 5 days. As a result of the involuntary filed days before, the Club had to argue for Chapter 11 over Chapter 7 and decide on court venue. Although that is now resolved, we had originally planned on proceeding with DIP funds by the first week of June and now our best-case scenario is getting approval on July 12th with funding to occur on the following week on July 19th. Time is of the essence to get a plan approved and reopen in time for the season and unfortunately initial arguments have only delayed the process to a plan confirmation.

 

  1. DIP Loan Hearing: The Club is attempting to avoid a contested argument with Berkshire Bank over the approval of the DIP loan. Berkshire Bank is still seeking a liquidation sale either through an attempt to lift the auto stay in Chapter 11 and proceed with the foreclosure process or seek conversion to a Chapter 7 and force liquidation. This will be very hard for the bank to argue as the bank and the club have appraisals that exceed the bank’s debt by at least 2X. They would need to show updated appraisals that show value has dropped 50%. The bank and the Club will update its appraisals for the hearing and we will be in court July 12th to seek approval of our DIP loan approved and funded.

 

  1. 363 Sale Process. Some creditors are seeking a sale process within Chapter 11. In a typical scenario, if the debtor can’t get approval in the 120-day exclusivity period then the court will order that a sale process takes place to sell the assets and pay off creditors within the Chapter 11 process. When this occurs, a marketing company is hired and seeks best and highest bids from all parties. Any party may make a qualified bid. The court will approve the highest and best offer that pays-off secured and unsecured creditors the most of their claim.  In this process anyone could end up owning the club and can decide to do whatever they want to do with it.  We have done an analysis using a hypothetical cash bid of $25M. In that scenario Berkshire would get mostly paid, junior secured lien holders like plumbers and electricians could possibly get 30-40%, unsecured creditors might get 5-10% and members would get zero. The members would have to hope that the buyer would keep the asset as a private club versus a public resort. If it were to remain private, the members would be hoping that a new membership agreement would be offered which would likely have some type of reup fee.

 

  1. Why the Club seeks approval of the Reorganization Plan? The Club believes the draft Plan of Reorganization has a much better chance of winning approval by majority of creditors and comparing the treatment one would get in a sales process is easy to assess. Most importantly; in the Plan of Reorganization you get to vote for the plan. In a 363 sale process you don’t. The court decides.  Highest and best offer gets the bid.  The Club believes the plan approval process keeps the pressure on all parties to come to agreement on a consensual plan and avoid the great unknown that a 363 sales process would expose us to. If we make good progress in getting early acceptance, we can ask the court for an expedited distribution of the disclosure statement and seek approval for vote before a sale process deadline.

 

  1. We will ask for your opinion of the plan.  The process has just begun and as we have discussed in previous communication there will come a time for a formal vote on the plan once the Creditors Committee is formed and after it hires legal and financial advisors to make comment, provide guidance and offer suggestions on modifications.  As we prepare to go into the hearing to approve the DIP loan, The Club would like to get a sense of member and creditor support for the plan and will conduct a non-binding survey prior to the hearing on July 12th. This will give members and creditors plenty of time to review the draft plan, ask questions in the FAQ’s area and have a sense if this plan is something they can support- in light of what else could be the possible outcomes.   Neubert, Pepe & Monteith, bankruptcy counsel for The Hermitage Club will conduct the survey, keep members & creditors survey information confidential and inform the court of the overall level of support of the draft plan.

 

  1. Hermitage Club Philosophy on Reorganization: If were trying to win the majority of member-creditors to support the reopening of the club, we feel we must treat the majority in the best possible manner to make them feel good about our club community and encourage new growth. Member-creditors helped build this community and all deserve an opportunity to be part of the economics. We’re respectful of all creditors who funded the building of this community and we don’t want to lose this opportunity-to transfer control to all the members. There is too much at stake for the club to end up in hands of a third party- without complete member governance. Please touch the following link to see a short video that further defines the Reorganization Philosophy.  https://www.youtube.com/watch?v=dKwXrSQzT5U

 

Sincerely,

The Hermitage Club

Hermitage Inn Real Estate Holding Company

End 6 28 19

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