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.

DOGS DE:217649.1

Case 18-10189-KG Doc 4 Filed 01/30/18 of 58

"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

ROCS DE217649.1

2


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

DOGS DE2176491

3


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

entered into an agreement to sell itself to a third party.DOCS D~217649.1


(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

DOCS D~:217649.1

5


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

DOGS DE217649.1

6


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

DOGS DE:217649.1

7


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

DOCS DE:2176491

g


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.

DOCS DE217649.1


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

DOCS D~:217649.1

1~


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.

DOCS DE:217649.1

11


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.

ROCS DE217649.1

12


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

DOGS DE217649.1

13


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.

DOCS DE217649.1

14


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.

DOCS D~217649.1

15


£ 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

DOCS D~2176491

~~


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.

DOGS DE2176491

17


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.

DOCS DE:217649.1

Ig


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

19


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

relief.DOCS DE:2176491

m


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

DOCS DE217649.1

21


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.

DOGS DE217649.1

22


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

Motion.DOCS DE2176491

23


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,

DOGS DE2176491

24


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.

DOCS DE:217649.1

25


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

ROCS DE:2176491

26


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

DOCS D~217649.1

2~


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.

DOCS DE:217649.1

2g


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.

DOCS DE;217649.1

29


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.

DOCS DE2176491

30


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,

DOCS DE2176491

31


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

pay cycle.DOGS DE217649.1

32


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

DOCS DE217649.1

33


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

DOGS DE:217649.1

34


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.

DOCS DE217649.1

35


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

DOGS DE;217649.1

36


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

Docs DE:zi~649.137


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


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.

DOCS DE:2176491

38


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

DOCS DE217649.1

39


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'

ROCS DE:217649.1

~~


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.

DOGS D~:217649.1

41



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.

DOCS DE217649.1

42



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


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

DOGS DE217649.1

43


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)

DOCS DE:217649.1

~~


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

DOCS DE2176491

45


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

DOGS DE:217649.1

~~


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

DOGS DE217649.1

47


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

DOGS DE:217649.1

48


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.

ROCS DE217649.1

~•


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

DOCS DE:217649.1

50


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

DOCS DE:217649.1

51


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

ROCS DE217649.1

52


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

DOGS DE217649.1

53


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

ROCS DE217649.1

54


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-

DOCS DE217649.1

55


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

DOCS DF,:217649.1

56


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.

[SignatuNe on next page]

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

diversion of limited resources.DOCS DE217649.1

57


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.
