A “fourth” exit strategy of a structured dismissal in Chapter 11 continues to grow as a popular option for companies after they conduct a §363 asset sale, according to an article in the May issue of ABI Journal.
Lisa Sommers Gretchko, attorney with Howard & Howard Attorneys and vice president of publications for the American Bankruptcy Institute, and Paul R. Hage, a partner with Jaffe Raitt Heuer & Weiss and a board member of the ABI, wrote the article, which is entitled “Nuts and Bolts of the Structured Dismissal of a Chapter 11 Case.”
“For decades, the conventional wisdom was that no matter why a business filed for chapter 11, there were only three ways for it to exit: (1) confirmation of a plan (which could include a liquidating plan); (2) conversion to chapter 7; or (3) dismissal,”Gretchko and Hage wrote. “Increasingly, however, chapter 11 cases are filed for the purpose of conducting so-called ‘free and clear’ sales of substantially all of a business’s assets pursuant to §363.”
Whereas traditional dismissal normally returns a debtor to its pre-petition state, a structured dismissal extends certain benefits obtained during the bankruptcy case post-dismissal without the cost or delay associated with confirming a liquidating plan, according to Gretchko and Hage.
“Structured-dismissal orders have been characterized as a hybrid dismissal and confirmation order,” they wrote.
Although the Supreme Court reversed the approval of the structured-dismissal order in Jevic because it violated the Bankruptcy Code’s priority scheme without the consent of the adversely impacted creditors, the court’s language in Jevic suggests that a structured dismissal might be approved where such defects do not exist, according to Gretchko and Hage. In light of this decision, Gretchko and Hage recommend the following tips to practitioners considering structured-dismissal requests:
- The structured-dismissal order should contain a finding that “cause” exists for the structured dismissal, and the record should describe the circumstances creating such cause.
- Especially when the structured dismissal follows a 363 sale or court-approved settlement, the structured-dismissal order should provide that all orders entered in the bankruptcy case continue in full force and effect post-dismissal, and that the bankruptcy court retains jurisdiction relating to the implementation of the structured-dismissal order or any other order entered in the Chapter 11 case.
- The structured-dismissal order should not be entered until after the bar date(s) for administrative expenses (including professionals’ fees) and unsecured claims has passed, and the universe of allowed expenses and claims has been determined pursuant to a claims-reconciliation process that is reasonable under the circumstances.
- In order to satisfy Jevic, any distribution contemplated under the order should comply with the absolute priority rule or, alternatively, note that adversely impacted creditors have consented to any deviation from the absolute priority rule.
- Some courts require that the structured-dismissal order list the proposed distributions to be made in a manner similar to a final report in a Chapter 7 case (e.g., the claim amount and the amount to be distributed on that claim), and give parties notice and time after the structured-dismissal order in which to object to the order itself.
- The order should appoint a responsible person to supervise the distribution process and should provide that any funds remaining after the completion of the final distribution may be distributed pro rata to creditors in a subsequent distribution.
- The bankruptcy court will not dismiss the bankruptcy case until the completion of all the conditions/tasks set forth in the structured-dismissal order.
- In some cases, the debtor or other stakeholders will ask for various exculpations and releases for debtor and nondebtor parties in the dismissal order.
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