ICL Holding Co., Inc. v.
802 F.3d 547
3rd Cir.2015Background
- LifeCare faced severe financial distress with high secured debt and limited cash; sale or restructuring were explored.
- Secured lenders proposed a credit bid, erasing most of LifeCare’s debt in exchange for control of assets; cash changed hands only for fees via escrows.
- LifeCare filed Chapter 11; assets were marketed, but the $320 million credit bid remained the top offer.
- Committee and Government objected to the sale; a settlement funded by the purchaser provided $3.5 million to unsecured creditors.
- Bankruptcy Court approved the sale under § 363(b) and deemed escrow funds not part of the estate for priority purposes; settlement approved under Martin factors.
- Government appealed sale and settlement rulings; district court denied stay; issue presented on whether escrow/settlement funds violated priority or estate property rules.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the Government's appeal moot? | Constitutional/statutory/equitable mootness should bar review. | Not moot; relief possible and assets already transferred do not foreclose review. | Not Moot. |
| Are escrowed funds or settlement proceeds estate property? | Funds were proceeds of estate assets and must follow priority. | Funds were purchaser-owned, not estate property; not subject to priority rules. | Settlement funds not estate property; escrowed funds not estate property. |
| Did the distribution of funds violate the Code's priority rules? | Paying unsecured creditors while a senior claimant received nothing violated absolute priority and equal-rank rules. | Funds did not belong to the estate; priority rules do not apply. | No violation; not subject to priority rules in this context. |
Key Cases Cited
- In re Martin, 91 F.3d 389 (3d Cir. 1996) (four-factor test for approving settlements in bankruptcy)
- In re World Health Alternatives, Inc., 344 B.R. 291 (Bankr. D. Del. 2006) (Martin factors balancing value of claim vs estate)
- Cinicola v. Scharffenberg, 248 F.3d 110 (3d Cir. 2001) (363(m) interpretation and finality of § 363 sale orders)
- In re TSIC, 393 B.R. 71 (Bankr. D. Del. 2008) (trust-funded settlements to unsecured creditors not estate property)