The Third Circuit sanctions both structured dismissals and gift plans.
Structured dismissals were approved in the appeals court in May by a divided panel writing about the aborted reorganization of Jevic Holding Corp. In a structured dismissal, the chapter 11 case is dismissed, but property is not distributed in accord with priorities in the Bankruptcy Code.
Unanimously, the appeals court approved gift plans on Sept. 14 when Circuit Judge Thomas Ambro wrote the opinion upholding a settlement in the attempted reorganization of LCI Holding Co. In a gift plan, the secured lender makes a payment with its own money directly to unsecured creditors, even though creditors with higher priority go unpaid.
Judge Ambro, who was a bankruptcy lawyer before ascending to the bench in 2000, reviewed a case in which the secured lender bought all of the debtor’s property in a credit bid, exchanging $320 million of its $355 million in secured debt for title to the assets.
To settle the unsecured creditors’ committee’s objection to the sale, the buyer agreed to put its money in escrow to cover professional fees alongside an additional $3.5 million of its money earmarked exclusively for unsecured creditors. The U.S. government objected, citing its $24 million administrative tax claim arising from the sale of the property.
The government contended that the money in escrow could not be distributed in violation of the Code’s priorities. The Delaware bankruptcy judge disagreed and approved the sale. A Delaware district judge affirmed in March 2014. The government went to the Third Circuit, held oral argument on the same day in January as Jevic, and lost again.
Before addressing the gift question, Judge Ambro first held that the appeal was not moot despite Section 363(m), which precludes setting aside a sale when there was no stay pending appeal. Judge Ambro said that section only protects a good faith purchase from having the sale clawed back, adding that Section 363(m) does not moot every term in a sale agreement.
Proceeding to the merits, Judge Ambro reasoned that the $3.5 million never became property of the estate and thus was eligible for distribution contrary to the rules of priority.
Although he said that the money for professional fees presented a more difficult question, he similarly concluded that the money never was and never became estate property.
The opinion does not deal with the argument that the creditors’ committee was settling a claim against the lender that was estate property, thus turning settlement proceeds into property of the estate. The LCI opinion does not cite Jevic.