Court: LifeCare sale payments not subject to distribution priority

By Caroline Salls

Pittsburgh, Sept. 14 – Cash payments for the assets of ICL Holding Co., Inc., formerly LifeCare Holdings, Inc., are not subject to the Bankruptcy Code’s distribution priority, according to an order entered Monday by the U.S. Court of Appeals for the Third Circuit.

The court said the appeal stemmed from a question raised by the U.S. Government of whether payments made by an entity formed by the company’s secured lenders in connection with the acquisition of the LifeCare debtors’ assets should be distributed according to the code’s creditor-payment hierarchy.

Though the secured lender group was selected by default as the successful bidder with a credit bid valued at $320 million, the court said LifeCare’s official committee of unsecured creditors and government objected to the asset transfer.

The committee argued that the sale was a “veiled foreclosure” that would leave the bankruptcy estate so insolvent even administrative expenses would not be paid, while the government argued that the sale would result in capital-gains tax liability estimated at $24 million, giving it an administrative claim that would go unpaid.

The government said this was unfair because equally situated administrative claimants, primarily the company’s bankruptcy professionals, would get paid if the sale went through.

The committee later agreed to drop its objections and support the sale in exchange for the secured lenders’ agreement to deposit $3.5 million in trust for the benefit of the general unsecured creditors.

After the sale was approved, the court ruled that because the settlement “permits a distribution directly to the unsecured creditors” from the buyer, the funds in question were not the property of LifeCare’s estate and not subject to the “absolute priority” rule.

The government appealed both the sale and settlement orders.

As previously reported, the lender entity acquired the assets by crediting roughly 90% of the secured debt it was owed.

Since the sale was completed under the credit bid, the appeals court said the only cash payments made in connection with the deal were those the secured lenders deposited in escrow for professional fees and paid directly to the unsecured creditors.

The court ruled Monday that the cash was not subject to the code’s distribution priority because “neither of the two payments went into or came out of the bankruptcy estate.”

“The Bankruptcy Code’s creditor-payment hierarchy only becomes an issue when distributing estate property,” the appeals court said in its opinion.

“Thus, even assuming the rules forbidding equal-ranked creditors from receiving unequal payouts and lower-ranked creditors from being paid before higher ranking creditors apply in the § 363 context, neither was violated here.”

LifeCare, a Plano, Texas-based health care consulting and management services company, emerged from bankruptcy in June 2013.

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