For some time chapter 11 debtors have increasingly used bankruptcy to sell assets and cease operations through what is easily the cheapest way to exit a chapter 11—dismissal. The concept to which I am referring is a certain kind of voluntary dismissal, known as a ‘structured dismissal,’ where a debtor effectively winds up its business in a dismissal order by, among other things, distributing all its assets. Doing so avoids the administrative expense of enduring the chapter 11 plan process. Typically, a chapter 11 debtor does not find itself in such a fortunate position unless it has struck a deal with and therefore, obtained the consent of most creditors.
Historically, structured dismissals have flown under the radar, or when scrutinized have passed muster, where the dismissal conditions treated creditors in accordance with the priority scheme laid out by the Bankruptcy Code. See e.g., In re Buffet Partners, Case No. 14-30699, 2014 WL 3735804, *3 (Bankr. N.D. Tex. July 28, 2014). It’s easy to see why a structured dismissal with distributions according to the ‘absolute priority rule’ might be “in the best interests of creditors and the estate,” the statutory test under section 1112(b)(2). The debtor and its estate are saved the time and the administrative expense of the Plan and Disclosure Statement process, thereby enhancing creditor recovery. However, in some instances, senior creditors have opted to permit some of the proceeds of their collateral to be directed to a junior class in order to gain support or at least acquiescence from that class. In the formal Plan context, this is known as a “Gift Plan” and that was what was attempted by the debtor in Czyzewski et. al. v. Jevic Holding Corp., Docket No. 15-649 (slip opinion) (Mar. 22, 2017), 580 U.S. __ (2017).
The debtor in Jevic attempted to violate the Bankruptcy Code’s priority scheme for distributions to creditors in its structured dismissal. This led to the Supreme Court’s recent 6-2 decision, which held that a structured dismissal cannot violate the Bankruptcy Code’s ‘absolute priority rule’ without the consent of affected creditors.
Specifically, the Jevic dismissal was impermissible because it paid certain general unsecured claims before paying other unsecured wage-claims in full. The ‘absolute priority rule’ provided that the wage-claims were senior to the general unsecured claims pursuant to section 507 of the Bankruptcy Code. What is interesting about the facts that led to this situation is that the debtor and its attorneys in Jevic worked diligently to obtain settlements with both the general unsecured creditors and with the wage-claimants. While impressive, this consensus-building fell short because the senior wage-claimants didn’t agree with the deal struck with the junior unsecured creditors. While not conclusive from the Supreme Court decision, in the interim it seems clear that structured dismissals are still permissible so long as they don’t run afoul of the ‘absolute priority rule.’ It is also possible, although not certain, that a debtor can complete a structured dismissal that upsets the priority scheme of the Bankruptcy Code, if all parties affected consent.
The Jevic opinion can be found here.