In Jevic, the Supreme Court only addressed a particular feature (a “gifting” distribution that violated the Bankruptcy Code’s absolute priority rules) of a structured dismissal order. Jevic merely held that structured dismissals cannot be approved if distributions are made to creditors in violation of the Bankruptcy Code’s priority rules and the affected creditors have not consented. Id. at 983–7. Jevic is not a death-knell for structured dismissal. In fact, the Supreme Court noted that structured dismissals were “increasingly common” and “express[ed] no view about the legality of structured dismissals in general.” Id. at 979 (quoting American Bankruptcy Institute Commission To Study the Reform of Chapter 11, 2012–2014 Final Report and Recommendations 270, n. 973 (2014).
According to a recent survey, in the five years since the Jevic there have been at least 21 bankruptcy cases involving a structured dismissal. See Dennis J. Connolly & Christopher K. Coleman, The Increasing Utilization (and Challenges) of Structured Dismissals as an Alternative Disposition of Bankruptcy Cases, 2021 Ann. Surv. of Bankr.Law 1 (). In nearly all of those cases (17 out of 21), parties in interest objected to the motion to dismiss. A majority of these objections focused on the treatment of the objector’s individual claim and not the propriety of the structured dismissal itself. In each case where the U.S. Trustee filed an objection, the trustee challenged the legitimacy of a structured dismissal as opposed to targeting specific statutory infractions. Nonetheless, in 18 of those 21 cases, the bankruptcy court entered the structured http://paydayloansohio.net/cities/kettering dismissal order. That is an impressive record and provides a strong and credible basis to push for structured dismissals in the right circumstances.
In sum, the trend in favor of structured dismissals is a positive development for private credit lenders and adds a practical and efficient tool to their in-court restructuring tool box
Section 305(a)(1) provides that the “court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if-the interests of creditors and the debtor would be better served by such dismissal or suspension”
Section 1112(b) provides that “on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.”
The Plan Path
First, the Bankruptcy Code contemplates dismissal of a chapter 11 case in Section 305(a) and 1112(b) of the Bankruptcy Code. Each statute affords the bankruptcy court wide discretion to determine whether there is “cause” to dismiss the case and whether the interests of debtor and creditors are best served by dismissal. The argument that a dismissal order must be “plain vanilla” and simply dismiss the bankruptcy case ignores the fact that many bankruptcy court orders (like DIP orders and sale orders) include conditions that go beyond the general language in the applicable authorizing statute. Bankruptcy courts enjoy discretion to craft provisions to an order beyond a simple dismissal. The key is to restrict the order’s extra provisions to matters otherwise authorized under the Bankruptcy Code. Section 105(a) of the Bankruptcy Code permits the court to “issue any order … that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code. Thus, the conditions in a dismissal order are authorized when they are “necessary or appropriate” to implement Sections 305(a) and/or 1112(b) of the Bankruptcy Code.