Opinion ID: 2929108
Heading Depth: 4
Heading Rank: 1

Heading: The Settlement Sums

Text: The Bankruptcy Court held that, because the settlement monies were paid directly to the unsecured creditors from a trust funded by the purchaser and not given in exchange for any estate property, those funds were not property of LifeCare’s estate. The Government contends the Court erred because the secured lenders’ payment to the Committee was in substance an increased bid for LifeCare’s assets. In other words, the purchaser “agreed to a price it was willing to pay to acquire the debtors’ assets,” but “later had to increase its offer . . . to secure its successful bid.” Gov’t Br. at 36. Thus, the argument goes, the settlement sums should be treated as estate property. We are not persuaded. Though it is true that the secured lenders paid cash to resolve objections to the sale of LifeCare’s assets, that money never made it into the estate. Nor was it paid at LifeCare’s direction. In this context, we cannot conclude here that when the secured lender group, using that group’s own funds, made payments to unsecured creditors, the monies paid qualified as estate property. For these points we find instructive In re TSIC, 393 B.R. 71 (Bankr. D. Del. 2008). There, as here, the unsecured creditors launched objections to the winning bid at a § 363 auction. See id. at 74. Before the sale closed, the purchaser and creditors’ committee agreed that the latter would drop its objection if the former funded a trust account for the benefit of unsecured creditors. See id. The United States trustee, relying principally on In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005), contended that the settlement violated the proscription against paying lower-statured creditors before higher ones. But the Bankruptcy Court disagreed. It held that, in contrast to Armstrong—which dealt with a gift of estate property from a senior creditor to a junior creditor over an intermediate creditor’s objection—the 18 purchaser’s “funds [were] not proceeds from a secured creditor’s liens, do not belong to the estate, and will not become part of the estate even if the Court does not approve the Settlement.” In re TSIC, 393 B.R. at 77. And the trustee presented no evidence that the settlement funds “were otherwise intended for the Debtor’s estate.” Id. at 76. All are true here: the settlement sums paid by the purchaser were not proceeds from its liens, did not at any time belong to LifeCare’s estate, and will not become part of its estate even as a pass-through. Moving to the Government’s next argument, we are similarly unpersuaded by its reliance on the Committee’s purported concession in its settlement-approval motion that the parties’ compromise “represents an agreement between the Buyer, the Lenders and the Committee to allocate proceeds derived from the sale.” App. at 519 (emphasis added). Like the Bankruptcy Court, we decline to elevate form over substance and give legal significance to the Committee’s description of the settlement funds. Our focus is on whether the settlement proceeds were given as consideration for the assets bought at the § 363 sale. The evidence we have leads us to conclude they were not.