U.S. trustee criticizes Hermitage plan

The clubhouse at the Hermitage Club.

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ALBANY, N.Y. — A reorganization plan published on the Hermitage Club website has fallen under the scrutiny of a federal official.

"The debtors are engaged in prohibited actions intended to improperly subvert the disclosure statement and plan process, and to unduly influence creditors and members of the club to approve the plan desired by debtors' management," attorneys for William K. Harrington, the United States Trustee for Region 2, wrote in a motion to convert or dismiss the Hermitage's Chapter 11 bankruptcy cases or appoint a Chapter 11 trustee. "This activity must not be countenanced as it is contrary to the letter and the spirit of the Bankruptcy Code and destructive to the integrity of the bankruptcy system."

Harrington serves as the U.S. trustee for several states including Vermont. He is charged with enforcing civil bankruptcy laws.

In May, three creditors filed a Chapter 7 bankruptcy petition against the Hermitage days before its operating companies filed for voluntary Chapter 11 bankruptcy. U.S. Bankruptcy Judge Colleen Brown merged the cases late last month.

The Hermitage ran a private ski resort, golf course and inns before financial issues brought on a foreclosure complaint by Berkshire Bank and a shutdown of properties by the Vermont Department of Taxes last year. Hermitage founder Jim Barnes has recently pushed reorganization as a way to pay back creditors and get the club back open.

"It has come to the attention of the United States trustee that the debtors are using their internet website to publish and seek support for a proposed plan of reorganization that has neither been filed with nor approved by this court," attorneys for Harrington wrote, providing screenshots from hermitageclub.com taken Monday. "In fact, no party has filed a disclosure statement or plan in either of these cases."

The reorganization plan was published online last month. And a video posted on YouTube.com outlines why Chapter 11 reorganization would be better than liquidation.

Barnes "has secured a new publicly traded 'shell' company that will be utilized as the platform company to facilitate exit from bankruptcy," according to the plan. "Utilizing publicly traded shares in exchange for old company debt obligations in combination with structured cash payments is a key component to the exit strategy and new memberships can be sold and issued once an investor purchases an amount of stock equal to the initiation value from company holdings on future membership options. The plan requires $10 million of new capital which is currently being raised in a private placement within the new company."

The website also says that prior to a hearing scheduled in Rutlandon Friday for motions from the Hermitage on securing insurance and debtor-in-possession financing, there will be a non-binding survey of creditors and club members on the reorganization plan.

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Attorneys for Harrington said the plan and survey "constitute separate violations" of a section of U.S. Bankruptcy Code related to postpetition disclosure and solicitation.

"A plan proponent may not solicit creditors or interest holders prior to receiving court approval of a disclosure statement," they wrote. "No parties have filed disclosure statements in these cases. The court has not conducted hearings on disclosure statements and no disclosure statements have been approved by the court."

It is not known where the Hermitage received authority from state or federal regulators to engage in the purchase and sale of publicly traded investments, attorneys for Harrington wrote.

"Also unknown are the details of the '$10 million of new capital which is currently being raised in a private placement within the new company,'" the attorneys added. "To the extent that the debtors lack appropriate authority, the debtors' failed to provide that disclosure."

The Hermitage published "factually and legally incorrect information" in the plan regarding parties seeking liquidation and how the court proceedings will work, attorneys for Harrington wrote. The attorneys also said information in the plan about the proposed debtor-in-possession financing "contradict express representations" made to the court.

"The debtors' statements create a perception that parties must act swiftly to approve the debtors' plan," attorneys for Harrington wrote. "It appears that these statements have been made to improperly induce creditors to vote for the debtors' plan by creating unfounded fears about what will happen if the debtors' plan is not approved. It also appears that the debtors have manufactured artificial deadlines to create a false sense of urgency and thereby limit due diligence that might otherwise be undertaken by the creditors and members of the debtors."

Reach staff writer Chris Mays at cmays@reformer.com, at @CMaysBR on Twitter and 802-254-2311, ext. 273.