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Media Alerts - In re: ICL HOLDING COMPANY, INC., et al.- Third Circuit
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September 23, 2015
  In re: ICL HOLDING COMPANY, INC., et al.- Third Circuit
Headline: Third Circuit Holds That The Code's Creditor-Payment Hierarchy Was Not Invoked Because After Secured Lenders Buy A Company And Then Make a Subsequent Agreement With The Company's Unsecured Lenders Using Its Own Funds, Those Funds Are Not Part Of The Estate Property.

Area of Law: Bankruptcy

Issues Presented: Whether certain payments by a § 363 purchaser in connection with acquiring the debtors' assets should be distributed according to the Code's creditor-payment hierarchy and what constitutes estate property?

Brief Summary: After LifeCare experienced extreme financial loss, it was in debt amounting to $484 million. An entity formed by secured lenders offered to purchase LifeCare outright for all of its cash and assets for $320 million. The secured lenders were owed $355 million by LifeCare. LifeCare accepted the offer. A committee of unsecured lenders (the "Committee") and the United States of America objected to the sale because LifeCare would be left with no assets and would therefore receive nothing from what was owed to them. The secured lenders and the Committee reached an agreement in which the Committee would withdraw its objection in return for the secured lenders agreeing to deposit $3.5 million in trust for the benefit of the general unsecured creditors. The Government appealed in this case from the Bankruptcy Court's approval of the sale and the Settlement Agreement between the Committee and secured lenders. The Government sought to alter the both the sale and the agreement. The Third Circuit first rejected LifeCare and the Committee's claim that the Government's appeal was moot. On the merits, the Third Circuit held that because the secured lenders used their own funds to make payments to unsecured lenders, the money did not qualify as estate property. Further, the Court held that under the sale order, any money that remained in escrow went back to where it came from, which was the secured lenders' account. The Third Circuit held that it the funds were not estate property and affirmed the lower court's ruling.

Extended Summary: This case concerns an entity formed by secured lenders buying out LifeCare Holdings, Inc.'s ("LifeCare") assets in order to acquire 90 percent of the debt owed to the secured lenders, and a subsequent settlement agreement with the Committee of Unsecured Creditors (the "Committee"). LifeCare's debt was $484 million, of which $355 million was secured. The secured lenders offered to buy LifeCare outright for all of its cash and assets. The secured lenders offered to credit $320 million of the $355 million that they were owed. LifeCare agreed to this option. The secured lenders also agreed to pay the legal and accounting fees for LifeCare and the Committee, as well as LifeCare's wind-down fees.

LifeCare and its 34 subsidies filed for bankruptcy one day after entering into the Asset Purchase Agreement with the secured lenders. LifeCare received permission from the Bankruptcy Court to sell all of its assets through a Court-supervised auction under 11 U.S.C § 363(b)(1). The secured lenders were the successful bidders. The United States and the Committee objected to the asset transfer. The Committee argued that the sale would not allow LifeCare to even have the ability to pay for administrative expenses. The United States argued that the sale would result in capital-gains tax liability estimated at $24 million. The secured lenders and the Committee entered into a deal, which consisted of the Committee removing its objection and instead supporting the sale and in return the secured lenders agreed to deposit $3.5 million dollars in trust for the benefit of the general unsecured creditors. The secured lenders and the Committee entered into a Settlement Agreement.

On April 2, 2013, the Bankruptcy Court accepted the proposed sale to the secured lenders. The Bankruptcy Court addressed the Government's code based fairness objection and stated that the administrative fee monies put into escrow by the secured lenders were not estate property. Therefore the Bankruptcy Court held that those funds were not subject to distribution by LifeCare's creditors, and the Government had no claim to them. The Committee was a junior creditor and the Government was a senior creditor, thus the Government contended that the settlement allowed for the bypass of it, which violated the absolute priority rule. The lower court rejected this argument and held that the Settlement Agreement allowed the secured lenders to directly pay the Committee, and therefore was not part of LifeCare's property. Further, because it was not LifeCare's property, the absolute priority rule was not invoked. The lower court accepted the Settlement Agreement. The Government then appealed the denial of its request for a stay to the District Court. The District Court agreed with the Bankruptcy Court that the funds at issue were not property of the estate and thus not subject to the Code's distribution rules. The District Court denied the Government's stay request because the request did not meet the threshold that there was a sufficient likelihood it would succeed on the merits. The Government then appealed to the Third Circuit.

As to the merits of the Government's appeal, the Third Circuit first looked at the claim that the settlement sums should be treated as estate property because the secured lenders' payment to the Committee was an increased bid for LifeCare's assets. The Court disagreed and held that because the secured lenders used their own funds to make payments to unsecured lenders, it could not conclude that the money qualified as estate property. Further, the Court acknowledged that the sums paid by the secured lenders to the Committee did not at anytime belong to LifeCare. The Third Circuit explained that its analysis rested on whether the settlement money was given to the Committee as consideration for the assets bought at the § 363 sale. The Court concluded that those assets were not in consideration.

The Third Circuit also considered whether the fees and wind-down expenses, which make up the escrow funds, qualified as property of the estate. The Court held that through the Asset Purchase Agreement, all of the LifeCare's assets, including its cash, were purchased by the secured lenders. Thus, the Government's argument that the residual cash from the sale, such as the monies for fees and wind-down expenses, were LifeCare's property was erroneous. Under the sale order, any money that remained in escrow went back to where it came from, which was the secured lenders' account. The Third Circuit held that it could not conclude the funds were estate property. The Third Circuit noted that the Bankruptcy Code's creditor-payment hierarchy only becomes an issue when distributing estate property. Therefore, the Court held that that even if the rule applies in a § 363 context, it was not violated in this case. To read the full opinion, please visit http://www2.ca3.uscourts.gov/opinarch/142709p.pdf


Panel (if known): Ambro, Fuentes, and Roth, Circuit Judges

Argument Date: January 14, 2015

Date of Issued Opinion: September 14, 2015

Docket Number: No. 14-2709

Decided: Affirmed.

Case Alert Author: Trisha Stein

Counsel: Tamara W. Ashford, David A. Hubbert, Thomas J. Clark, Bethany B. Hauser, Christopher Williamson, Charles M. Oberly, III, Ellen W. Slights, Counsel for Appellant, The United States of America; and Anthony W. Clark, Kristhy M. Peguero, Felicia G. Perlman, Matthew N. Kriegel, Candice Korkis, Kenneth S. Ziman, for Appellees ICL Holding Co., Inc.,
Boise Intensive Care Hospital Inc., CareRehab Services LLC, Crescent City Hospitals LLC,
LifeCare Healthcare Holdings Inc., LifeCare HoldCo LLC, Lifecare Ambulatory Surgery Center Inc., Lifecare Holding Co. of Texas LLC, Lifecare Holdings Inc., Lifecare Hospital at Tenaya LLC, Lifecare Hospitals LLC, Lifecare Hospitals of Chester County Inc., Lifecare Hospitals of Dayton Inc., Lifecare Hospitals of Fort Worth LP, Lifecare Hospitals of Mechanicsburg LLC, Lifecare Hospitals of Milwaukee Inc., Lifecare Hospitals of Ne Orleans LLC, Lifecare Hospitals of North Carolina LLC, Lifecare Hospitals of North Texas LP, Lifecare Hospitals of Northern Nevada Inc., Lifecare Hospitals of Pittsburgh LLC, Lifecare Hospitals of San Antonio LLC, Lifecare Hospitals of Sarasota LLC, Lifecare Hospitals of south Texas Inc., Lifecare Investments LLC, Lifecare Investments 2 LLC, Lifecare Management Services LLC, ICL Holding Co., Inc.,
Boise Intensive Care Hospital Inc., CareRehab Services LLC, Crescent City Hospitals LLC, LifeCare Healthcare Holdings Inc., LifeCare HoldCo LLC, Lifecare Ambulatory Surgery Center Inc., Lifecare Holding Co. of Texas LLC, Lifecare Holdings Inc., Lifecare Hospital at Tenaya LLC, Lifecare Hospitals LLC, Lifecare Hospitals of Chester County Inc., Lifecare Hospitals of Dayton Inc., Lifecare Hospitals of Fort Worth LP, Lifecare Hospitals of Mechanicsburg LLC, Lifecare Hospitals of Milwaukee Inc., Lifecare Hospitals of Ne Orleans LLC, Lifecare Hospitals of North Carolina LLC, Lifecare Hospitals of North Texas LP, Lifecare Hospitals of Northern Nevada Inc., Lifecare Hospitals of Pittsburgh LLC, Lifecare Hospitals of San Antonio LLC, Lifecare Hospitals of Sarasota LLC, Lifecare Hospitals of south Texas Inc., Lifecare Investments LLC, Lifecare Investments 2 LLC, Lifecare Management Services LLC; and Laura D. Jones, Peter J. Keane, James E. O'Neill, Bradford J. Sandler, for Appellee Official Committee of Unsecured Creditors; and Stanley B. Tarr, Michael D. DeBaecke, Ira S. Dizengoff, Abid Quershi, Scott Alberino, Ashleigh L. Blaylock, for Appellee Steering Committee

Author of Opinion: Judge Ambro

Circuit: Third Circuit

Case Alert Supervisor: Professor Mary E. Levy

    Posted By: Susan DeJarnatt @ 09/23/2015 02:53 PM     3rd Circuit  

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