"Straight" Dismissal Of Chapter 11 Case Did Not Violate Jevic's Prohibition Of "Structured Dismissals" That Do Not Conform With Bankruptcy Code's Priority Scheme

• Published date: 27 July 2023
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Jones Day
• Author: Mr Oliver Zeltner and Mark Douglas

In Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), the U.S. Supreme Court held that the Bankruptcy Code does not allow bankruptcy courts to approve distributions to creditors in a "structured dismissal" of a chapter 11 case that violate the Bankruptcy Code's ordinary priority rules without the consent of creditors. However, because the Court declined to express any "view about the legality of structured dismissals in general," many open questions remain regarding the structured dismissal mechanism.

A bankruptcy appellate panel for the Ninth Circuit ("BAP") recently addressed structured dismissals in In re Pourteymour, 2023 WL 2929323 (B.A.P. 9th Cir. Apr. 12, 2023). The BAP affirmed a bankruptcy court order granting a "straight dismissal" of a chapter 11 case, finding that, notwithstanding the debtor's pledge on the record to pay some, but not all, unsecured creditors after dismissal of his bankruptcy case, the court's dismissal order complied with all applicable provisions of the Bankruptcy Code.

Structured Dismissals

In a typical chapter 11 case, a plan of reorganization or liquidation is proposed; the plan is confirmed by the bankruptcy court; the plan becomes effective; and, after the plan has been substantially consummated and the case has been fully administered, the court enters a final decree closing the case. Because chapter 11 cases can be prolonged and costly, prepackaged or prenegotiated plans and expedited asset sales under section 363(b) of the Bankruptcy Code have been increasingly used as methods to short-circuit the process, minimize expenses, and maximize creditor recoveries. In chapter 11 cases primarily involving one, or just a few, real estate assets, bankruptcy courts also sometimes authorize nonjudicial foreclosure, enabling a creditor to take title to an estate asset outside of a chapter 11 plan.

After a bankruptcy court approves the sale of substantially all of a chapter 11 debtor's assets under section 363(b) of the Bankruptcy Code (or a nonjudicial foreclosure of real estate assets outside of a chapter 11 plan), three options are generally available to deal with the debtor's vestigial property and claims against the bankruptcy estate, and to wind up the bankruptcy case. Namely, the debtor can propose and seek confirmation of a liquidating chapter 11 plan, the case can be converted to a chapter 7 liquidation, or the case can be dismissed. The first two options commonly require significant time and administrative costs.

Yet outright dismissal of a chapter 11 case may not be the best course of action either, for several reasons. Section 349(b) of the Bankruptcy Code provides that, "[u]nless the court, for cause, orders otherwise," the dismissal of a bankruptcy case generally reinstates the status quo ante by, among other things, reinstating any pre-bankruptcy custodianship, vacating any bankruptcy court order avoiding a transfer or lien, and revesting property of the estate in the debtor. Dismissal of a case is intended to "undo the Bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case." H.R. Rep. No. 95-595, 338 (1977).

However, because conditions may have changed such that a complete restoration of the status quo is difficult or impossible, section 349(b) of the Bankruptcy Code permits the bankruptcy court, "for cause," to modify the ordinary "restorative consequences" of unconditional dismissal of the chapter 11 case. Jevic, 137 S. Ct. at 979. This power is particularly relevant in cases where the debtor's assets have been sold in a section 363(b) sale or foreclosed upon by a creditor. See H.R. Rep. No. 95-595, 338 (1977) (the intent "to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case ... does not necessarily encompass undoing sales of property from the estate to a good faith purchaser").

Such a conditional dismissal'or "dismissal with strings"'is commonly referred to as a "structured dismissal," which has been defined as:

a hybrid dismissal and confirmation order in that it typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third party-releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case. These additional provisions'often deemed "bells and whistles"'are usually the result of a negotiated and detailed settlement arrangement between the debtor and key stakeholders in the case.

Final Report and Recommendations of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 (2014), p. 270.

Typical Terms

Among the provisions commonly included in bankruptcy court orders approving structured dismissals are:

• Expedited procedures to resolve claims objections;
  
  
• Provisions specifying the manner and amount of distributions to creditors;
  
  
• Releases and exculpation provisions that might ordinarily be approved as part of a confirmed chapter 11 plan;
  
  
• Senior creditor carve-outs and "gifting" provisions whereby, as a quid pro quo for a consensual structured dismissal, a senior secured lender or creditor group agrees to carve out a portion of its collateral from the sale proceeds and then "gift" it to unsecured creditors; and
  
  
• Provisions that, notwithstanding section 349(b) of the Bankruptcy Code, prior bankruptcy court orders survive dismissal and the court retains jurisdiction to...