Recent Third Circuit Decision Encourages 363 Sales

September 25, 2015 | Comments Off on Recent Third Circuit Decision Encourages 363 Sales
Posted by Donald F. Campbell, Jr.

A recent opinion from the U.S. Court of Appeals for the Third Circuit could encourage debtors to resolve their Chapter 11 bankruptcies through 363 sales instead of a traditional reorganization plan.

Section 363 of the bankruptcy code allows debtors to create an asset purchase agreement with the first proposed purchaser. A 363 sale, also called a “melting ice cube” sale, sets the initial purchase price and proposes a structure for the asset sale. It is considered a quick close to bankruptcy cases and is utilized when a debtor’s position is seen as getting progressively worse void of a quick sale.

The appellate court published the opinion in the case of in re: ICL Holding Company, which centered on the financial issues of a company that ran long-term acute care hospitals. ICL had previously tried to sell itself to pay off its heavy debts, but opted for a 363 sale when the traditional sale offers were not enough to pay off its secured debt.

In ICL’s case, its secured lender made the only bid, agreeing to forgive the debt for all of the debtor’s assets and offering to credit $320 million or the $355 million owed. The agreement also decreed that the lenders would pay the cost of the case. The day after the agrrement was signed, LifeCare and its 34 subsidiaries filed for Chapter 11 bankruptcy. The IRS objected, fearing ICL would owe capital gains taxes but lack the assets to repay them.

The Delaware bankruptcy court approved the sale over the IRS’ complaint, and the appellate court agreed with their ruling. Judge Thomas L. Ambro, a member of the American College of Bankruptcy who wrote the appellate court’s opinion, said that a 363 sale differs from a “gift plan,” in which a secured creditor allows some of its recovery to flow to other creditors, because the buyer in this case was a secured lender, which is allowed to distribute the debt repayment as it wishes. Whatever the lender doesn’t take for repayment is covered through regular bankruptcy rules.

The ruling suggests that for companies on the verge of bankruptcy, a 363 sale can offer increased flexibility as well as a quicker turnaround.

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