LifeCare unsecured creditors to receive distribution under settlement

By Jim Witters

Wilmington, Del., May 28 - LCI Holding Co., Inc.'s unsecured creditors will split about $3.5 million under a settlement approved May 28 during a hearing in the U.S. Bankruptcy Court for the District of Delaware.

Over objections from the U.S. Trustee's Office and the Internal Revenue Service, judge Kevin Gross approved the agreement, in which the purchaser of LCI's assets - Hospital Acquisition, LLC - will pay the settlement amount at the closing of the sale.

LCI is the parent of LifeCare Holdings, Inc.

Scott L. Alberino, representing the secured lenders and the purchaser, said his clients hope to close the sale by the end of the week or early in the week of June 3.

Hospital Acquisition was the successful bidder with a $320 million credit bid plus cash to cover administrative expenses.

Agreement terms

The terms of the approved settlement include the following:

• Avoidance actions against the unsecured creditors will be released. The committee said the releases will result in a recovery of $1.05 million to $2.45 million for general unsecured creditors, in addition to a cash distribution;

• The buyer will make a $1.5 million lump sum payment for the benefit of general unsecured creditors, except for the holders of 9¼% senior subordinated notes due 2013;

• A one-time distribution of $2 million will be made to notes trustee U.S. Bank NA for the noteholders;

• Pre-bankruptcy and post-bankruptcy secured lenders have agreed to subordinate their $35 million deficiency claim and waive any recovery from any distribution of the general unsecured creditor funds; and

• The buyer will pay an additional $150,000 of committee professional fees and indenture trustee fees and expenses.

Term sheet objections

The trustee and the IRS argued that the cash being used to fund the settlement is part of the debtors' estate and that the distribution to unsecured creditors before payment of administrative and priority claims violates the bankruptcy code.

The two parties said the asset purchase agreement and the creditors committee's objection to the bidding procedures contained language proving that the cash assets were part of the estate being acquired by Hospital Acquisition.

The committee identified unencumbered assets of the estate, then "kept them for themselves," said David L. Buchbinder, representing the trustee.

LCI attorney Bradford J. Sandler said the purchaser can use its cash in any way it chooses, and once the sale closes, the cash is no longer part of the debtors' estate.

Judge Gross found that the cash is not part of the estate and, therefore, not subject to distribution under the bankruptcy code's "absolute priority" rule, which ensures that junior creditors do not receive recoveries ahead of more senior creditors.

The committee fulfilled its function by securing a settlement for its constituents, Gross said.

The lender/purchaser has no responsibility to ensure that the estate's administrative and priority claims are paid, the judge ruled.

Christopher Williamson, representing the IRS, said his client plans to appeal the judge's ruling.

No distribution of the $3.5 million settlement money to creditors will occur until the court conducts a hearing on the IRS' motion for a delay in implementing the agreement pending the appeal.

LifeCare, a Plano, Texas-based health-care consulting and management services company, filed for bankruptcy on Dec. 11. Its Chapter 11 case number is 12-13319.

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