In re: LCI Holding Company Inc. et al

Filing 27

MEMORANDUM. Signed by Judge Sue L. Robinson on 3/10/2014. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

) Chapter 11
In re:
LCI HOLDING COMPANY, INC., et al., ) Bk. No. 12-13319 (KG)
)
)
Debtors.
)

_________________________)
UNITED STATES OF AMERICA,

)

)
)
)
) Civ. No. 13-924-SLR
v.
) Civ. No. 13-1188-SLR
LCI HOLDING COMPANY, INC., et al., )
)
)
Appellees.

Appellant,

MEMORANDUM
At Wilmington this

ID-t-

day of March, 2014, having reviewed the materials

submitted in connection with appellant's appeal and motion to stay, the court concludes
that said motions 1 are denied and the appeals 2 are dismissed, for the reasons that
follow:
1. Background. On December 11, 2012 (the "petition date"), LCI Holding
Company, Inc. and certain of its subsidiaries, including LifeCare Holdings, Inc.
(collectively the "debtors"), filed petitions for relief under chapter 11 of the Bankruptcy

1

D.I. 2 & 13 in lead case, In re: LCI Holding Company, Inc., Civ. No. 13-924-SLR
(D. Del. filed May 23, 2013).
2

D.I. 1 in lead case. D. I. 1 in member case, In re: LCI Holding Company, Inc.,
Civ. No. 13-1188-SLR (D. Del. filed July 5, 2013).

Code in the United States Bankruptcy Court for the District of Delaware (the
"bankruptcy court"). (D.I. 22 JA0001-0003) The request for joint administration of the
cases was granted. In re LCI Holding Company, Inc., Case No. 12-13319-KG. (ld. at
JA0003)
2. On the petition date, the debtors filed a motion seeking, among other things,
to sell substantially all of their assets. 3 (Id. at JA0001) The debtors and their advisors
conducted an extensive marketing process beginning in June 2012. (ld. at JA0004-5)
However, during the prepetition marketing process, the only bid received for debtors'
assets was a credit bit made by Hospital Acquisition LLC (the "purchaser"). (/d. at
JA0006) Thereafter, the postpetition marketing process was conducted consistent with
the bankruptcy court's approved bidding procedures. (/d. at JA0376-0377) The
debtors did not receive any other bids. The scheduled auction was cancelled and the
purchaser was selected by default as the successful bidder. (/d. at JA0372)
3. On April 4, 2013, the bankruptcy court held a hearing to consider, among
other things, the debtors' sale motion. (ld. at JA0416) Appellant United States, on
behalf of the Internal Revenue Service, filed opposition and argued against sale at the
hearing. Appellant's objection to the sale was "that no provision was made for the
payment of any part of the substantial tax liability that [would] accrue as a result of this
sale, despite the fact that provisions [were] made for payment of other claims, both
other administrative claims that would be junior, including those of unsecured creditors."

3

"The debtors' prepetition restructuring efforts, including attempts to reach terms
of a consensual plan of reorganization with the prepetition lenders, exhausted all
possibilities to reduce the company's over-leveraged capital structure and maximize
value." (ld. at JA0378)

2

(/d. at JA0438 - 0439) Moreover, appellant asserted that the provisions of the proposed

sale conflicted with the provisions of 11 U.S.C. § 1129. (/d. at JA0439) Appellant
requested that, if the sale were approved, the court order the pro rata distribution of
administrative claims.
4. At the close of the hearing, the bankruptcy court overruled appellant's
objections and entered the order authorizing the sale (the "sale order") of debtors'
assets, including all of the debtors' cash, to the purchaser pursuant to an Asset
Purchase Agreement, dated December 10, 2013 (the "APA"). (/d. at JA0518) In so
doing, the bankruptcy court concluded:
The fact of the matter is that I have to analyze this under Section
363 today, that we're not here on a confirmation of a plan. We're
here on a sale of all of substantially all of the assets. It is not
unfamiliar to this court that a case proceed this way.
Your situation is unusual., but looking at this motion, I do see a
sound business purpose. Not just the continuation of these
businesses as a going concern, not just the importance of it to
the patients and to the communities in which these hospitals exist
and do business, but there is an assumption of operating liabilities.
There are a number of sound business purposes. And as far as
the other tests that we analyze in a sale it has clearly been proposed
in good faith. There is no motion to dismiss or convert these
cases. And I think that it is in the - certainly in the best interests of
debtors' estate that the court approve the sale, and I'm going to
approve the sale, and what will happen in your case to your claimthere may be some remedies that you will be able to perceive in
the coming days that I don't want to be suggesting, but you will
be, at some point, a claimant, and can pursue your remedies as
such.
(/d. at JA0466-0467)

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5. On April17, 2013, appellant appealed the sale order entered on Apri14,
2013. 4 (/d. at JA0643) On April 22, 2013, appellant filed a motion for a stay of the sale
order to the "extent necessary to continue to stay disbursement of the escrowed funds
set forth in the APA, and, if the proposed settlement with the unsecured creditors [were]
approved, to add those settlement funds to the escrow." 5 (/d. at JA0650)
6. On May 28, 2013, the bankruptcy court held a hearing to consider, among
other matters, appellant's objections to the sale order and the terms of the settlement.
(/d. at JA069) The bankruptcy court rejected appellant's arguments, finding that the

settlement proceeds were not property of the debtors' estate. (/d. at JA0765) Although
the court granted the motion to approve settlement, the parties agreed that the funds
(sought by appellant) would be held in trust until the hearing on the stay motion. 6 (/d. at
JA0768) Appellant filed an appeal of this second bankruptcy court's order. 7
7. On June 11, 2013, the bankruptcy court held a hearing on appellant's motion
to stay, which was opposed. (/d. at JA0785) Appellant asserted that if the appeals
were successful then it would be entitled to a portion of its administrative claim. (/d. at

4

ln re: LCI Holding Company, Inc., Civ. No. 13-924-SLR (D. Del. filed May 23,
2013) (D.I. 1).
5

Aithough initially requesting to stay the sale, at the June 11, 2012 hearing,
appellant limited the requested relief to a stay of disbursements from the escrows. (/d.
at JA0791)
6

On May 31, 2013, the sale closed.

7

1n re: LCI Holding Company, Inc., Civ. No. 13-1188-SLR (D. Del. filed July 5,
2013) (D.I. 1). Appellant's motion to consolidate the two cases was granted on July 24,
2013. (/d. at 5)

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JA0792) Following extensive argument, the court concluded that appellant failed to
satisfy the requirements for a stay. More specifically:
Well, I think the issue again turns on - it begins and it ends with the
court's determination that these funds are not property of the estate,
and there's been no proof to the contrary [as was pointed out] that
we had oversecured creditors who, therefore, weren't entitled to all
of the funds that they received with the estate for distribution in
accordance with - the bankruptcy code. That is not the case we
have here. This was a contract, and the funds belong to the
purchasers not to the debtor's estate. And as a consequence, the
first and probably most important factor that a court must weigh
in determining whether or not to grant a stay has not been not been met by appellant. And I could go through the other
tests but I think that ultimately that is the primary issue before
this court and will be before, I suppose, the appellate court. And
the court finds that there is really no record here on which to for me to base a finding that the funds being held, in effect, in
trust for other creditors, for other parties and specifically
pursuant to a contract, that those are not property of the estate
and I find and, therefore, I will deny the stay.
(!d. at JA0819)

8. On July 1, 2013, appellant filed a motion to stay (0.1. 13) in this court, to
which opposition (0.1. 15, 16, 17, 21, 23, 25) and a reply (0.1. 26) have been filed.
9. Standard of review. This court has jurisdiction to hear an appeal from the
bankruptcy court pursuant to 28 U.S.C. § 158(a). In undertaking a review of the issues
on appeal, the court applies a clearly erroneous standard to the bankruptcy court's
findings of fact and a plenary standard to that court's legal conclusions. See Am. Flint
Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). With

mixed questions of law and fact, the court must accept the bankruptcy court's "finding of
historical or narrative facts unless clearly erroneous, but exercise[s] 'plenary review of
the [bankruptcy] court's choice and interpretation of legal precepts and its application of

5

those precepts to the historical facts."' Mellon Bank, N.A. v. Metro Communications,
Inc., 945 F.2d 635, 642 (3d Cir. 1991) (citing Universal Minerals, Inc. v. C.A. Hughes &

Co., 669 F.2d 98, 101-02 (3d Cir. 1981)). The district court's appellate responsibilities
are further informed by the directive of the United States Court of Appeals for the Third
Circuit, which effectively reviews on a de novo basis bankruptcy court opinions. In re
Hechinger, 298 F.3d 219, 224 (3d Cir. 2002); In re Telegroup, 281 F.3d 133, 136 (3d

Cir. 2002).
10. A party moving for a stay pending appeal has the burden of showing the
following four factors: (1) whether the stay applicant has made a strong showing that it
is likely to succeed on the merits; (2) whether the applicant will be irreparably injured
absent a stay; (3) whether issuance of the stay will substantially injure the other parties
interested in the proceeding; and (4) where the public interest lies. Republic of
Philippines v. Westinghouse Elec. Corp., 949 F.2d 653,658 (3d Cir.1991) (citing Hilton
v. Braunski/1, 481 U.S. 770 (1987); see also In re Freedom Communications Holdings,
Inc., Civ. No. 09-825, 2009 WL 4506553 (D. Del. Dec. 4, 2009) at *1; In re Genesis
Health Ventures, Inc., 367 B.R. 516, 520 (Bankr.D.Del.2007). No single factor should

be considered in isolation; rather, the court must balance and weigh all relevant factors.
See In re Calabria, 407 B.R. 671, 678 (Bankr. W.O. Pa.2009) ("[F]ailure to satisfy any

one of the four factors ... might not necessarily be fatal to a motion for stay pending
appeal. Rather, to determine whether a stay pending appeal is warranted, the court is to
balance each of the factors at issue and examine individualized considerations relevant
to the case.").

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11. Having considered the parties' submissions against the record at bar, the
court concludes that the controlling issue with respect to the appeal is whether the
bankruptcy court correctly found that the funds at issue were not part of debtors' estate.
From a voluminous and uncontested record supplemented by the argument and
testimony presented at several hearings, the bankruptcy court determined that the sale
was warranted and the funds at issue belonged to the purchaser not the estate. At no
time did appellant present any factual evidence to refute this finding. The court finds no
error in the bankruptcy court's application of the law to the facts of record. See In re
TSIC, Inc., 393 B.R. 71, 77 (Bankr. D. Del. 2008).
12. Similarly, in light of this conclusion, the court finds that appellant has not
demonstrated the first element required for a stay, likelihood of success on the merits.
With respect to irreparable harm, appellant contends that a stay is needed to prevent
the disbursement of funds because "seeking disgorgement after the fact could be
potentially so complicated as inequitable, or even useless." (D. I. 14 at 19) Although
appellant contends that these funds are in jeopardy, there is disagreement as to
whether there would actually be any funds were the sale to be voided. (See D.l. 17 at
14-16) The court finds this issue too speculative to weigh in appellant's favor.
13. Regarding the third element, appellant argues that "neither debtors,
purchasers nor unsecured creditors will face substantial injury if the court enters the
stay." (D.I. 23 at 19) In response, the parties advise that harm and/or insolvency will
result while awaiting an indeterminable period of time to resolve the appeal. (See e.g.,
D. I. 17, 16) The potential injuries are more than mere inconvenience that would result
by delayed payment.

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14. Finally, appellant states that the public interest is served by a stay because
the principles of the bankruptcy code would be protected. While a commendable
purpose, the court finds that the public interest is better served by allowing the estates
to be administered swiftly and efficiently and with the sale remaining in effect by the
continuation of jobs, patient care and hospital services.
15. Conclusion. Appellant has failed to demonstrate that the bankruptcy judge
erred in his April 4 and May 28, 2013 orders, either in his findings of fact or in applying
those facts to the law. Further, appellant has not established that a stay pending
appeal is warranted. An order shall issue.

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