By David S. Hilzenrath
Washington Post Staff Writer
Friday, April 16, 2010; 6:40 PM
Erickson Retirement Communities, which manages campuses with more than 23,000 residents, has won court approval of a plan to restructure its debts and sell itself to an investment firm.
The Baltimore-based company, which sought bankruptcy protection in October after lenders froze millions of dollars of cash it needed to run its business, said Friday that it expects to emerge from Chapter 11 by early May.
Erickson borrowed heavily to develop new campuses and was overwhelmed by its debts when the meltdown of the housing and stock markets made it difficult for retirees to sell assets and raise the cash needed to move into communities.
The business continued to deteriorate during the bankruptcy proceeding, company representatives have said. In an interview Thursday, Thomas R. Califano, an attorney for Erickson, said a company like Erickson that relies on consumer confidence is likely to see its business improve when it emerges from bankruptcy.
Residents of Erickson communities, who pay entrance fees that can total hundreds of thousands of dollars, have a personal stake in the outcome. If they move out or die, they and their heirs are entitled to recoup their deposits without interest, but only after someone else puts up a new deposit to occupy their unit.
Erickson's 20 campuses across the country include Greenspring, Riderwood and Ashby Ponds in the Washington area.
The campuses are known as continuing care retirement communities because they typically provide a continuum of accommodations for residents, from independent living to assisted living and nursing facilities. However, some of the communities, such as Ashby Ponds, were unfinished when the developer sought bankruptcy protection.
The financial restructuring gives the developer "access to new capital sources so building in developing communities can resume as market demand warrants," Erickson said in a statement.
The privately owned company was founded in the early 1980s by John C. Erickson, who brought his children into the business.
The company's former success was built largely on nonprofit, tax-exempt organizations that Erickson Retirement Communities created to oversee communities. The nonprofits leased properties from Erickson and awarded Erickson contracts worth millions of dollars to manage the communities. In some cases, the nonprofits bought their campuses from Erickson using money borrowed on relatively favorable terms through the issuance of tax-exempt bonds.
As Erickson's financial condition declined last year, prompting it to eliminate jobs, some Erickson employees agreed to stay on for a while longer based on promises of severance pay. As the company has since acknowledged, it failed to make promised severance payments before it sought refuge in bankruptcy court. Some employees will lose benefits on which they were counting, because bankruptcy law limits the amounts they can recover.
Local governments such as Loudoun County opposed the company's reorganization plan, arguing that it did not assure payment of property taxes they are owed. In a recent court filing, Erickson said the local authorities' tax claims are based on assessments that far exceed the current value of the real estate.
Money to pay the tax claims will be escrowed until the disputes are resolved, Califano said Friday.
Some of the Erickson communities have defaulted on bonds, and Califano said they are still working to restructure those debts outside the company's bankruptcy proceeding.
A federal bankruptcy court judge in Dallas approved the reorganization from the bench Thursday. Lawyers were working Friday on a written court order formalizing the approval.
Though it is based in Maryland, Erickson filed for bankruptcy in Dallas partly because the court there has "a very practical perspective," Califano said.
The reorganization plan offers creditors more money than they would have received if the company were liquidated, Califano said.
"The best result was achieved under the circumstances," he said.
Erickson has been striving to win court approval for its reorganization plan before April 30, when its deal to sell itself to Redwood Capital Investments for $365 million expires.
Court records show that the company's staff during the bankruptcy has included boat captains. A company spokesman did not respond to questions about the captains.
The fruits of John Erickson's past success include a 120-foot yacht. The vessel was pledged as collateral to Redwood in 2008 when Redwood agreed to lend Erickson and his wife $10 million.