Case 18-10189-KG Doc 4 Filed 01/30/18 Page 1 of 58 · Mariano beneficially owns or controls...
Transcript of Case 18-10189-KG Doc 4 Filed 01/30/18 Page 1 of 58 · Mariano beneficially owns or controls...
IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF DELAWARE
In Ne Chapter 11
PATRIOT NATIONAL, INC., et al.,l Case No. 18-10189 (_)
Debtors. (Joint Administration Requested)
DECLARATION OF JAMES S. FELTMAN, CHIEF RESTRUCTURING OFFICER OFPATRIOT NATIONAL, INC., IN SUPPORT OF FIRST DAY RELIEF
JAMES S. FELTMAN hereby declares, under penalty of perjury, as follows:
1, I am the Chief Restructuring Officer ("CRO") of debtors and debtors-in-
possession Patriot National, Inc. ("Patriot National"); Patriot Services, LLC ("Patriot Services");
TriGen Insurance Solutions, Inc. ("TriGen"); Patriot Captive Management, LLC ("Patriot
Captive"); Patriot Underwriters, Inc. ("Patriot Underwriters"); TriGen Hospitality Group, Inc.
("TriGen Hos itp ality"); Patriot Risk Consultants, LLC ("Patriot Risk"); Patriot Audit Services,
LLC ("Patriot Audit"); Patriot Claim Services, Inc. ("Patriot Claims"); Patriot Risk Services, Inc.
("Patriot Risk"); Corporate Claims Management, Inc. ("CCM"); CWIBenefits, Inc. ("CWI");
Forza Lien, LLC ("Forza"); Contego Investigative Services, Inc. ("Contego Investi ag five");
Contego Services Group, LLC ("Conte~o Services"); Patriot Care Management, LLC ("Patriot
Care"); Radar Post-Closing Holding Company, Inc. ("Radar"); Patriot Technology Solutions,
LLC ("Patriot Technology"); and Decision UR, LLC ("Decision UR") (collectively, the
1. The Debtors in these Chapter 11 Cases, along with the last four digits of each Debtors' federal tax identification
number, are: Patriot National, Inc. (1376), Patriot Services, LLC (1695); TriGen Insurance Solutions, Inc.
(2501); Patriot Captive Management, LLC (2341); Patriot Underwriters, Inc. (0045); TriGen Hospitality Group,
Inc. (6557); Patriot Risk Consultants, LLC (0844); Patriot Audit Services, LLC (5793); Patriot Claim Services,
Inc. (9147); Patriot Risk Services, Inc. (7189); Corporate Claims Management, Inc. (6760); CWIBenefits, Inc.
(0204); Forza Lien, LLC (7153); Contego Investigative Services, Inc. (0330); Contego Services Group, LLC
(0012); Patriot Care Management, LLC (2808); Radar Post-Closing Holding Cornpany, Inc. (2049); Patriot
Technology Solutions, LLC (6855); and Decision UR, LLC (1826). The Debtors' headquarters are located at
401 East Las Olas Boulevard, Suite 1650, Fort Lauderdale, Florida 33301.
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"Debtors" or "Patriot"). I currently perform my duties out of the Debtors' headquarters located at
401 East Las Olas Boulevard, Suite 1650, Fort Lauderdale, Florida 33301. I submit this
declaration (the "Declaration") in support of the Debtors' chapter 11 petitions and requests for
relief contained in certain "first day" applications and motions (the "First Dav Motions") filed on
or shortly after the date hereof (the "Petition Date") in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court").
2. I am a Managing Director of Duff &Phelps, LLC ("Duff &Phelps"), based in
New York, New York. On October 18, 2017, Patriot National engaged Duff &Phelps to provide
turnaround management services, and designated me as CRO. My experience in the restructuring
industry spans nearly 30 years and encompasses a broad range of corporate recovery services,
including engagements involving business workouts and turnarounds, operational restructuring,
fiduciary and related matters. I have for decades served as a chapter 11 bankruptcy trustee, a
panel trustee, an examiner and a chief restructuring officer, as well as in other fiduciary roles in
numerous matters. My industry specialization includes insurance and financial services,
healthcare, retail, manufacturing and distribution, real estate/construction, aviation, and other
industries. My extensive experience acting as a fiduciary includes operating and managing
businesses, overall case management, sales and liquidation of assets and business interests,
claims development and adjudication, managing litigation, negotiating settlements, and
administering claims payment structures in a variety of cases.
3. Before joining Duff & Phelps, I had over two decades of experience with Big 4
accounting firms, and was previously a partner at Arthur Andersen LLP and KPMG LLP. I am a
Fellow of the American College of Bankruptcy, a member of the American Institute of Certified
Public Accountants and Florida Institute of Certified Public Accountants, and a Certified Public
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Accountant in the State of Florida. From 2002-2008, I was a member of the Board of Directors
of the American Bankruptcy Institute.
4. As CRO, I am authorized to submit- this Declaration on behalf of the Debtors.
Except as indicated otherwise, all statements in this Declaration are based upon my personal
knowledge or my review of the Debtors' books and records, public filings with the Securities and
Exchange Commission, and other relevant documents and information prepared or collected by
the Debtors' employees and the Duff &Phelps team engaged by the Debtors. If called to testify
as a witness in this matter, I could and would testify competently to each of the facts set forth
herein. In making the statements herein, I have relied in part upon others to accurately record,
prepare and collect necessary documentation and information.
5. Part I of this Declaration provides a brief overview of the Debtors and a summary
of their chapter 11 cases (the "Chapter 11 Cases"). Part II of this Declaration describes in more
detail the background of the Debtors' businesses, the developments that led to the filing of these
Chapter 11 Cases, and the Debtors' goals in these Chapter 11 Cases. Part III sets forth the
relevant details of the various First Day Motions, and Part IV concludes this Declaration.
I. OVERVIEW AND SUMMARY
6. Patriot National, through its 100%-owned subsidiary Patriot Services and other
indirect subsidiaries, provides comprehensive services to its insurance carrier clients, primarily
in the workers' compensation sector. As an independent national provider of comprehensive
technology-enabled outsourcing solutions, Patriot helps insurance carriers, employers and other
clients mitigate risk, comply with complex regulations, and save time and money. Patriot offers
end-to-end insurance related and specialty services that allow its clients to improve efficiencies
and reduce expenses through its value-added processes. The core of Patriot's value proposition
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includes the benefit of a "one-stop" solution with a broad array of offered services, scalable
state-of-the-art technology, and support for complex business and regulatory processes focused
on insurance and claims-related services.
7. The Debtors are not insurance carriers and do not issue insurance policies. Rather,
Patriot provides agency, underwriting and policyholder services to its insurance carrier clients.
Patriot's business is comprised of three primary components —underwriting, claims processing,
and its proprietary technology platform. Patriot's customers and revenue sources are mainly
insurers, who engage Patriot to underwrite and service workers' compensation policies that those
clients issue. Workers' compensation insurance policies are typically written on an annual basis,
with most policies expiring at the end of each calendar year. A significant component of the
Debtors' business model is therefore dependent on the annual renewal of policies written by its
insurance carrier clients, whereupon the Debtors earn commissions and additional revenue for
providing services in connection with those policies.
8. Until late November 2017, Patriot's most significant customers included
Guarantee Insurance Company ("GIC") and Ashmere Insurance Company ("Ashmere"), both of
which are licensed insurance carriers and both of which are affiliates (as I understand that term to
be defined in Section 101(2) of the Bankruptcy Code) of Patriot National.2 For the year ended
December 31, 2016, GIC accounted for approximately 55% of the policies serviced by the
Debtors and a corresponding percentage of the Debtors' gross revenues. Patriot's other
2. 1 understand and am informed that substantially all of the equity of Guarantee Insurance Group, Inc.
("Guarantee Insurance Group"), the parent company of GIC, is owned by Mr. Steven Mariano ("Mr. Mariano"),
the Debtors' founder and former Chairman, President and Chief Executive Officer. I further understand that Mr.
Mariano beneficially owns or controls approximately 46.3% of Patriot National's outstanding common stock
(including through Guarantee Insurance Group, which owned approximately 3,993,553 shares of Patriot
National's common stock, and GIC, which owned approximately 1,936,535 shares of Patriot National's
common stock). I understand that Mr. Mariano pledged certain of these shares to Fifth Third Bank. I also
understand that Mr. Mariano owns the majority of Ashmere's equity but that as discussed below Ashmere has
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(unaffiliated) insurance carrier clients include Zurich Insurance Group Ltd., American
International Group, Inc., QBE and Scottsdale Insurance Company. Patriot also provides claims
administration services to over 200 local government or municipal entities and other insurance
services providers, and provides reinsurance captive entity design and management services for a
number of reinsurance clients.
9. On or about November 17, 2017, the Florida Office of Insurance Regulation
("OIR") notified the Florida Department of Financial Services of OIR's determination that one
or more grounds existed for the initiation of receivership proceedings against GIC. In response
to OIR's notification, on November 21, 2017 the Florida Department of Financial Services
("DFS") petitioned the Circuit Court of the Second Judicial Circuit in and for Leon County,
Florida (the "State Court"), for an order appointing DFS as receiver for GIC, in the action styled
State of FloNida ex rel., Dept of Fin. Servs. v. Guarantee InsuNance Co., Case No. 2017-CA-
2421 (the "GIC Receivership Proceedings"). On November 27, 2017, the State Court in the GIC
Receivership Proceedings entered a Consent Order Appointing the Florida Department of
Financial Services as ReceiveN of Guarantee InsuNance Company foN Purposes of Liquidation,
Injunction, and Notice of Automatic Stay (the "GIC Receivership Order"). Following entry of
the GIC Receivership Order, 2017, DFS took over control of GIC.
10. For a period of several months prior to the GIC Receivership Proceedings, GIC
had been operating under the supervision of the OIR. During this period, due to OIR's directive
to preserve capital for payment of policy related obligations, GIC's cash payments to Patriot had
fallen off sharply, substantially depleting Patriot's cash balances and operating capital. As
mandated by the GIC Receivership Order, GIC's insurance policies were canceled in late
December and were rewritten on other insurance companies. The DFS, as receiver for GIC, will
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service the "run-off' of the GIC policies in-house and through contracts with other third party
administrators. These services were previously rendered by Patriot. This series of events caused
a significant loss of revenue, an impairment of Patriot's cash flow, and an immediate
deterioration in Patriot's enterprise value.
11. The loss of enterprise value arising from the curtailment and ultimate elimination
of GIC's business was particularly severe. For a period of approximately 6 months prior to the
Petition Date, the Debtors had engaged in a protracted sale process managed by two leading
investment banking firms, and through that process identified not less than three strategic and/or
financial bidders who had conducted substantial due diligence into a potential transaction with
Patriot. The above-described events that led to the GIC Receivership Proceedings (and the
consequent impact on Patriot) caused each of these prospective purchasers to defer and
ultimately walk away from any proposed transaction.
12. Furthermore, in addition to the problems emanating from. GIC's demise, the
Debtors have been in default under that certain Financing Agreement, dated as of November 9,
2016, by and among (i) Patriot National, as Borrower, and each of its subsidiaries party thereto,
as guarantors, (ii) the lenders from time to time party thereto (the "Lenders"), and (iii) Cerberus
Business Finance, LLC ("Cerberus"), as Collateral Agent and Administrative Agent (in such
capacities, the "A~ents") (as amended, modified, or otherwise supplemented from time to time
prior to the date hereof, the "Financing Agreement"). The Debtors are indebted to the Lenders
under the Financing Agreement in an amount not less than $223 million, which amount includes
approximately $5 million of Collateral Agent Advances (plus all fees, expenses, and accrued and
unpaid interest, including default interest, thereon) made pursuant to the Forbearance Agreement
(as defined below). These defaults include, without limitation, failure to pay interest when due
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and failure to deliver certain audited financial statements for the fiscal year ended December 31,
2016.
13. In light of the material impact that the GIC Receivership Proceedings had on the
Debtors' business and operations, the Debtors and Lenders engaged in good faith arms' length
negotiations to determine how best to stabilize the Debtors' operations, finance the Debtors'
liquidity requirements, and how ultimately to recapitalize and restructure the Debtors. Those
discussions resulted in two important agreements. First, the Debtors, the Agents and the Lenders
entered into a Forbearance Agreement, dated November 17, 2017 (as amended, the "Forbearance
Agreement") pursuant to which, among other things, the Agents and Lenders agreed to forbear
from the exercise of rights and remedies while at the same time providing approximately $4
million of new cash loans (in addition to allowing the Debtors to use proceeds from collections,
including tax refunds totaling $6 million) to fund ongoing operations. Second, the Debtors,
Agents and Lenders negotiated a Restructuring Support Agreement and Plan Term Sheet, dated
as of November 27, 2017 (collectively, the "RSA99). The Debtors are filing the plan of
reorganization contemplated by the RSA contemporaneously with the filing of this Declaration.
The proposed plan of reorganization contemplates a chapter 11 plan under which the Debtors
will be recapitalized and the Lenders will acquire equity interests in the reorganized Debtors,
which will continue to operate as a going concern. The Lenders also agreed to provide the
Debtors with $15.5 million of debtor-in-possession financing to allow for the Debtors to
prosecute these Chapter 11 Cases and implement the transactions contemplated by the RSA.
14. The Debtors intend to continue to operate their business during the pendency of
these Chapter 11 Cases through the closing. of the transactions contemplated by the RSA.
Accordingly, in order to minimize the adverse effects of the commencement of these Chapter 11
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Cases on their business operations, the Debtors request various forms of relief in the First Day
Motions. The First Day Motions are described in greater detail in Part III below, but generally
seek, among other things, authorization from this Court for the Debtors to: (a) continue their
business operations with as little disruption as possible through the effective date of a chapter 11
plan contemplated by the RSA; (b) compensate their employees through the chapter 11 process;
(c) use cash collateral with the consent of, and borrow up to an additional $15.5 million from, the
Lenders pursuant to adebtor-in-possession financing facility (the "DIP Loan Facility"); (d)
implement a critical vendor/insurance agent program; (e) continue their existing cash
management system; and (~ retain appropriate professionals whose services are necessary to the
foregoing efforts and the confirmation and implementation of their chapter 11 plan. It is crucial
to the success of the Debtors' efforts to maximize the value of their estates and ensure an
expeditious resolution of these Chapter 11 Cases that they obtain the requisite authority from this
Court to maintain the support of their key constituencies and operate their day-to-day business
with minimal disruption and erosion.
II. BACKGROUND
A. O~~ervie~v of the Debtors.
15. Patriot National — a public holding company that owns 100% of Patriot Services —
employs all or substantially all of the Debtors' employees and leases many of the various offices
from. which their businesses are conducted. Through Patriot Services and its respective
subsidiaries, Patriot principally offers two types of services to its insurance carrier clients: front-
end services, such as brokerage, underwriting and policyholder services (collectively, the "Front-
End Services"), and back-end services, such as claims adjudication and administration
(collectively, the "Back-End Services"). Patriot provides its services either on an individual
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basis, as bundles of two or more services tailored to a client's specific needs, or on a turnkey
basis where it provides a comprehensive set of Front-End Services and Back-End Services.
Patriot also offers specialty services including technology outsourcing and other IT services, as
well as employment pre-screening and background checks. As a service company, Patriot does
not assume any underwriting or insurance risk. Its revenue is primarily fee-based, most of which
is contractually committed or anticipated to be regularly recurring.
16. Patriot provides its Front-End Services primarily through Debtor subsidiaries
TriGen, Patriot Captive, Patriot Underwriters, TriGen Hospitality, Patriot Risk, and Patriot
Audit, as well as non-debtor foreign subsidiaries Patriot Captive Management (Caymans) Ltd.
and Patriot Captive Management (Bahamas) Ltd.3 Patriot provides its Back-End Services
primarily through Debtor subsidiaries Patriot Claims, Patriot Risk, CCM, CWI, Forza, Contego
Investigative, Contego Services, and Patriot Care. In addition to its Front-End Services and
Back-End Services, Patriot provides technology solutions to its clients through Debtor
subsidiaries Patriot Technology Solutions and Decision UR, LLC, along with non-debtor foreign
subsidiaries PN India Holdings and Mehta & Pazol Consulting Services PVT, LTD.4 Debtor
subsidiary Radar is anon-operating holding company for a former subsidiary, Global HR
Research, Inc. ("Global HR"), which retains certain earn-out rights in respect of the prior sale of
Global HR. Patriot National directly or indirectly owns 100% of its debtor subsidiaries, with the
exception of Contego Services, in which Mr. Mariano maintains a 3%membership interest (d/b/a
3. Patriot Captive Management (Caymans) Ltd. and Patriot Captive Management (Bahamas) Ltd. provide captive
insurance services in the Caymans and. Bahamas, respectively.
4. PN India Holdings is a Mauritius-based holding company that owns Mehta & Pazol Consulting Services PVT,
LTD, which performs software development services in India.
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Cantego Recovery); and Decision UR, in which Kevin Hamm owns a 1.2% membership interest.
An organizational chart for Patriot is attached hereto as Exhibit A.
17. As of January 30, 2018, Patriot employed approximately 540 people, including
approximately 409 full time employees and approximately 131 part time employees,
approximately 72 of which are based at its headquarters in Fort Lauderdale, Florida. As a result
of the GIC Receivership Proceedings and the loss of the GIC business and revenues, on or about
November 22, 2017, the Debtors issued notices under the Worker Adjustment and Retraining
Notification (WARN) Act, 29 U.S.C. § 2101 et seq. ("WARN Act Notices") to approximately
200 employees, terminating their employment as of November 24, 2017. On or about December
1, 2017, Patriot issued WARN Act Notices to approximately 50 additional employees,
terminating their employment on or about December 5, 2017. In addition, since January 19,
2018, as part of Patriot's ongoing cost contairunent activities, Patriot terminated the employment
of approximately 110 additional employees.
B. Patriot's History.
18. Patriot traces its origins to a workers' compensation insurance business started in
2003 when Mr. Mariano acquired GIC. The business then underwent an operational restructuring
in November 2013, whereby the insurance risk-taking operations of Guarantee Insurance Group
(the parent company of GIC) were separated from Patriot's insurance services business. In
connection with that operational restructuring, Patriot National (f/k/a Old Guard Risk Services,
Inc.) was incorporated in Delaware in November 2013. About nine months later, Patriot acquired
certain contracts to provide marketing, underwriting and policyholder services to certain of its
insurance carrier clients, as well as related assets and liabilities, from a subsidiary of Guarantee
Insurance Group. Patriot also acquired a contract to provide a limited subset of its brokerage and
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policyholder services to GIC, and subsequently entered into a new agreement to provide all
brokerage and policyholder services to GIC.
19. Patriot completed an initial public offering (the "IPO") in January 2015. In its
Registration Statement in connection with the IPO, Patriot publicly disclosed the risks to
investors arising from Mr. Mariano's substantial influence on Patriot due to, among other factors,
his (then-) approximately 60.4% ownership of Patriot National's outstanding common stock, as
well as his ownership of substantially all of the outstanding equity of Guarantee Insurance
Group, the parent of GIC, which was also Patriot's largest customers
20. When Patriot went public in January 2015, its sole business was to provide
services in connection with workers' compensation insurance policies issued by its insurance
carrier customers. In accordance with its vision to grow its business, in its first six months as a
public company Patriot acquired several new businesses that provided additional services to its
clients. Fox example, it purchased Decision UR, which provides web-based utilization review
software for the workers' compensation industry; Vikaran Solutions, LLC (n1k/a Patriot
Technology), which provides software services to insurance carriers; CCM, which services
general and professional liability insurers; Infinity Insurance Solutions, LLC, which provides
premium audit services for insurance companies; InsureLinx, Inc., which provides software for
the automatic collection of premiums out of payroll; and CWI, which provides claims
administration for self-insured health insurance.
5. As discussed in more detail below, Mr. Mariano is no longer employed by Patriot and no longer serves on its
Board of Directors (the "Patriot Board"). Further, one or more of the Debtors may hold claims against Mr.
Mariano, and as such, he is an adverse party to the Debtors in these Chapter 11 Cases.
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21. In August 2015, Patriot acquired Global HR,6 which provided customized pre-
employment screening, including background checks, verification, and drug screening services
to major corporations. At the time of the acquisition, Patriot believed that Global HR's business
would provide Patriot a platform and entry into human capital management, furthering its goal to
expand the range of services it could provide to employers. Although Global HR continued to
grow after being acquired by Patriot, the synergies Patriot anticipated did not materialize. As a
result, the Patriot Board decided to explore strategic alternatives to maximize shareholder value,
and in the third quarter of 2016 requested that Evercore Group L.L.C. ("Evercore") —which had
previously been engaged in November 2015 as an investment banker for Patriot — conduct a sale
of Global HR. That process resulted in a sale (announced on April 3, 2017) for $20 million in
cash and earnouts (the rights to which are held by Radar) that could generate an additional $10
million.
C. Prepetition Capital Structure.
(1) Financin~A~reement.
22. Patriot National, as borrower, and Patriot Services, TriGen, Patriot Captive,
Patriot Underwriters, TriGen Hospitality, Patriot Risk, Patriot Audit, Patriot Claims, Patriot Risk,
CCM, CWI, Forza, Contego Investigative, Contego Services, Patriot Care, Radar, Patriot
Technology, and Decision UR, as guarantors (collectively, the "Guarantors") are parties to the
Financing Agreement, pursuant to which the Lenders have extended certain financial
accommodations to Patriot National and pursuant to which each Guarantor guaranteed the
payment and performance of the obligations thereunder•.
6. Patriot acquired Global HR from an entity indirectly controlled by Austin Shanfelter, a former director of
Patriot National.
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23. The Financing Agreement provided fora $30.0 million revolving credit facility
(the "Revolvin~~Credit Facility") and a $250.0 million term loan facility (the "Term Loan
Facility"; and together with the Revolving Credit Facility, the "Credit Facility"). The Credit
Facility had a maturity of five years, and borrowings thereunder bear interest, at Patriot
National's option, at LIBOR plus a margin ranging from 700 basis points to 725 basis points or
at a base rate plus a margin ranging from 525 basis points to 550 basis points. Given the
occurrence and continuance of events of default, the obligations under the Financing Agreement
have been accruing interest at the default rate (i.e., 2.00% in excess of the otherwise applicable
rate) since July 15, 2017.
24. All obligations under the Financing Agreement are guaranteed by the Guarantors
and secured by afirst-priority perfected security interest in substantially all of Patriot National's
and the Guarantors' tangible and intangible assets, whether now owned or hereafter acquired,
including a pledge of 100% of the equity interests of each Guarantor.
25. On November 9, 2017, the Agents issued a Notice of Default with respect to the
Financing Agreement. Specifically, the Debtors were in default of the Financing Agreement due
to their failure to deliver timely financial statements, non-payment of interest due November 1,
2017, and failure to comply with certain financial covenants.
26. On November 17, 2017, the Debtors obtained and entered into the Forbearance
Agreement. Since the execution of the Forbearance Agreement, the Lenders have made a total of
approximately $5 million in Collateral Agent Advances. Thus, as of the Petition Date, the total
amount due under the Financing Agreement was in excess of $223 million. The DIP Motion (as
defined below) contemplates the repayment of the Collateral Agent Advances (plus all fees,
expenses, and accrued and unpaid interest, including default interest, thereon) from loans made
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under the DIP. Upon termination or expiration of the Forbearance Period, the Agents and/or the
Lenders would have been entitled to exercise any of their respective rights and remedies under
the Forbearance Agreement and/or the Loan Documents, or applicable law, including, without
limitation, enforcing any and all of the liens on, and security interests in, the collateral described
in the Loan Documents and accelerating the maturity of the loan under the Financing Agreement.
(2) Unsecured Debt.
27. The Debtors also have unsecured debt in the approximate amount of $27 million,
consisting primarily of former employee severance claims, unpaid fees for professional and other
services, trade debt, lease obligations and contractual earn-out obligations, and certain litigation
claims (discussed below) that, if ultimately liquidated nevertheless would be subject to
subordination under Section 510(b) of the Bankruptcy Code.
~3) ~•
28. As of the Petition Date, Patriot National had a total of 26,939,888 shares of
common stock issued, of which 26,798,886 shares are freely tradable without restriction or
further registration under the Securities Act unless held by affiliates, and 141,002 shares were
"restricted securities" within the meaning of SEC Rule 144 and were subject to certain
restrictions on resale. Patriot National also could be required to issue up to 3,250,000 additional
shares of common stock upon exercise of New Series A Warrants, and up to 4,889,165 shares of
common stock upon exercise of New Series B Warrants. Although 100,000 shares of preferred
stock are authorized, no shares of preferred stock are issued and outstanding. Patriot National's
common stock was listed on the New York Stock Exchange under the symbol "PN." However,
trading in Patriot National's stock has been suspended since November 28, 2017, when it
received a delisting notice from the New York Stock Exchange.
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D. Prepetition Litigation.
29. As of the Petition Date, the Debtor was involved in several significant litigation
matters, many relating to its prepetition equity financing activities discussed below. These
matters include, among others, the following:
a. Hudson Bay Master Fund Ltd. v. Patriot National, Inc., et al., No. 1:16-cv-02767-
GBD (S.D.N.Y.). On April 13, 2016, Hudson Bay Master Fund Ltd. ("Hudson
") filed suit in the United States District Court for the Southern District of
New York against Patriot National, Mr. Mariano, and American Stock Transfer
Company, LLC as a nominal defendant. Hudson Bay alleges that Patriot National
and Mr. Mariano are in breach of various contracts regarding delivery of price
adjustment warrants, and that Mr. Mariano interfered with those same contracts
between Patriot National and Hudson Bay. Hudson Bay seeks specific
performance of the contracts, monetary damages, and attorney's fees.
b. CVI Investments, Inc. v. Patriot National, Inc., No. 1:16-cv-02787-GBD-RLE
(S.D.N.Y.). On April 14, 2016, CVI Investments Inc. ("CVI"), filed'a suit against
Patriot National similar to the Hudson Bay action, alleging breach of contract
regarding price adjustment warrants. The CVI suit similarly seeks specific
performance of the contracts, monetary damages, and attorney's fees, as well as
injunctive relief.
c. Henry Wasik, et al. v. Steven M. Mariano, et al., No. 12953 (Del. Ch.). This
action seeks individually and on behalf of a class, and derivatively on behalf of
Patriot National, to assert claims against numerous defendants (including certain
present and former officers and directors of Patriot National, certain entities
allegedly affiliated with Mr. Mariano, and other parties having dealings with
Patriot during the relevant time period) for breach of fiduciary duty, corporate
waste, aiding and abetting breach of fiduciary duty, breach of contract, and unjust
enrichment.
d. Hudson Bay MasteN Fund Ltd. v. John R. Del Pizzo, et al., No. 1:17-cv-06204-UA
(S.D.N.Y.) (the "Hudson Bay Action"). This six-count complaint asserts both
direct and derivative claims against certain present and former officers and
directors of Patriot National for breach of fiduciary duty and corporate waste, and
direct claims for violations of the Securities Act of 1934 (the "Exchange Act") or
for common-law torts.
e. Adam Kayce v. PatNiot National, Inc. and Steven MaNiano, No. 1:17-cv-07164-
DLC (S.D.N.Y.). This two-count complaint pleads one count against Patriot
National and Mr. Mariano for an alleged violation of section 10(b) of the
Exchange Act and SEC Rule lOb-5, and one count against Mr. Mariano for
violation of section 20(a) of the Exchange Act, and seeks certification of a class.
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£ Anthony L. Gingello v. Patriot National, Inc., et al., No. 1-17-cv-01866-ER
(S.D.N.Y.). This one-count complaint seeks relief against Patriot National for an
alleged violation of section 10(b) of .the Exchange Act and SEC Rule l Ob-5, and
seeks certification of a class.
g. Henry Wasik v. PatNiot National, Inc., No. 2017-0581-AGB (Del. Ch.). This one-
count complaint against Patriot National seeks entry of an order requiring Patriot
National to hold an annual meeting. of stockholders for 2017.
h. ANic MclntiNe, et al. v. Steven M. MaNiano, et al., No. 0:18-cv-60075-BB (S.D.
Fla.). This class action complaint seeks relief against former officers and
directors of Patriot National and other parties, including underwriters and
auditors, for alleged violations of the Securities Act of 1933 and the Exchange
Act based on alleged material misstatements or omissions in Patriot National's
SEC filings, as well as for alleged violations of Section 10(b) of the Exchange Act
and Rule l Ob-5, and seeks certification of a class.
E. Certain Creditors' Collection Efforts end Litigation.
30. Subsequent to entry into the RSA and prior to the Petition Date, the Debtors were
subject to creditors' collection efforts and ongoing litigation with respect to several litigations.
31. On May 4, 2017, Kasowitz Benson Torres LLP ("Kasowitz") commenced a
lawsuit, Kasowitz Benson ToNNes LLP v. Patriot National, Inc., No. 154162/2017 (N.Y. Sup.),
asserting claims for breach of contract, quantum meruit and account stated with respect to
allegations that Patriot National failed to pay for certain professional legal services rendered by
Kasowitz. On December 22, 2017, the court entered an order granting summary judgment in
favor of Kasowitz. I understand that Kasowitz subsequently commenced a proceeding to have
the judgment recognized in Florida. Furthermore, I am informed that, on or about January 26,
2018, Kasowitz served upon certain counsel representing Patriot information subpoenas with
restraining notices directed at the counsel themselves in furthe~•ance of Kasowitz' collection
efforts.
32. Litigation has also proceeded in several lawsuits against the Debtors based upon
allegations that the Debtors have defaulted on obligations to former employees under various
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severance agreements or have failed to provide adequate notice of terminations pursuant to the
WARN Act. On December 29, 2017, the Debtors filed a motion to set aside a default judgment
in a lawsuit captioned Ermatinge~ v. PatNiot National, Inc., No. CACE17021316 (Fla. Cir. Ct.),
which asserts that Patriot National is in default with respect to obligations under a severance
agreement. On January 3, 2018, a lawsuit captioned Kelly v. Patriot National, Inc., No.
CACE18000215 (Fla. Cir. Ct.), was commenced against Patriot National, alleging breach of a
severance agreement. On January 12, 2018, a pretrial order was entered scheduling a trial in a
lawsuit captioned Wilson v. Patriot National, Inc., No. 17-62177 (S.D. Fla.), which asserts that
Patriot National is in breach of its obligations pursuant to a severance agreement.
33. Additionally, on December 14, 2017, Michelle Cole and Andrea Scarlett, former
employees of Patriot National, filed a putative class action in the United States District Court for
the Southern District of Florida against Patriot National and Guarantee Insurance Company,
Michelle L. Cole, et al. v. Patriot National Inc., et al., No. 0:17-cv-62461-JEM (S.D. Fla.),
alleging they and similarly-situated employees were terminated without cause in violation of the
WARN Act. The plaintiffs seek recovery of their wages and other employee benefits for 60
working days following their termination.
34. On January 10, 2018, Patriot National was named as defendant in a lawsuit,
Jamboree Center 3 LLC v. Patriot National, Inc., No. 30-2018-00966233 (Cal. Sup.). Upon
information and belief, the lawsuit was commenced by a lessor and seeks to evict Patriot
National from certain commercial real estate.
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F. Events Leading to Chanter 11 Filings and Efforts to Restructure.
(1) Patriot Relies on GIC as its La~,est Customer and Significant Source of Revenue.
35. Since its operational restructuring in November 2013 and through its IPO in
January 2015, Patriot continued to depend on GIC as its largest customer and a significant source
of revenue. It is my understanding that GIC, however, suffered net underwriting losses and its
financial difficulties caused it to delay or defer payments, thereby accruing large payables to
Patriot. Further, as GIC is a significant shareholder of Patriot National, declines in Patriot
National's stock price would cause declines in GIC's capital, which was necessary to underwrite
insurance policies. The decline in Patriot National equity values thus in turn put GIC in further
financial distress, which resulted in additional payment delays by GIC to Patriot (including
accrued accounts receivable in excess of $42 million), which caused further financial distress to
Patriot.
(2) Mariano Creates Ashmere; The 2015 PIPE Transaction.
36. In light of GIC's financial distress, in the summer of 2015, Mr. Mariano raised
fresh capital to invest in Ashmere —anew private insurer that could underwrite insurance
policies that Patriot could service —thus relieving some of the financial distress on GIC and
lessening Patriot's dependence on GIC as its primary customer. Patriot also explored various
options to raise money to address its financial challenges that largely resulted from GIC's
impaired financial condition. In late 2015, Patriot National pursued a private investment in
public equity ("PIPE") transaction with certain hedge funds that was announced on December
7. As of October 25, 2017, GIC owned approximately 7% of Patriot National's common stock, and Guarantee
Insurance Group (which owns 100% of GIC) owned approximately 14.6% of Patriot National's common stock.
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14, 2015.8 After that announcement, however, Patriot National's stock price declined
precipitously. Once again, the cycle emerged whereby the decline in Patriot National's stock
price caused a further decline in GIC's capital, which put additional stress on GIC, which in turn
caused more delays in payment to Patriot, further impairing Patriot's own position and working
capital.
(3) Initial Efforts to Sell Patriot.
37. By the summer of 2016, the Patriot Board determined to sell Patriot through a sale
process managed by Evercore and Aon Securities, Inc. ("Aon"; and together with Evercore, the
"Investment Bankers"). In June 2016, a potential purchaser made an unsolicited offer to purchase
Patriot. The Patriot Board pursued this and other opportunities until the Patriot Board concluded
that the sale proposed by that potential purchaser was not in Patriot's best interests. By
November 2016, Patriot had discussions with other potential acquirers. However, none of those
negotiations materialized into an executable transaction. Shortly thereafter, Patriot entered into
the Financing Agreement with the Lenders on November 9, 2016 to address Patriot's liquidity
needs arising from its reduced cash flow and revenue.
(4) Mr. Mariano's Resi nation.
38. On July 10, 2017, Mr. Mariano tendered his resignation as President, Chief
Executive Officer, director and Chairman of the Patriot Board.9 On July 12, 2017, the Patriot
Board accepted his resignation. As part of his separation from Patriot, Mr. Mariano entered into a
separation agreement on July 12, 2017, which provided, subject to his compliance with the terms
8. The PIPE transaction is the basis for the Hudson Bay Action and CVI action described above.
9 Prior to his resignation, on June 23, 2017, Mr. Mariano and Patriot National entered into a new Employment
Agreement, which provided, among other things, that Mr. Mariano would serve as Chief Executive Officer,
President and Chief Operating Officer of Patriot National.DOCS DE:217649.1
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and conditions thereof, for him to receive (i) a cash payment of $6 million, plus an additional
aggregate of $4 million to be paid in four annual installments beginning August 1, 2018 (.which
payments will accelerate upon a change in control); and (ii) continuation of group health plan
coverage until the earlier of July 13, 2019, or the time he obtains group health plan coverage
with a new employer. The severance payments are subject to claw back by Patriot under certain
circumstances. Mr. Mariano also provided a general waiver and release of claims against Patriot,
and is subject to certain cooperation and restrictive covenants. Patriot similarly released claims
against Mr. Mariano.lo
39. Following Mr. Mariano's resignation, on July 13, 2017, the Patriot Board
appointed John J. Rearer as Chief Executive Officer of Patriot National. Mr. Rearer previously
served as CEO of Patriot Underwriters, where he was responsible for underwriting, sales and
marketing.
(5) Renewed Efforts to Sell Patriot.
40. Due in part to the distraction caused by the litigations described in Section D
above, as well as the escalating uncertainty with respect to GIC's financial stability, Patriot
renewed its efforts to sell its business. Through its Investment Bankers, Patriot reached out to
more than 130 potentially interested purchasers, signed nearly 50 confidentiality agreements, had
extensive due diligence conducted by approximately 9 interested purchasers, and ultimately
received three letters of intent. Through as late as November 2017, Patriot was in negotiations
with at least two interested purchasers to enter into an asset purchase agreement or other form of
10. Patriot believes that the separation agreement with Mr. Mariano, and the payments and releases to Mr. Mariano
thereunder, are subject to avoidance as fraudulent conveyances and the Debtors intend to promptly pursue such
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transaction through which one of those purchasers would acquire the business operations of
Patriot.
41. Due to GIC's financial distress and ultimately the commencement of the GIC
Receivership Proceedings, Patriot's cash flow and revenue rapidly declined, resulting in severe
liquidity constraints. As a result, neither of the two remaining purchasers were willing to proceed
with a proposed sale transaction.
(6) Related Efforts to Sell Ashmere.
42. Related to Patriot's efforts to sell its business, in late 2017, I understand that Mr.
Mariano and the other equity holders of Ashmere engaged in an effort to sell the equity in
Ashmere to an unaffiliated purchaser that would have the financial wherewithal to increase
Ashmere's capital to levels that would allow Ashmere to issue new policies (that Patriot would
earn commissions on and service) in replacement of the terminated GIC insurance policies.
43. I understand that on or about November 21, 2017, Bedrock Insurance Group
Holdings LLC ("Bedrock") entered into a definitive agreement to purchase Ashmere. I
understand that this transaction has not yet closed.
(7) Severe Liquidity Constraints and Rapid Deterioration of Value.
44. On or about November 13, 2017, GIC's board of directors voted to consent to
entry of an Order of Rehabilitation or Liquidation for GIC, and on November 17, 2017, OIR
Commissioner David Altmaier, advised GIC that OIR determined that one or more grounds
existed for the initiation by DFS of delinquency proceedings against GIC pursuant to Chapter
631, Florida Statutes.
45. In an effort to maintain an ongoing servicing relationship even in light of GIC's
then-impending receivership, Patriot's general counsel and I met with OIR and DFS on
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November 20, 2017, seeking to obtain both payment for past services rendered to GIC and an
agreement that would allow Patriot to provide and receive payment for future services while GIC
is in receivership. Based on that meeting, Patriot believes that any agreement reached with the
regulators would result in some future work in respect of GIC but no payment on account of
more than $42 million owed for past services. Thus, with the loss of its largest customer and
elimination of the major component of its cash flow, both liquidity and enterprise value were
adversely impacted.
46. Given the circumstances, the Patriot Board determined to engage in negotiations
with the Agents and Lenders regarding a recapitalization and restructuring transaction for Patriot
and its subsidiaries to maximize and preserve going concern value. Accordingly, on or about
November 28, 2017, the Debtors entered into the RSA, which sets forth the terms of a
consensual restructuring pursuant to a chapter 11 plan. To meet immediate cash needs, Patriot
requested, and the Agent and the Lenders agreed to provide, Collateral Agent Advances pursuant
to the terms of the Forbearance Agreement to avoid a catastrophic impairment to its business and
the potential elimination of its remaining enterprise value.
G. The Restructuring Support A~reeiYient.
47. Before commencing these Chapter 11 Cases, the Debtors and the Lenders and
their respective professionals engaged in arm's-length, good-faith negotiations, culminating in
their agreement on the terms of the RSA, Plan Term Sheet, and the DIP Loan Facility. The RSA
provides the framework for a prompt resolution of these Chapter 11 Cases under the terms set
forth in the Plan Term Sheet, in order to allow the Debtors' operating businesses to emerge from
bankruptcy as a going concern.
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48. The RSA provides for the reorganization of the Debtors through a change in
control transaction whereby the Lenders will become the ultimate common equity owners of the
reorganized Debtors. The RSA also provides for the cancellation of all existing equity interests
in the Debtors. Significantly, with the support of the Lenders, the Debtors anticipate that certain
vendors and third party insurance agents will receive payment in full on account of their claims,
subject to certain conditions. This will minimize disruption to the Debtors' business on account
of these Chapter 11 Cases, send a strong positive message to the Debtors' business partners and
the workers' compensation insurance market generally; and prepare the Debtors for success upon
emergence from chapter 11.
III. FIRST DAY MOTIONS
49. In order to enable the Debtors to minimize the adverse effects of the
commencement of the Chapter 11 Cases on their business operations, the Debtors have requested
various types of relief in certain First Day Motions,ll which the Debtors filed concurrently with
the filing of the Chapter 11 Cases. The First Day Motions seek relief aimed at, among other
things: (i) maintaining employee morale; (ii) preserving customer relationships; (iii) obtaining
access to necessary financing and usage of cash collateral; (iv) ensuring the continuation of the
Debtors' cash management systems and other business operations without interruption; and (v)
establishing certain administrative procedures to facilitate a smooth transition into, and
uninterrupted operations tlu•oughout, the chapter 11 process.
50. Gaining and maintaining the support of the Debtors' customers, employees and
certain other key constituencies, as well as maintaining the Debtors' day-to-day business
operations with minimal disruption, will be critical to the success of the Chapter 11 Cases and
11. Terms used but not otherwise defined herein have the meanings assigned to such terms in the relevant First Day
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the Debtors' efforts to preserve and maximize the value of their assets. The approval of each
First Day Motion is an important element of the Debtors' efforts to maximize value for their
stakeholders and is necessary to ensure a seamless transition into chapter 11 with minimal
disruption to their operations.
51. I have reviewed each of the First Day Motions, including the exhibits thereto, and
believe that the relief requested therein is critical to the Debtors' ability to preserve and
maximize the value of their assets and is thus in the best interests of the Debtors. Factual
information with respect to each First Day Motion is provided below and in the applicable First
Day Motion.
Debtors' Motion for Entry of ~n Order Pursuant to 11 U.S.C. § 105(a),
Fed. R. Bankr. P. 1015(b) and Local Rule 1015-1 Directing Joint Administration
of the Debtors' Related Chapter 11 Cases (the "Joint Administration Motion")
52. The Debtors request that the Court authorize and direct the joint administration of
these Chapter 11 Cases and the consolidation thereof for procedural purposes only. There are
nineteen (19) affiliated Debtors in these Chapter 11 Cases. The Debtors believe that many, if not
most, of the motions, applications, and other pleadings filed in these Chapter 11 Cases will relate
to relief sought jointly by each of the Debtors. For example, virtually all of the relief sought by
the Debtors in the First Day Motions is sought on behalf of all of the Debtors. Joint
administration of the Debtors' Chapter 11 Cases, for procedural purposes only, under a single
docket entry, will also ease the administrative burdens on the Court by allowing these Chapter 11
Cases to be administered as a single joint proceeding instead of nineteen (19) independent
Chapter 11 Cases.
53. Joint administration of these Chapter 11 Cases will create a centralized location
for the numerous documents that are likely to be filed and served in these cases by the Debtors,
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creditors, and parties-in-interest, and for all notices and orders entered by the Court. A single
docket will also make it easier for all parties in each of the Chapter 11 Cases to stay apprised of
all the various matters before the Court. The rights of creditors will not be adversely affected by
the proposed joint administration of these Chapter 11 Cases; in fact, the rights of all of the
creditors will be enhanced by the likely substantial reduction in costs resulting from joint
administration of the cases. Finally, the Debtors believe, and I agree, that the joint
administration of these Chapter 11 Cases will simplify supervision of the administrative aspects
of these Chapter 11 Cases for the Court and the Office of the United States Trustee for the
District of Delaware.
54. Accordingly, the Debtors believe, and I agree, that it is in the best interest of the
Debtors, their estates and creditors and other parties-in-interest in these Chapter 11 Cases that the
Court grant the relief requested in the Joint Administration Motion.
Debtors' Motion for Entry of an Order Pursuant to
11 U.S.C. § 341 and 28 U.S.C. § 156(c) Authorizing the Debtors to file a
(A) Consolidated List of Creditors and (B) Consolidated
List of Debtors' Ton T~ventj~ Creditors
55. The Debtors request that the court authorize the Debtors to file a consolidated list
of creditors and a consolidated list of the Debtors' twenty (20) largest unsecured creditors. The
Debtors have identified over a thousand entities to which notice of certain proceedings in the
Chapter 11 Cases must be provided. The Debtors anticipate that such notices will comprise,
without limitation, notice of: (i) the filing of the Debtors' voluntary petitions under chapter 11 of
the Bankruptcy Code, (ii) the initial meeting of the Debtors' creditors in accordance with section
341 of the Bankruptcy Code, (iii) applicable bar dates for the filing of claims, (iv) the hearing on
adequacy of a disclosure statement in respect of a plan of reorganization; and (v) the hearing to
confirm a plan of reorganization.
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56. The Debtors maintain computerized lists of the names and addresses of their
respective creditors that are entitled to receive such notices in the Chapter 11 Cases. The
Debtors believe, and I agree, that the information as maintained in the computer files may be
consolidated and used efficiently to provide interested parties with notices and other similar
documents. Accordingly, the Debtors seek authority to file the lists on a consolidated basis,
identifying their creditors and equity security holders in the format or formats currently
maintained in the ordinary course of the Debtors' businesses.
57. The Debtors also seek authority to file a single consolidated list of their twenty
largest unsecured creditors in these cases. The Debtors believe, and I agree, that a single
consolidated list of their combined twenty largest unsecured creditors in the Chapter 11 Cases
would be more reflective of the body of unsecured creditors that have the greatest stake in these
cases than separate lists for each of the Debtors. The Debtors believe, and I agree, that such
relief is necessary for the efficient and orderly administration of their Chapter 11 Cases.
Debtors' Application for Entry of an Order Appointing Prime Clerk, LLC as Claims and
Noticing Agent Pursuant to 28 U.S.C. § 156(c), 11 U.S.C. § 105(a), Bankruptcy Rule 2002(f~
and Local Rule 2002-1(f1(the "Claims Agent Application")
58. The Debtors request, pursuant to 28 U.S.C. § 156(c), section 503(b) of the
Bankruptcy Code, Bankruptcy Rule 20020, and Local Rule 2002-1(~ the entry of an order
appointing Prime Clerk, LLC ("Prime Clerk") as Claims and Noticing Agent for the Clerk's
Office to, among other things (a) serve as the Court's noticing agent to mail notices to the
estates' creditors and parties in interest, (b) provide computerized claims database services, (c)
provide and maintain the Debtors' case management website, and (d) provide expertise,
consultation and assistance in claim processing and other administrative information
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59. Prior to the selection of Prime Clerk, the Debtors reviewed and compared
engagement proposals from three court-approved claims and noticing agents to ensure selection
through a competitive process. I believe, based on the engagement proposals obtained and
reviewed, that Prime Clerk's rates are competitive and reasonable given Prime Clerk's quality of
services and expertise.
60. Based on Prime Clerk's considerable experience in providing similar services in
large chapter 11 cases, the Debtors believe, and I agree, that Prime Clerk is eminently qualified
to serve as Claims and Noticing Agent- in these Chapter 11 Cases. A detailed description of the
services that Prime Clerk has agreed to render and the compensation and other terms of the
engagement are provided in the Claims Agent Application, the Weiner Declaration and the
engagement letter between the Debtors and Prime Clerk. I have reviewed the terms of the
engagement and believe that the Debtors' estates, their creditors, parties-in-interest and this
Court will benefit as a result of Prime Clerk's experience and cost-effective methods.
Accordingly, the Claims Agent Application should be approved.
Debtors' Motion For Entry of Interim ana Final Orders (I) Authorizing Debtors end
Debtors in Possession to Obtain Postpetition Financing; (II) Authorizing Use of Cash
Collateral; (III) Granting Liens and Providing for Superpriority Claims; (IV) Gi anting
Adequate Protection to Prepetition Secured Lenders; (V) Modifying The Automatic Stay;
(VI) Scheduling a Final Hearin; and (VII) Granting Related Relief (the "DIP Motion")
61. The DIP Motion requests authority to enter into the senior secured DIP Facility
and to continue using Cash Collateral pursuant to the terms of the Interim DIP Order. I believe
the DIP Loan Facility will provide the Debtors with liquidity to stabilize and fund the Debtors'
operations during these Chapter 11 Cases. The DIP Agreement provides for a postpetition loan
commitment in an aggregate principal amount not to exceed $15.5 million; provided that, until
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the Court enters the Final Order, no loans under the DIP Agreement shall be made other than
loans in an aggregate principal amount not to exceed $5 million.
62. Beginning in early November 2017, the Debtors initiated a process designed to
secure postpetition financing on the best available terms. As part of this process, Patriot
National solicited proposals for financing from the Lenders. Patriot National did not solicit any
other lenders with respect to providing the DIP Loan Facility because, among other things,
seeking financing from sources other than the Lenders would have been futile given the Debtors'
rapidly deteriorating and unknown financial condition; the willingness of the Lenders to provide
DIP financing on reasonable terms; the Debtors needed not only the DIP Loan Facility but also
the Collateral Agent Advances (from which the Lenders were the only viable sources); and the
Lenders had liens on substantially all of the Debtors' assets (the values of which were declining
rapidly). Additionally, other lenders would likely not be willing to engage in a priming fight
with the Lenders.
63. Beginning with the Debtors' request for a Collateral Agent Advance, and
continuing through negotiations with respect to the DIP Loan Facility, the Debtors and the
Lenders entered into arm's-length negotiations regarding the terms and the amount of the
proposed DIP Loan Facility. The proposed DIP Loan Facility includes a budget (the "Bud et")
along with customary milestones and operational covenants, including delivery of schedules,
assignments,' financial statements, and weekly reports of receipts and budgeted cash usage. The
Debtors believe that the DIP Loan Facility will provide the Debtors with sufficient liquidity to
continue uninterrupted operations and bridge to the consummation of the restructuring
transactions contemplated by the RSA, and is in the best interests of all stakeholders.
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64. The Debtors lack sufficient liquidity to operate and absent entry into the DIP
Loan Facility, the Debtors will have no alternative but to immediately cease operating and
convert these cases to cases under chapter 7 of the Bankruptcy Code. The liquidity provided by
the DIP Loan Facility will ensure the Debtors can continue to operate in the ordinary course of
business, which will ensure continued, uninterrupted operations, preserving the value of the
estate for the benefit of all stakeholders.
65. I believe the requested relief is necessary to avoid the immediate and irreparable
harm that would otherwise result if the Debtors are denied the liquidity that would be provided
by the DIP Loan Facility pursuant to the Interim DIP Order and the Final DIP Order.
Accordingly, I respectfully submit that the DIP Motion should be approved.
Motion of Debtors for (I) Interim and Final Autho~•ization to (A) Continue
Their Existing Cash Management System, (B) Maintain Existing Bank Accounts
and Business Forms and (C) Continue Engagement in Intercompan~~ Transactions, end (II)
Granting an Extension of Time to Comply ̀i~ith
Section 345(b) of the Sankruptc~~ Code (the "Cash Management Motion")
66. The Debtors seek interim and final orders: (a) authorizing, but not directing, the
Debtors' continued use of (i) their current Cash Management System; and (ii) their existing Bank
Accounts and existing Business Forms, including authorizing the Debtors to open and close bank
accounts; (b) authorizing, but not directing, the Debtors to continue to implement the recent
changes to their Cash Management System that began prepetition and will continue postpetition;
(c) granting the Debtors a 45-day extension as necessary to comply with the requirements of
section 345(b) of the Bankruptcy Code; (d) approving the continuation of Intercompany
Transactions; (e) according administrative expense status to ordinary course postpetition
Intercompany Transactions; and (~ authorizing all banks participating in the Cash Management
System to honor certain transfers and charge bank fees and certain other amounts.
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67. The Debtors' ability to continue their Cash Management System is essential to
their ability to maintain their current operations as they transition into chapter 11. Absent the
ability to maintain their Cash Management System, the Debtors would have to significantly alter
their business operations to comply with U.S. Trustee Guidelines. In light of the timeline and
objectives of these Chapter 11 Cases, as well as the administrative burden the commencement of
these Chapter 11 Cases have already placed on the Debtors' employees and management,
compliance with the UST Guidelines would impose a substantial burden on the Debtors'
estates. Moreover, the Cash Management System provides benefits to the Debtors, such as
enabling them to: (a) control and monitor corporate funds; (b) ensure cash availability; and
(c) reduce costs and administrative expenses by facilitating the movement of funds. These
benefits are critical given the volume of transactions managed through the Cash Management
System.
68. In light of the status of the Debtors' ongoing operations, any further disruption in
the Debtors' cash management procedures at this time will hamper the Debtors' efforts to
preserve and enhance the value of their estates. Altering the Cash Management System could
delay the receipt of payables from customers or disrupt payments to essential employees and
vendors at a time when their support is most critical. It is therefore critical that the Debtors be
permitted to continue to use their Cash Management System, including implementing the recent
changes described herein and in the Cash Management Motion, in accordance with the cash
management procedures they put in place prior to the filing of these Chapter 11 Cases.
69. Consequently, I believe that maintaining the existing Cash Management System
and approval of the Cash Management Motion is not only essential, but is in the best interests of
the Debtors' estates, their creditors, and parties in interest.
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Debtors' Motion for Entry of Interim and Final Orders (A) Authorizing the Debtors to Pay
(I) All Prepetition Employee Obligations, (II) Prepetitian Wits;holding Obligations, and
(III) Postpetition Employee Obligations in the Ordinary Course, ai;d (B) Authorizing
Banl~s to Honor Related Transfers (the "Employee Motion")
70. Pursuant to the Employee Motion, the Debtors seek authority, in their sole
discretion (and subject to statutory caps contained in sections 507(a)(4) and 507(a)(5) and in
accordance with any orders authorizing postpetition financing and the use of cash collateral and
the applicable budget thereunder), to pay and honor, as the case may be, (i) all prepetition claims
of Employees, including, but not limited to, claims for Wages, Commissions, PTO, as applicable,
and certain costs and disbursements related to the foregoing, (ii) any claims or payments
pursuant to the Employee Benefit Plans, (iii) all Benefits Withholding Obligations ((i) through
(iii) collectively, the "Em~plovee Obli ate ions"), (iv) the Reimbursable Expenses, and (v) any
prepetition claims for Independent Service Providers and Temporary Employees.
71. The Debtors operate in several different locations throughout the United States,
including, but not limited to, Florida, California, Georgia, Illinois, Kansas, Missouri, North
Carolina, New Jersey, New York, Pennsylvania, South Carolina and Virginia. As of the Petition
Date, the Debtors' collective workforce comprises approximately 540 employees. Of these
Employees, approximately 273 are full-time salaried employees, approximately 136 are full-time
hourly employees, and approximately 131 are part-time hourly employees. The Debtors also
utilize the services of Independent Service Providers and several staffing agencies to fulfill
critical employment needs and to address fluctuations in demand or provide special skills
required by the Debtors.
72. I'a3~roll Processing Sei~~ices. The Debtors incur costs incidental to Employee
Wages and Commissions, such as payments to parties for charges associated with the
administration of the Wages and for other costs incident to the provision thereof (collectively,
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the "Processin~Costs"). The Debtors process payroll for all Employees through Trion
Solutions, Inc. ("Trion").
73. The Processing Costs owing to Trion are approximately $5,551.94 per payroll
period. Although the Debtors do not believe that any Processing Costs are accrued and
outstanding as of the Petition Date, the Debtors seek authority to pay any such amounts.
Payment of the unpaid Processing Costs to Trion and any other parties is justified because the
failure to pay any such amounts might disrupt the services of third-party providers that are
essential to the timely payment of Employees. By paying these Processing Costs, the Debtors
will avoid disruptions of such services, ensuring that the Employees obtain all of their
compensation without interruption. Accordingly, the Debtors seek authority, but not direction, to
continue remitting the Processing Costs to the appropriate third parties.
74. Wages anti Commissions. All Employees are paid wages or salary (collectively,
the "Wages") on a bi-weekly basis. Salaried Employees are paid on account of service for the
two weeks preceding the date that their Wages are paid. Hourly Employees are paid for the two-
week period ending one week before the date that their Wages are paid.
75. The Debtors' gross payroll is approximately $1,200,000 per payroll period,I2
excluding the Debtors' portion of the Payroll Taxes (as defined below). As of the Petition Date,
the Debtors estimate that they owe Employees an aggregate of approximately $550,000 in
accrued Wages earned prior to the Petition Date (subject to the variability described above), and
that only one employees is owed in excess of the statutory cap under section 507(a)(4) of the
Bankruptcy Code on account of such Wages.
12. Due to the significant number of hourly employees the precise amount of the Debtors' payroll can vary each
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76. In addition to the Wages, certain of the Employees are eligible to receive
commissions (the "Commissions"). The amount of Commissions payable to the eligible
Employees constitutes a significant portion of such Employee's total earnings. As of the Petition
Date, the. Debtors are aware of approximately $2,000 in accrued and unpaid Commissions owed
to certain of the Employees. However, the Debtors anticipate that there may be substantial
additional Commissions obligations accrued as of the Petition Date.
77. The Debtors request the authority, in the ordinary course of business, to pay
Wages and Commissions accrued prepetition to their Employees, up to the statutory priority
amount of $12,850 per Employee (inclusive of other Employee Obligations that are subject to
section 507(a)(4) of the Bankruptcy Code), and to continue to otherwise pay Employees in the
ordinary course of business. (and subject to and in accordance with any orders authorizing
postpetition financing and the use of cash collateral and the applicable budget thereunder).
78. Payroll Obligations. As employers, the Debtors, are required by law to withhold
federal, state and local taxes from Wages for remittance to appropriate tax authorities (the
"Employee Taxes"). In addition to the Employee Taxes, the Debtors are required to pay, from
their own funds, social security and Medicare taxes and pay, based on a percentage of gross
payroll and subject to state-imposed limits, additional amounts for state and federal
unemployment insurance (together with the Employee Taxes, the "Payroll Taxes") and remit the
same to the appropriate authorities (collectively, the "Taxing Authorities").
79. In the aggregate, the Debtors estimate that Payroll Taxes total approximately
$270,000 per month, based on actual monthly Payroll Taxes paid during calendar year 2017. As
of the Petition Date, the Debtors estimate that there are no unpaid, outstanding amounts owed to
the Taxing Authorities on account of Payroll Taxes for the most recent period up to the Petition
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Date. The Debtors seek authority, in their sole discretion (and subject to and in accordance with
any orders authorizing postpetition financing and the use of cash collateral and the applicable
budget thereunder), to continue remitting the Payroll Taxes to the appropriate Taxing Authorities
as needed, including, without limitation, with respect to the most recent payroll period up to the
Petition Date, and any prior period.
80. Vacation Time and Sick/Per•sonal Days. The Debtors provide eligible
Employees with paid time off ("PTO") each year to use for any reason, such as for vacation,
personal time, observance of religious holidays, personal illness, personal injury or the illness or
injury of dependents or family members. Temporary and part-time Employees do not accrue
I~~~
81. Depending on their years of continuous active service, eligible Employees accrue
between 15 days and 30 days of PTO per year. PTO earned in a given calendar year must be
used during that calendar year, and any unused PTO at the end of that calendar year is not paid
out and may not be carried over to the following calendar year, except where required by
applicable law. The Debtors pay for. accrued, but unused, PTO in connection with employee
departures.
82. As of the Petition Date, the Employees have not accrued PTO for calendar year
2018. Accrued PTO, however, is not a current cash payment obligation, as Employees are not
entitled to cash payment for accrued and unused PTO, except upon separation and if required by
applicable law or specific agreement.
83. The Debtors request authority to continue to honor their PTO policies in the
ordinary course of business and to honor all prepetition obligations up to the statutory cap related
thereto in a manner consistent with their prepetition practices, provided, however, that nothing in
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the Employee Motion seeks to authorize the Debtors to cash out unpaid PTO upon an
Employee's departure unless applicable state law requires such payment.
84. Employee Benefit Plans. The Debtors have established certain benefit plans and
policies for eligible Employees that provide, among other benefits, medical, prescription drug,
dental and vision plans, life insurance, disability insurance, retirement plans and other benefits
which are described in more detail below (collectively, including any administrative costs with
respect thereto, the "Employee Benefit Plans"). The Debtors utilize the services of Debtor
CWIBenefits, Inc. ("CWI") as their benefits administrator and pay CWI approximately $23,000
per month for its services.
85. Medical/Dental/Vision Plans. Historically, the Debtors have offered Employees
comprehensive medical and prescription drug coverage through a combination of PPO and HSA
plans provided by Cigna Health and Life Insurance Company ("Cigna_"), as well as subsidized
certain benefits to certain former Employees, including (without limitation) benefits provided
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")
(collectively, the "Self-Insured Medical Plans"). Employees are also offered a vision and a
dental plan (the "Self-Insured Vision and Dental Plans," and together with the Self-Insured
Medical Plans, the "Self-Insured Health Plans").
86. The Self-Insured Health Plans are self-insured and require the Debtors to pay for
costs arising under such plans, including claim payments and associated administrative costs.
Participating employees pay monthly premiums, which the Debtors deduct from the
participating Employees' paychecks. Claims are normally paid one or two months in arrears.
The Debtors also pay a monthly network access fee to Cigna on the first day of each month. The
network access fee has averaged approximately $7000 per month over past three months.
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87. In connection with the Self-Insured Health Plans, the Debtors also purchase stop-
loss insurance (the "Stop Loss Coverage") from Cigna that provides additional protection against
catastrophic claim accumulation above a predetermined threshold. The Debtors pay
approximately $52,650.79 per month to Cigna Health &Life in premiums for the Stop Loss
Coverage.
88. Prior to the Petition Date, in order to stabilize operating cash flows and provide
improved health care options and better coverage to the Employees, the Debtors began preparing
to transition to fully-funded health insurance plans. On January 17, 2018, the Debtors provided
notice to Employees that the Self-Insured Health Plans would terminate in sixty days.
Concurrently, the Debtors have established fully insured plans administered by Trion (the
"Fully-Insured Health Plans" and, together with the Self-Insured Health Plans, the "Health
Plans"). As part of and to facilitate the switch to the Trion-administered plans, the Debtors also
engaged Trion as the Debtors' payroll processor. As of February 1, 2018, the Fully-Insured
Plans will be active, and the Debtors have encouraged Employees to change their coverage to the
Fully-Insured Health Plans. As of the Petition Date, a majority of eligible Employees have
transitioned to the Fully-Insured Health Plans, and the Debtors expect that substantially all
Employees currently covered by the Self-Insured Health Plans will move to the new plans.
89. Nearly all of the Debtors' full-time Employees participate in the Health Plans. On
average, the Debtors have incurred approximately $7 million per year in connection with the
Health Plans, including costs of administration. As of the Petition Date, the Debtors estimate
that there are approximately $700,000 in accrued and unpaid costs with respect to the Health
Plans. As of the Petition Date, the Debtors have not accrued any obligations with respect to the
Fully-Insured Health Plans. However, the Debtors anticipate that there are currently, and will be
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in the future, prepetition claims under the Self-Insured Health Plans that are not yet known to the
Debtors. Furthermore, the Debtors estimate that the Fully-Insured Health Plans will cost
approximately $162,000 every two weeks.
90. The Debtors seek authority (subject to and in accordance with any orders
authorizing postpetition financing and the use of cash collateral and the applicable budget
thereunder) to (a} pay all such amounts owed under the Health Plans to the extent that they
remain unpaid on the Petition Date subject to the statutory caps contained in section 507(a)(4)
and 507(a)(5) of the Bankruptcy Code (as applicable), (b) continue to provide the Health Plans in
the ordinary course of business, including the termination of the Self-Insured Health Plans and
the commencement of the Fully-Insured Health Plans, (c) continue to honor the Debtors'
obligations under such benefit programs, including any premiums and administrative fees, and
(d) pay any obligations in connection with the Fully-Insured Health Plans in the ordinary course
of business, including. any premiums or administrative fees.
91. Health Savings Accounts. The Debtors offer Employees the option to set up
Health Savings Accounts (the "Health Savin~Ls Accounts"). The annual cost to the Debtors
associated with the Health Savings Accounts for 2018 are approximately $143,000. As of the
Petition Date, the Debtors estimate that there are approximately $4,744.94 in accrued and unpaid
costs associated with the Health Savings Accounts. By the Employee Motion, the Debtors seek
authority to pay any such amounts and to continue their prepetition practices with respect to the
Health Savings Accounts.
92. Other Insurance Plans. The Debtors offer Employees disability insurance,
including short-term disability insurance and long-term disability insurance (the "Disability
Insurance Plans"). The short-term disability insurance covers up to 75% of an employee's salary
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for a period of no more than 90 days. The long-term disability covers 60% of an employee's
salary up to $10,000 per month. Eligible full-time Employees are also offered a basic life
insurance benefit up to twice the employee's salary up to $200,000 through The Lincoln
National Life Insurance Company, which includes an accidental death and dismemberment
benefit (the "Life Insurance Plan").
93. On average, the Debtors incur an aggregate monthly cost of approximately $2,785
in connection with the Disability Insurance Plan and approximately $48,000 in connection with
the Life Insurance Plan. As of the Petition Date, the Debtors believe that there are approximately
$41,563.04 in accrued and unpaid monthly costs in connection with the Life Insurance Plan.
Furthermore, as of the Petition Date approximately $4,877.99 is outstanding with respect to the
Disability Insurance Plans.
94. The Debtors seek authority to pay, in their sole discretion (and subject to and in
accordance with any orders authorizing postpetition financing and the use of cash collateral and
the applicable budget thereunder), any and all prepetition amounts owed on account of the
Disability Insurance Plans and Life Insurance Plans, and to continue their prepetition practices
with respect to such benefits.
95. Supplemental Insurance PNog~ams. The Debtors' Employees may also choose to
enroll in certain other insurance policies, including hospital indemnity insurance, critical illness
insurance, cancer-only indemnity insurance, and accident insurance (collectively, the
"Supplemental Insurance Pro rims"). The premiums for the Supplemental Insurance Programs
are paid for by each participating Employee.
96. The Debtors seek authority to continue their prepetition practices with respect to
the Supplemental Insurance Programs.
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97. 401 (k) Plan. The Debtors maintain retirement savings plans for the benefit of
eligible Employees in accordance with the requirements of section 401(k) of the Internal
Revenue Code (the "401(k) Plan"). The 401(k) Plan is administered by Fidelity Investments.
The majority of Employees participate and contribute to the 401(k) Plans. Employees may
contribute to the 401(k) Plan each- year through salary deferrals up to the IRS limit. The Debtors
also provide matching contributions up to certain limits and remit those to Fidelity Investments
together with the amounts contributed by Employees through payroll withholdings. The
Debtors' matching contributions fully vest over a 5-year period with 20% vesting each year. The
Debtors make approximately $1 million to $1.3 million annually in company matching
contributions on account of the 401(k) Plans. No amounts are accrued but unpaid by the Debtors
under the 401(k) Plan as of the Petition Date.
98. The .Debtors seek authority, in their discretion, to continue to honor their
obligations with respect to the 401(k) Plan, including the matching contributions, in the ordinary
course of their business.
99. Reimbursable Business Expenses. Business expenses incurred by Employees in
the course of employment and in furtherance of the Debtors' business are generally paid directly
by the Employee and then charged to the Debtors in accordance with the Debtors'
reimbursement policy. The Debtors reimburse employees for certain ordinary course expenses
incurred within the scope of the Employees' employment, including travel, lodging,
transportation, meals and other miscellaneous expenses (collectively, the "Business E~enses")
100. As of the Petition Date, the Debtors are aware of $73,478.15 in accrued and
unpaid Business Expenses awaiting payment. However, although the Debtors encouraged the
submission of expense reports for Business Expenses prior to the Petition Date, the Debtors
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anticipate that some Employees will have not yet submitted their recent expense reports for
accrued and unpaid Business Expenses. As a point of reference, the Debtors reimbursed
approximately $130,000 in Business Expenses in December 2017.
101. In addition, until December 2017, there were approximately 66 Employees with
credit cards issued by Diners Club International (collectively, the ̀ Expense Cards," and together
with the Business Expenses, the "Reimbursable Expenses") for use for paying business expenses.
Although no Employees currently have such cards, a balance of $28,789.39 remained on the
Expense Cards as of the Petition Date. Failing to reimburse employees for Reimbursable
Expenses could have a negative effect on Employee morale and would cause those employees
with outstanding Reimbursable Expenses to suffer undue hardship.
102. Accordingly, the Debtors seek authority, in their sole discretion, to (i) continue
their prepetition practices with respect to the Reimbursable Expenses in the ordinary course of
business, (ii) continue to pay the Reimbursable Expenses as they deem appropriate in their
business judgment (subject to and in accordance with any orders authorizing postpetition
financing and the use of cash collateral and the applicable budget thereunder), and (iii) pay all
prepetition amounts outstanding in connection with the Reimbursable Expenses.
103. }3ene~ts Withholding Obligations. As part of the relief requested herein, the
Debtors seek authorization to pay the Payroll Taxes and all other withholdings such as
contributions to savings, retirement or pension plans, insurance contributions and charitable
contributions, if any (collectively, the "Benefits Withholding Obli atg ions").
104. The Debtors routinely withhold from Employee paychecks the Benefits
Withholding Obligations, and are required to transmit these amounts to third parties. The
Debtors believe that such withheld funds, to the extent that they remain in the Debtors'
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possession, constitute moneys held in trust and therefore, are not property of the Debtors' estates.
Thus, whether or not such funds are prepetition amounts, the Debtors believe that directing such
funds to the appropriate parties does not require Court approval. Nevertheless, in the interests of
transparency and full disclosure, the Debtors seek authority to pay any outstanding amounts
owed for Benefits Withholding Obligations, in the ordinary course of business, including those
incurred prior to the Petition Date.
105. As part of the relief requested herein, the Debtors seek authorization to pay the
Payroll Taxes and all other withholdings such as contributions to savings, retirement or pension
plans, insurance contributions and charitable contributions, if any (collectively, the "Benefits
Withholding Obligations").
106. Temporary Employees. In general, the Debtors use Temporary Employees to
augment or provide flexibility to their workforce as needed. Temporary Employees fulfill a
variety of the Debtors' staffing needs, including claims adjustment services, clerical and
administrative support, and specialized IT expertise. Engaging Temporary Employees is crucial
to the Debtors' ability to address seasonal or fluctuating client demand, fill certain roles in
geographic areas where the Debtors have experienced hiring challenges, and to meet specialized
needs. The use of Temporary Employees also allows the Debtors to select individuals with the
proper skills to potentially become members of their permanent workforce.
107. The Debtors paid approximately $689,000 in the aggregate on account of
Temporary Employees in 2017 (the "Temporary Employee Obli ate ions"). As of the Petition
Date, the Debtors estimate that approximately $113,196.69 is outstanding on account of
Temporary Employee Obligations.
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108. The Debtors request the authority, in the ordinary course of business, to pay
Temporary Employee Obligations accrued prepetition, up to the statutory priority amount of
$12,850 per Temporary Employee, and to continue to otherwise pay Temporary Employee
Obligations in the ordinary course of business (and subject to and in accordance with any orders
authorizing postpetition financing and the use of cash collateral and the applicable budget
thereunder).
109. Independent service Providers. In addition to the Employees, the Debtors
contract with a limited number of independent contractors (the "Independent Service Providers")
who provide services that are essential to the Debtors' ongoing business operations (the
"Independent Services"). The Independent Service Providers include certain independent
consultants who were formerly employed by the Debtors and now provide services to the
Debtors as consultants. The services provided by the Independent Services Providers include
general corporate and administrative functions such as finance and accounting support. The
Independent Service Providers are critical to the Debtors' operations, and they rely on the
Debtors for their individual income.
110. The Debtors estimate that the aggregate accrued amount owing to the Independent
Service Providers as of the Petition Date is approximately $118,387.81. The Debtors believe
that only one Independent Service Provider is owed more than $12,850 with respect to
prepetition obligations. The Independent Service Providers are paid through the Debtors'
respective accounts payable and not through the Debtors' payroll. Nonetheless, if the Debtors
are unable to pay the Independent Service Providers, the Debtors will lose the services,
continuity and institutional knowledge of the Independent Service Providers, and the Debtors'
business operations will be severely and irreparably compromised.
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111. The Debtors request the authority, in the ordinary course of business, to pay
Independent Service Providers for obligations accrued prepetition, up to the statutory priority
amount of $12,850 per Independent Service Provider, and to continue to otherwise pay
Independent Service Providers in the ordinary course of business (and subject to and in
accordance with any orders authorizing postpetition financing and the use of cash collateral and
the applicable budget thereunder).
Debtors' 1Wlotion for Enti~~ of I~itei•ini and Final Orders (I) Authorizing the Debtors to Pay
Certain Prepetition Taxes and Regulatory Fees in the Ordinary Course of Business acid (II)
Authorizing Banks and Financial Institutions to Honor and Process Checks anc~ Transfers
Related Thereto (the "Taxes Motion")
112. The Debtors respectfully request the entry of interim and final orders, (i)
authorizing the Debtors to pay certain prepetition taxes and regulatory fees in the ordinary course
of business; and (ii) authorizing banks and financial institutions to honor and process checks and
transfers related thereto.
113. In the ordinary course of business, the Debtors (i) incur taxes including, without
limitation, sales and use taxes (the "Sales and Use Taxes"), income taxes (the "Income Taxes"),
property taxes (the "Property Taxes"), and other miscellaneous taxes (together with the Sales and
Use Taxes, Income Taxes and Property Taxes, the "Taxes"); (ii) incur business license,
environmental, reporting, commercial, and vehicle fees and other similar assessments
(collectively, the "Fees"); and (iii} remit such Taxes and Fees to various taxing, licensing and
governmental authorities (collectively, the "Authorities") or make payments to various third
parties for Taxes who, in turn, remit such Taxes to the Authorities. The Debtors seek
authorization to pay any Taxes and Fees (including amounts paid prepetition by checks that have
not yet cleared as of the Petition Date) on an interim basis up to an aggregate amount of
$759,561, which is the aggregate maximum sum that the Debtors currently believe may be due
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on account of prepetition Taxes and Fees, and on a final basis up to the aggregate amount of
$900,000.
114. The Debtors' management team and I presently estimate that the Debtors owe
approximately $759,561, on account of prepetition Taxes and Fees. However, as of the Petition
Date, the Debtors have not determined the amount of Income Taxes that may be owed for the
fiscal year 2017. As explained more fully in the Taxes Motion, the relief requested therein
should be granted because, among other things, (a) certain Taxes may constitute "trust fund"
taxes and thus are not property, of the Debtors' estates; (b) the failure to pay certain Taxes could
result in a lien being placed on the Debtors' property; and/or (c) such Taxes constitute priority
claims. The failure to pay the Taxes could disrupt the Debtors' operations and impair the
Debtors' efforts to maximize the value of their assets for their stakeholders. Accordingly, the
Debtors believe, and I agree, payment of the Taxes and Fees is in the best interest of the Debtors'
estates and therefore request that the Taxes Motion be granted.
Debtors' Motion for EntrS~ of Interim and Final Orders Pursuant to
11 U.S.C. §§ 1050) and 366 (I) Prohibiting Utilities fi•oin Altering, Refusing or
Discontinuing Sei~~ices on Account of Prepetition Invoices, (II) Deeming Utilities
Adequately Assumed of F~iture Performance, and (III) Establishing Procedures for
Determining Adequate Assurance of Payment (the "Utilities Motion")
115. The Debtors respectfully request the entry of an interim order and- final order, (i)
determining that the Utility Providers (defined below) have been provided with adequate
assurance of payment within the meaning of section 366 of the Bankruptcy Code; (ii) approving
the Debtors' proposed offer of adequate assurance and procedures whereby the Utility Providers
may request additional or different adequate assurance; (iii) prohibiting the Utility Providers
from altering, refusing or discontinuing services on account of prepetition amounts outstanding
or on account of any perceived inadequacy of the Debtors' proposed adequate assurance; and (iv)
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determining that the Debtors are not required to provide any additional adequate assurance
beyond what is proposed in the Utilities Motion.
116. In the ordinary course of business, the Debtors regularly incur utility expenses for
telephone, cellular, Internet access, and other services (the "Utility Services"). The Debtors'
aggregate average monthly cost for utility services is approximately $101,500. The utility
services are provided by approximately thirty-five (35) utility companies (the "Utility
Providers")
117. As of the Petition Date and as qualified in the Utilities Motion, the Debtors are
generally current on payments to the Utility Providers for Utility Services. Overall, the Debtors
have a long and established payment history with most of the Utility Providers indicating
consistent payment for Utility Services with few to no material defaults or arrearages with
respect to undisputed Utility Services invoices. As of the Petition Date, however, the Debtors
may have had (a) prepetition accounts payable to certain Utility Providers, (b) outstanding
checks issued to certain Utility Providers in payment for prepetition charges for Utility Services
that had not cleared the Debtors' bank account prior to the Petition Date, or (c) liabilities for
prepetition Utility Services for which the Debtors had not yet been billed.
118. Access to Utility Services is critical to the Debtors' ongoing operations while they
are exploring their strategic options. Should any Utility Provider refuse or discontinue a service
even for a brief period of time, the Debtors' operations and administrative functions would suffer
significant harm. Any interruption of the Utility Services would be severely disruptive to the
Debtors' businesses and diminish the Debtors' value to the detriment of their stakeholders.
Certain Utility Providers provide the Debtors with services necessary to run their day-to-day
operations. Further, the Debtors are dependent upon Internet and telephone service to maintain
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their ability to send and receive electronic communications and records. In this regard, the
Debtors believe, and I agree, it is in the best interest of the Debtors, their estates and their
creditors to maintain continuous and uninterrupted Utility Services during these Chapter 11
Cases.
119. As adequate assurance of future payment to the Utility Providers, the Debtors
propose to deposit cash in an amount equal to the approximate aggregate cost of 50% of the
approximate average monthly total for utility service from the Utility Providers calculated from
an historical approximate average for the three months prior to the Petition Date, or $50,750.
120. Based on the foregoing, the relief requested in the Utilities Motion is not
prejudicial to any party-in-interest and, in fact, only benefits the Debtors' estates and their
creditors. Accordingly, I submit that the proposed adequate assurance is sufficient and that the
relief requested in the Utilities Motion is in the best interests of the Debtors' estates, their
creditors and parties-in-interest.
Debtors' Motion for an Order (I) Authorizing the Debtors to (A) Continue Tlzeir Workers'
Compensation Programs and Their Liability, Property, and Other Insurance Programs
and (S) Pa3~ Certain Obligations in Respect Thereof and (II) Authorizing the Debtors'
Financial Institutions to Honor and Process Checks and Transfers
Related to Such Obli~atious (the "Insurance Motion")
121. Pursuant to the Insurance Motion, the Debtors request entry of an order, (i)
authorizing the Debtors to continue their liability, property, workers' compensation and other
insurance programs (collectively, the "Insurance Prorams"); (ii) authorizing the Debtors'
financial institutions to honor and process checks and transfers related to such obligations; and
(iii) authorizing the Debtors to pay, in their sole discretion (but subject to and in accordance with
any orders authorizing postpetition financing and the use of cash collateral and the applicable
budget thereunder), all undisputed premiums, amounts owed under a premium finance
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agreement, claims, deductibles, administrative fees, broker fees and other obligations relating to
the Insurance Programs as applicable, that were or are due and payable, and relate to the period
before or after the Petition Date (collectively, the "Insurance Obligations"). As of the Petition
Date, the Debtors believe that they have paid all outstanding prepetition Insurance Obligations,
but will owe up to $463,471.23 in ordinary course payments postpetition under these Insurance
Obligations, $159,070.36 of which is owed directly to the Insurance Carriers and the remainder
of which is owed on account of premium financing obligations.
122. In connection with the operation of their businesses, the Debtors maintain the
Insurance Programs through several different insurance carriers (the "Insurance Carriers"). The
Insurance Programs provide the Debtors with insurance coverage for liabilities relating to,
among other things, general liability, workers' compensation, directors' and officers' liability
(including excess liability), foreign general liability, fiduciary liability, commercial property
liability, commercial auto liability and various other property-related liability and general
liabilities. In addition to premiums that have been financed discussed herein and in the Insurance
Motion, the Debtors presently owe the Insurance Carriers on account of premiums under these
contracts. The Debtors believe, and. I agree, that continuation of the Insurance Programs is
essential to the operation of the Debtors' businesses and is necessary to protect the Debtors from
catastrophic liability
123. The Debtors are required to pay premiums under the Insurance Programs based
upon rates established by the applicable Insurance Carrier. For the 2017/2018 policy period, the
annual premiums for the Insurance Programs totaled approximately $1,384,081 in the aggregate.
In addition to annual premiums, the Debtors may be required to pay various deductibles and
retentions for claims asserted under the Insurance Programs. As of the Petition Date, the
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Debtors' management team and I estimate that the Debtors have paid all monthly charges and
retrospective premium adjustments that have been billed by the Insurance Carriers for all periods
through the Petition Date. However, pursuant to the Insurance Motion, the Debtors are seeking
authority to pay any undisputed obligations under the Insurance program, in their discretion (but
subject to and in accordance with any orders authorizing postpetition financing and the use of
cash collateral and the applicable budget thereunder), as they come due..
124. The Debtors are required to maintain workers' compensation coverage in each
state in which they have employees, in order to cover claims arising from or related to such
employment (the "Workers' Compensation Program"). Under the Workers' Compensation
Program, the Debtors are insured through The Hartford Fire Insurance Company for statutory
liabilities with $1,000,000 per occurrence coverage in all fifty states. As of the Petition Date, the
Debtors believe that they have paid all premiums presently owed on account of the Workers'
Compensation Premiums.
125. In the ordinary course of the Debtors' business, the Debtors finance the premiums
on certain Policies pursuant to a commercial premium financing agreement (the "PFA") with
First Insurance Funding ("First Insurance"). Debtors presently finance a total of $501,658.19 of
their insurance premiums with the PFA. The PFA requires monthly installment payments of
$51,159.81 due on the 15t~' day of each month beginning on October 15, 2017 and continuing for
a period of 10 months, ending on August 15, 2018. Pursuant to the PFA, the Debtors'
obligations to First Insurance are collateralized by a security interest in the Policies financed
through the PFA. Additionally, pursuant to the PFA, upon an event of default, the Debtors
appoint First Insurance as the Debtors' Attorney-in-Fact and grant First Insurance the authority
to cancel the Policies covered by the PFA. If the Debtors are unable to make payments under the
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PFA, First Insurance may attempt to terminate the Policies to recoup losses. The Debtors would
then be required to obtain replacement insurance on an expedited basis and at great cost to their
estates. Even if First Insurance or the Insurance Companies were not permitted to terminate the
Policies, any interruption of payments may negatively affect the Debtors' ability to extend the
current Policies or acquire new insurance coverage in the future.
126. The nature of the Debtors' business and the extent of their operations make it
essential for the Debtors to maintain their Insurance Programs on an ongoing and uninterrupted
basis. The nonpayment of any premiums, deductibles, or related fees under one of the Insurance
Programs could result in one or more of the Insurance Carriers terminating their existing
policies, declining to renew their insurance policies or refusing to enter into new insurance
agreements with the Debtors in the future. If the Insurance Programs are allowed to lapse
without renewal, the Debtors could be exposed to substantial liability for damages resulting to
persons and property of the Debtors and others, which could have an extremely negative impact
on the Debtors' ability to maximize the value of their assets for stakeholders. Furthermore, the
Debtors would then be required to obtain replacement policies on an expedited basis at what
would likely be a significantly higher cost to their estates. Accordingly, I believe that it is
necessary for the Debtors to meet all Insurance Obligations with respect to the Insurance
Programs.
127. Accordingly, the relief requested in the Insurance Motion is not prejudicial to any
party in interest and, in fact, only benefits the Debtors' estates and their creditors. The Debtors
submit, and I agree, that the relief requested in the Insurance Motion is in the best interests of the
Debtors' estates, their creditors and parties-in-interest.
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Debtors' Motion for Ent;y of Interim and Final Orders (A) Authorizing the
Debtors to Pay Prepetition Claims of C~•itical Vendors; (B) Authorizing Banks to
Honor' and Process Related Checks and Electronic Transfers; and (C) Granting
Related Relief (the "Critical Vendor Motion")
128. Pursuant to the Critical Vendor Motion, the Debtors respectfully request entry of
interim and final orders, (i) authorizing, but not directing, the Debtors, in their sole discretion
(and subject to and in accordance with any orders authorizing postpetition financing and the use
of cash collateral and the applicable budget thereunder), to pay critical vendors, including
(without limitation) third party insurance agents and agencies and vendors (the "Critical
Vendors," whose claims are the "Critical Vendor Claims"), collectively not to exceed an
aggregate amount of $2,000,000 on an interim basis and $2,500,000 on a final basis, and; (ii)
authorizing financial institutions to honor and process checks or electronic transfers used by the
Debtors to pay the foregoing; and (iii) granting any additional relief as is necessary to effectuate
the foregoing.
129. In an exercise of their business judgment, the Debtors have determined that
continuing to maintain a business relationship with certain Critical Vendors, including, without
limitation, (i) third party insurance agents and agencies that continue to utilize the Debtors'
brokerage services and bind insurance policies through the Debtors, and (ii) vendors that are
critical to the processing of payments for the restricted bank accounts over which Debtor
CWIBenefits, Inc. ("CWI") provides administrative services for third parties, is necessary to the
Debtors' ability to continue to operate their business as a going concern and to maximize value
for all creditors. If granted discretion to satisfy certain Critical Vendor Claims, as requested in
the Critical Vendor, the Debtors will assess, case by case and in real time, the benefits to their
estates of paying each Critical Vendor Claim and will pay such claims only to the extent their
estates will benefit. The Debtors believe that unless they are able to exercise discretion to make
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these payments when necessary, the Critical Vendors may cease their business with the Debtors,
including ceasing their use of the Debtors' insurance brokerage services and binding new
insurance policies through the Debtors, or may otherwise take action to impede the Debtors'
restructuring—a dire result for the Debtors and their stakeholders.
130. One of the Debtors' principal sources of revenue is generated by providing front-
end services, such as brokerage, underwriting and policyholder services (collectively, the "Front-
End Services"). The Debtors' Front-End Services business depends on, among other things, key
relationships the Debtors have established and cultivated with third party insurance agents and
agencies. Through those relationships, insurance agents and agencies use the Debtors' brokerage
services to identify favorable insurance rates and carriers and bind insurance policies for their
customers.
131. The Debtors' ability to retain the confidence and loyalty of such third party
insurance agents and agencies .and to maintain their reputation within the insurance services
industry is essential. The Debtors rely significantly on those third parties to generate revenue for
their brokerage business. Failing to pay the Critical Vendors for amounts owing prepetition may
cause those insurance agents to transfer their brokerage business to, or utilize the brokerage
services of, other insurance services companies to the detriment of the Debtors and their estates.
The loss of these third party insurance agents and agencies would cause immediate and
irreparable harm to the Debtors' business.
132. In the ordinary course of their businesses, the Debtors typically pay such third
party insurance agents on or about the 15th day of each month. Similarly, Debtor CWI seeks to
pay amounts owed to vendors that are critical to the processing of payments for the restricted
bank accounts over which CWI acts as agent for third parties, which payments are coming due
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for services rendered prepetition in the ordinary course of business. Thus, with respect to such
Critical Vendors, the Debtors are generally seeking to maintain the status quo by paying amounts
owed in the ordinary course.
133. To identify the Critical Vendors, the Debtors and their professionals reviewed
their records with a focus on those third parties most essential to the Debtors' operations.
Interruption of these relationships would cause the Debtors irreparable harm and jeopardize the
Debtors' ability to continue to operate their business in the ordinary course. Having the
discretion to pay Critical Vendors would enhance the Debtors' ability to maintain the value of
their business and thereby maximize value for the benefit of creditors and stakeholders.
Therefore, the Debtors seek authorization, in their discretion, to pay certain Critical Vendor
Claims.
134. The Debtors seek the authority to pay, in their sole discretion and business
judgment (subject to and in accordance with any orders authorizing postpetition financing and
the use of cash collateral and the applicable budget thereunder) all or a portion of the Critical
Vendor Claims. The Debtors estimate that the amount of the Final Critical Vendor Claims Cap
represents the maximum amount needed to pay the Critical Vendor Claims. Of this amount, the
Debtors estimate that the Interim Critical Vendor Claims Cap represents the maximum amount
needed to pay Critical Vendor Claims before the final hearing. The Final Critical Vendor Claims
Cap represents the Debtors' best estimate as to how much must be paid to such creditors to
ensure that they continue doing business with the Debtors. The Debtors may pay less than the
full requested amount.
135. If authorized to pay the Critical Vendor Claims, the Debtors will use
commercially reasonable efforts to require the applicable Critical Vendor to provide trade terms
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consistent with historical practice. The Debtors therefore request authority, in their business
judgment (subject to and in accordance with any orders authorizing postpetition financing and
the use of cash collateral and the applicable budget thereunder), to condition payment on such
Critical Vendor's entry into an agreement, substantially similar to the form of the letter, attached
as Exhibit A to the Critical Vendor Motion, to (i) verify the amount owing to the specific
Critical Vendor as of the Petition Date, (ii) accept such payment in satisfaction of all or a part of
its claim, and (iii) continue maintaining its business relationship with the Debtors during these
Chapter 11 Cases.
136. The Debtors submit, and I agree, that payment of the Critical Vendor Claims is
necessary to the Debtors' efforts to maintain their operations and thereby maximize the value of
their businesses in chapter 11. If the Critical Vendor Motion is not granted, the Debtors submit,
and I agree, that many of the Critical Vendors will refuse to do business with the Debtors. Such
a result would be extremely damaging to the Debtors and their estates.
Debtors' Motion for Entry of an Order Establishing Notification and Hearing Procedures
ai d Approving Restrictions on Certain Transfers of Interests in the Debtors' Estates
(the "Equity Trading Motion")
137. Pursuant to the Equity Trading Motion, the Debtors request authority to establish
notice and hearing procedures (collectively, the "Procedures") that must be satisfied before
certain transfers of common stock of Patriot National, Inc. or any beneficial interest therein (the
"Stock") are deemed effective. Specifically, the Debtors seek to establish the Procedures to
protect the potential value of the Debtors' net operating loss carryforwards ("NOLs") and certain
other tax attributes (together with the NOLs, the "Tax Attributes"). The Procedures would apply
with respect to the Stock and would impose restrictions and notifications requirements, to be
effective nunc pro tunc to the filing of the Equity Trading Motion. Parties would be notified of
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the Procedures through publication of a notice, which describes the trading restrictions and
notification requirements established in the proposed order.
138. The Debtors estimate that they have NOLs totaling approximately $70,000,000 to
$100,000,000. As described in greater detail in the Equity Trading Motion, the Debtors believe
that the NOLs could result in significant tax savings. However, much of that value will be lost if
the Equity Trading Motion is not granted. Specifically, the Debtors' ability to meet the
requirements of the tax laws to protect their tax attributes may be seriously jeopardized, unless
procedures are established to ensure that certain trading in Stock is either precluded or closely
monitored and made subject to Court approval. The Debtors therefore believe, and I agree, that
the proposed Procedures and restrictions are necessary to protect the value of the Debtors' Tax
Attributes, which are valuable assets of the Debtors' estates, while providing appropriate latitude
for trading in Stock below specified levels.
139. The relief requested in the Equity Trading Motion is narrowly tailored to permit
certain trading to continue. By the Equity Trading Motion, the Debtors are seeking only to
enforce the provisions of the injunction sought in connection with certain transfers of Stock that
pose a serious risk under the ownership change tests.
140. For the reasons discussed herein and in the Equity Trading Motion, the Debtors
respectfully submit, and Iagree, -that the relief requested therein is in the best interests of the
Debtors, their estates and creditors, and therefore should be granted.
Debtors' Motion for Eiitiy of ~n Interim and a Final Order (A) Authorizing
the Debtors to Continue Their Prepetitioii Practices With Respect to
Their Pass-Through Bank Account and (B) Authorizing Bans to Hanor
Related Transfers (the "Pass-Through Account Motion")
141. The Debtors respectfully request entry of interim and final orders (a) authorizing
the Debtors to continue their prepetition practices with respect to a certain trust-like pass-through
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bank account that is maintained by the Debtors for the benefit of certain of its insurance carrier
clients, and (b) authorizing all banks to honor the Debtors' prepetition and postpetition transfers
for payment of any of the foregoing.
142. As part of their business providing administrative services to approximately
twenty (20) Insurance Carrier clients, the Debtors maintain the Pass-Through Account. The
Debtors calculate the premiums due to the Insurance Carriers by their policyholders and transfer
funds from the policyholders' accounts into the Pass-Through Account via automated clearing
house transfer. The Debtors collect these premiums effectively as agent for the Insurance
Carriers. The Debtors' course of dealing with the Pass-Through Account and its customers
respecting account activity is as if the funds therein are held as trust funds for the benefit of the
Insurance Carriers. No funds of the Debtors are deposited into this account, and are not used by
the Debtors in any manner or for any purpose other than as noted herein. Utilizing proprietary
software, the Debtors then determine the allocation of each Insurance Carrier's funds in the Pass-
Through Account. For most Insurance Carriers, the Debtors distribute all funds deposited into
the account by the policyholders directly to the respective Insurance Carrier within five days of
receipt. These Insurance Carriers then pay fees owed to the Debtor for the Debtors' services
directly to the Debtors, which fees are deposited into the Debtors' operating account. Some
Insurance Carriers have opted to have the Debtors debit their distributions with the amount of the
fees owed to the Debtors for the Debtors' services, in which case the Debtors distribute the net
fees to the respective Insurance Carrier within five business days of receipt, while a small portion
of the Insurance Carrier's funds are transferred to one of the Debtors' operating accounts in
satisfaction of fees owed to the Debtors under the applicable Service Agreements (as defined
below) with that Insurance Carrier. Notably, no fees are paid to the Debtors from the Pass-
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Through Account funds until the fee amounts due have been reconciled with the relevant
Insurance Carrier.
143. Pursuant to written Service Agreements with each of the Insurance Carriers, the
Debtors are authorized to use the Pass-Through Account only for the purposes of receiving
insurance premiums from policyholders and remitting the funds (in some cases net of fees due
the Debtors) to the Insurance Carriers. Furthermore, consistent with their obligations under the
Service Agreements, the Debtors are able to determine the applicable beneficial owner of each
dollar deposited into the Pass-Through Account. Accordingly, although the Pass-Through
Account is held in the name of Debtor Patriot Technology Solutions, LLC, the funds in the Pass-
Through Account are held in trust for the benefit of the applicable Insurance Carriers and are not
property of the Debtors' estates.
144. Prior to the Petition Date, certain of the Insurance Carriers expressed concern that
the funds deposited into the Pass-Through Account might be treated as property of the estate if
the Debtors were to file for chapter 11 protection. In order to maintain the Insurance Carriers'
business and protect the value of the Debtors' business, the Debtors addressed such concerns in a
few ways. First, the Debtors have provided assurance to the Insurance Carriers that, in the
Debtors' view, other than the fees owed to the Debtors, such funds are not property of the estate
for the reasons described herein. Second, the Debtors agreed to file the Pass-Through Account
Motion to seek an order recognizing that status of the funds in the Pass-Through Account as
funds held in trust and not constituting property of the Debtors' estates. Third, with respect to
certain of the Insurance Carriers, the Debtors and the relevant Insurance Carriers have
commenced plans to shift away from use of the Pass-Through Account for purposes of the
administrative services provided by the Debtors to those Insurance Carriers. The shift away
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from use of the Pass-Through Account is still in the early stages and could not be completed
prior to the Petition Date because of the substantial logistical burden involved in making such a
change.13
145. Consequently, the Debtors seek this Court's authorization to continue to utilize
the Pass-Through Account, including authorization to continue making transfers out of the Pass-
Through Account, whether relating to prepetition or postpetition transactions, in the ordinary
course of business. The relief requested in the Pass-Though Account Motion is necessary to
ensure that the Debtors are able to honor their contractual relationships with the Insurance
Carriers, and that the Insurance Carriers continue to honor those relationships, secure in the
knowledge that funds paid to such account by their policyholders do not wind up being trapped
in the Debtors' chapter 11 estate. In addition, it will enable the Debtors to avoid breach of
contract or other claims that might be asserted and professional fees that would be incurred in
connection with litigation regarding such claims. Finally, it will enable the Debtors to continue
to operate their businesses during the pendency of these Chapter 11 Cases, thereby maintaining
and maximizing value for the benefit of their stakeholders.
IV. CONCLUSION
146. For the reasons described herein and in the First Day Motions, I believe that the
prospect for achieving these objectives for the benefit of creditors and other stakeholders will be
substantially enhanced if this Bankruptcy Court grants the relief requested in each of the First
Day Motions and respectfully request the Bankruptcy Court to do so.
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13. The Debtors are hopeful that, upon entry of orders granting the Pass-Through Account Motion, the Insurance
Carriers' concerns will be alleviated and they will withdraw their insistence on the Debtors' shifting away from
use of the Pass-Through Accounts, as doing so is both costly and time consuming, and is resulting in the
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Pursuant to 28 U.S.C. § 1746(2), I declare under penalty of perjury that the foregoing is
true and correct.
Executed on January 30, 2018.
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