Opinion ID: 2929108
Heading Depth: 2
Heading Rank: 2

Heading: LifeCare Files for Bankruptcy

Text: LifeCare and its 34 subsidiaries, which together operated 27 long-term acute care hospitals in 10 states and had about 4,500 employees, filed for bankruptcy one day after entering into the Asset Purchase Agreement.3 Among the 2 For convenience, we refer to the buyer interchangeably as the secured lender group, the secured lenders, or simply the purchaser. 3 The cases were subsequently consolidated for procedural purposes. The separate corporate identities of LifeCare’s subsidiaries are irrelevant to this appeal. 7 company’s first requests was permission to sell substantially all of its assets through a Court-supervised auction under 11 U.S.C. § 363(b)(1). After receiving the go-ahead from the Bankruptcy Court, LifeCare marketed its assets to over 106 potential strategic and financial counterparties. In the end, however, the secured lender group’s $320 million credit bid remained the most attractive offer. According to the testimony of LifeCare’s advisor from Rothschild, Inc., many of the putative bidders were concerned with “reimbursement issues and the challenging regulatory environment facing the long-term acute care industry.” Hence they were unwilling to offer LifeCare an amount commensurate with the debt relief put forward by the secured lenders. Though the secured lender group was selected by default as the successful bidder, the sale was not yet a done deal. Two important players in the bankruptcy case, the Committee and United States Government—neither of which would recover anything if the Court approved the sale— objected to the asset transfer. The former criticized it as a “veiled foreclosure” that would leave the bankruptcy estate so insolvent even administrative expenses would not be paid. The Government, for its part, argued that the sale would result in capital-gains tax liability estimated at $24 million, giving it an administrative claim that would go unpaid. This was unfair, it maintained, because under the proposed sale arrangement equally situated administrative claimants— primarily the bankruptcy professionals—would get paid if the sale went through. As is not uncommon, however, and before its objections to the sale reached resolution, the Committee struck a deal with the secured lender group. In exchange for the Committee’s promise to drop its objections and support the sale, the secured lenders agreed to deposit $3.5 million in trust for the benefit of the general unsecured creditors. The 8 compromise was embodied in a Term Sheet (which we refer to as the “Settlement Agreement” or “Settlement”) that was submitted to the Bankruptcy Court together with the sale materials, but later resubmitted in a stand-alone motion for the Court’s approval.