Lynch at Large

(03/06/06 SeniorCare Investor)
By Steve Monroe

We thought that after the Valentine's Day shareholder vote approving the sale of Beverly Enterprises to an affiliate of Fillmore Capital Partners, there would be nothing more to write about other than the closing of the deal.

Think again.

In a court filing in Delaware last week, CapitalSource filed a complaint against Fillmore Capital Partners, Geary Property Holdings and Pearl Senior Care for breach of contract, unjust enrichment, fraudulent inducement and specific enforcement.

This is the same CapitalSource that committed to lend Fillmore and its affiliates up to $625 million that enabled them to secure the acquisition of Beverly after the original buyer, North American Senior Care (NASC), was unable to come up with the required equity commitments by the deadline.

According to the complaint, as a result of the negotiations concluded on November 18, 2005, Pearl and Geary were supposed to put down a deposit of $1.0 million, but CapitalSource agreed to a three-day extension of that requirement. That date came with no deposit and, according to CapitalSource's complaint, no communication from the defendants. Delayed because of a death in the family of Ron Silva, Fillmore's CEO, discussions never reopened until December 16, when, according to the complaint, Mr. Silva stated he had no intention of paying the deposits or complying with other terms of the loan commitments, and he had "no interest in doing business with" CapitalSource at this point.

Our guess is that once Fillmore had the deal locked up, they went looking for better terms on the financing and found a new, cheaper lending source.

Obviously, Fillmore sort of inherited CapitalSource, which had also agreed to finance NASC's bid and was a known entity to Beverly's board, so it might be natural to seek a lender they were more comfortable with or with whom they had a prior relationship. But...an agreement is an agreement, and without CapitalSource's commitment, it is unclear whether Fillmore could have secured the deal for Beverly in the time frame required.

CapitalSource is seeking payment for damages suffered of $7.25 million, a relatively modest amount given the size of the deal, and one that could be funded by....the new lender. Although we do not believe this complaint filed in Delaware's court system can stop the sale of Beverly from closing,

Fillmore seems to be getting started on the wrong foot on this one. Perhaps Arkansas state representative Stephen Bright will catch wind of this development and call for a hearing. Possible, but not likely.