although “the secured lenders paid cash to resolve objections to the sale of LifeCare’s assets, the money never made it into the estate” and, furthermore, the money was not “paid at LifeCare’s discretion.” Id. at 555. The court continued: “[i]n this context, we cannot conclude . . . that when the secured lender group, using that group’s own funds, made payments to unsecured creditors, the monies paid qualified as estate property.” Id. It also noted that the settlement money did not consist of “proceeds from [the secured lenders’] liens, did not at any time belong to LifeCare’s estate, and [would] not become part of its estate even as a pass-through.” Id. at 556 (citing In re TSIC, 393 B.R. 71 (Bankr. D. Del. 2008)). Lastly, the court disagreed with the government’s contention that the settlement was an “allocat[ion]” of “proceeds derived from the sale,” stating that it would not “elevate form over substance,” referring to the poorly-worded settlement-approval motion, where the evidence before it indicated that the settlement proceeds were not part of the consideration for the sale. Id.
The Third Circuit also considered the government’s argument that the escrowed funds were consideration for the sale. Although the court acknowledged that the government’s case was bolstered by drafting flaws in the asset purchase agreement, it found that the agreement itself “ma[de] clear that the secured lender group purchased all of LifeCare’s assets, including its cash, by crediting $320 million owed by LifeCare to the secured lenders” such that “once the sale closed, there technically was no more estate property” to distribute. Id. The court also considered the fact that the sale order provided that any funds remaining in escrow after the professionals were paid would revert to the secured lenders (and the fact that such reversion of funds did indeed take place) as evidence that the escrowed funds were not part of the debtors’ estates. Id. The court stated that “as a matter of substance” it was unable to “conclude that the escrowed funds were estate property.” Id.
The government has decided against petitioning for a panel rehearing or a rehearing en banc, Letter from Bethany B. Hauser to Marcia M. Waldron, Esquire, Clerk, U.S Court of Appeals For the Third Circuit, In re ICL Holding Co., Inc., No. 14-2709 (3d Cir Nov. 23, 2015), so ICL is here to stay.
C. The Ramifications of ICL
sale transactions otherwise meet the “sound business purpose” test, ICL Holding, 802 F.3d at 551 (citing In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. Del. 1999)), and that their settlement agreements are otherwise “fair and equitable,” id. (citing Protective Comm. for Indep. Stockholders of TMT
The ramifications of ICL are far-reaching, especially in the Third Circuit. Before ICL, LifeCare’s disputes with its administrative and unsecured creditors would have been resolved within the confines of the Code and would quite possibly have required judicial intervention. After the holding in ICL, so long as parties take care to ensure that sale- and settlement-related payments never enter the debtor’s estate, that their sale transactions otherwise meet the “sound