The U.S. Court of Appeals for the Third Circuit has issued an opinion that will have a significant impact on Chapter 11 bankruptcy cases. Basically, the decision will reinforce the tendency to resolve Chapter 11 cases by what is referred to as 363 sales, as opposed to traditional reorganization plans.
The case involved a debtor described as a “leading operator of long-term acute care hospitals.” The company was deep in debt, but attempts to sell resulted in offers that would not even clear the secured debt, not to mention the more than $100 million of unsecured debt.
So instead, the debtor decided to sell itself under Section 363 of the bankruptcy code. But the only bidder to show up was a secured lender, who agreed to forgive most of the secured debt in exchange for all of the debtor’s assets. The IRS noted that the debtor was going to owe capital gains taxes on the sale, but collecting the taxes would be tough, since the debtor did not have any assets.
The creditors’ committee also expressed some concern that its constituency was going to be left without anything in the deal and questioned whether it was an appropriate use of the federal bankruptcy code. The secured lender had already agreed to pay the costs of the bankruptcy case, and agreed to make a token payment to the unsecured creditors.
Now with only the IRS objecting, the bankruptcy court approved the sale, and the appeals court upheld the bankruptcy court’s decision. The IRS argued that it was just as entitled to payment as the bankruptcy professionals and was clearly entitled to payment before general unsecured creditors.
In the opinion of the Court of Appeals for the Third Circuit, Judge Thomas L. Ambro, who is a member of the American College of Bankruptcy, explained that plans involve the distribution of bankruptcy estate assets. In this case, the payments to professionals and unsecured creditors were coming directly from the secured lender. It is a subtle distinction- but an important one. This decision will greatly affect the structuring of bankruptcy plans in the future. More importantly, it suggests flexibility in 363 sales that might not exist in traditional reorganization plans. As a result, the case is apt to lead to even more quick sales in corporate bankruptcy cases.
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If you have any questions on this topic or are in a financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade & Garcia, P.A. has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade & Garcia website at www.miamibankruptcy.com.
