Trustee says Colony viable

STEVE REID
Editor & Publisher
sreid@lbknews.com

Excitement could be felt buzzing through the Colony Beach & Tennis Resort following a report by court-appointed U.S. Bankruptcy Trustee William Maloney that said not only is the Colony viable, it also has more than a dozen investors ready and willing to negotiate a revitalization plan.

“It’s a great day,” Colony President and General Manager Katie Moulton said. “It is what we have wanted for so long, and we are very eager and happy to hear that all of the parties have consented to attempt to reach a resolution.”

Maloney’s opening statement of the trustee report read, “It is certain that Colony Beach & Tennis Club, Ltd. will ultimately be restructured in a new form, either as a condo-hotel, timeshare/fractional units/shared ownership, or other model. I have identified, met with or spoken to 13 groups who have expressed a genuine interest in participating as a sponsor in a restructuring plan for the Colony. I believe many of the plans are professional, feasible and several—but perhaps not all—likely financial capacity to fund a restructuring.”

Maloney was charged by Judge K. Rodney May in June to oversee and control the operations of the Colony in an effort to determine whether there existed cause to move the Colony into Chapter 7 Bankruptcy, or allow a reorganization. Over the past weeks, Maloney took responsibility for all of the Colony’s operations, its accounting, as well as vetted the many interested parties who seek to redevelop the property.

The long-standing dispute is between the management, ultimately Klauber and Moulton, and the association, which represents the unit owners. It centers on who is and was responsible for financing ongoing maintenance at the property; ultimately the case ended up in Bankruptcy Court with the association arguing that the Colony is not solvent. The association alleged that Klauber engaged in financial mismanagement.

The charge of financial mismanagement was addressed by the trustee in his report wherein Maloney wrote, “I implemented a procedure where all disbursements are approved by me and I review and approve each and every payment made by the debtor. I am particularly sensitive to the allegations of self-dealing by the General Partner, Klauber, and pay particular attention to allocated amounts and propriety of charges to the debtor. I have not witnessed any improper positioning in the business dealings by the Klauber entities.”

Klauber was impressed with the Trustee.

“He is a very bright man. He sees these guys (the association) are doing a land grab, and he told the judge they are being totally uncooperative and there are people here who are capable of taking this place over. He says what I have been saying all along, ‘the Colony can have a strong future.’”

Part of Maloney’s report addressed how the future of the Colony could best be resolved. Maloney made it clear to the judge that he was not successful in achieving a commitment on the part of the association to consider any plan. He made it clear that if the association were willing, a resolution among the interested parties could be reached.

“Unfortunately, no plan has a strong prospect of success without the cooperation and support of one of the significant players, The Colony Association,” wrote Maloney. “I have not been successful in achieving a commitment on their part to consider any plan. It seems clear to me, the Association’s agenda is to force a liquidation of the Colony so as to terminate the partnership and gain control of the Colony’s property and any plan to restructure. I believe, if the Association were willing, a plan could be negotiated amongst all the interested parties.”

At the hearing Thursday, July 23, Judge May requested that the involved parties hold a settlement conference Thursday, July 30, wherein Maloney will attempt to negotiate a binding resolution to the ownership and management issues. According to Moulton, Maloney provided criteria for the summit: the association has to deliver a term sheet outlining its settlement criteria by end of day Monday, the association representative at the settlement conference must have the full authority and rights to act on behalf of the board and the association must act in good faith.

Maloney retained Moulton, without pay, to assist him in operating the resort during the Trustee examination period. Moulton said that she feels Maloney took time to understand the importance of the Colony to the unit owners, the town and the community as a whole. She said he had a “strong global approach and has done an exceptional job meeting all the key parties.”

The following are direct excerpts from Maloney’s Trustee Report:

Trustee Report, Preliminary Conclusion
It is certain that Colony Beach & Tennis Club, Ltd. will ultimately be restructured in a new form, either as a condo-hotel, timeshare/fractional units/shared ownership, or other model. I have identified, met with or spoken to 13 groups who have expressed a genuine interest in participating as a sponsor in a restructuring plan for the Colony. I believe many of the plans are professional, feasible and several – but perhaps not all – likely financial capacity to fund a restructuring.

Unfortunately, no plan has a strong prospect of success without the cooperation and support of one of the significant players, The Colony Association. I have not been successful in achieving a commitment on their part to consider any plan. It seems clear to me, the Association’s agenda is to force a liquidation of the Colony so as to terminate the partnership and gain control of the Colony’s property and any plan to restructure.

I believe, if the Association were willing, a plan could be negotiated amongst all the interested parties. I am aware there have already been two failed mediation attempts. I believe a consensual restructuring is preferable rather than continuing to “gore the ox.”

The Debtor has a few assets, primarily condo unit furnishings, subject to a lien, which I consider to have little, if any value, and the contractual rights to use the condo units for 335 days of the year. This right will vanish unless the debtor can confirm a plan, which in my view, can only happen with a successful mediation. The Association claims to hold the lion’s share of the unsecured claims asserted against the estate, and is the rightful beneficiary of the claims, in any, under the directors and officers insurance policy. There do not appear to be any

Therefore, in the absence of a commitment by all constituents – including principally the Association – to participate in a mediation in good faith, I recommend the Chapter 11 case be dismissed.

Establish control over the debtor
On June 12, 2010, I met counsel for the debtor, Roberta Colton, and Dr. Klauber at the resort. I took possession, and toured the facility.

Promptly thereafter, I took possession of the bank account, changed signatories, interviewed key employees, and gained access to the computer system.

I implemented a procedure where all disbursements are approved by me and I review and approve each and every payment made by the debtor. I am particularly sensitive to the allegations of self dealing by the General Partner, Klauber, and pay particular attention to allocated amounts and propriety of charges to the debtor. I have not witnessed any improper positioning in the business dealings by the Klauber entities.

Continue to operate hotel
After carefully evaluating the debtor’s business and consulting with resort personnel, I decided to continue to operate the hotel as long as we could achieve a break-even financial result. Based on reservations booked and past seasonal trends it appears the month of July will likely be a strong month. I have decided to continue to operate the resort until at least early August 2010. I felt this was especially important to retain whatever intangible value exists for the resort, provide me an opportunity to assess the case, and protect the property and units owned by Association members to the extent there are still seven of 18 buildings open and maintained.

On a daily basis I review operating reports of the hotel operation and work closely with Katie Moulton, resort manager, who I decided to retain during this interim period, (although Ms. Moulton is serving without pay). All important hotel decisions are made by me. I decided to continue with the July 4th fireworks and to issue a summer promotion, with the sole purpose of increasing room occupancy in July. At latest count we have over 1.000 room night reservations in July, which is a fairly strong showing.

Restructuring plan sponsors
I have discussed, met with and reviewed proposals from 13 different groups. Each group has a slightly different approach but in general all groups propose a condo-hotel, timeshare or a blend of these concepts. Some of the groups are familiar to the court, some are not. Those that propose a condo-hotel feel that timeshares have gone the way of the leisure suit. Those that sponsor a timeshare claim a condo-hotel is not financially feasible. Perhaps not all, but many of the groups I believe can deliver the funding commitments needed to confirm a plan. Some parties have told me that funding was not line up for some of these sponsors; however, I believe in a few cases, the sponsors have been able to find funding commitments they may not have had earlier.

The following is a recap of the groups with whom I have met or held discussions:

•    Coral Hospitality
•    MW Development
•    Bill Hitson
•    Harper Sibley
•    Colony Lenders
•    Rusovich Group
•    Midlan International
•    Steep Rock Capital
•    Zuccarello Group
•    Charley Aker
•    Glenn Miller
•    Bob Shleider
•    TENCON

If the Association would consent to participating in another round of mediation, or if the court so ordered, I would propose each player be qualified with an affidavit as to financing capability and invited to submit their proposal and participate as a party at the mediation. In collaboration with the Association and other key constituents, I would select the highest or best proposal as the basis for advancing a plan of reorganization or other transaction that will result in the best resolution for this case.