U.S. Supreme Court Invalidates Non-Consensual Structured Dismissal Deviating from Bankruptcy Priority Scheme
The U.S. Supreme Court ruled on March 22, 2017, in Czyzewski v. Jevic Holding Corp., that without the consent of affected creditors, bankruptcy courts may not approve "structured dismissals" providing for distributions that "deviate from the basic priority rules that apply under the primary mechanisms the [Bankruptcy] Code establishes for final distributions of estate value in business bankruptcies."
Due to the significant time and costs associated with confirming a liquidating Chapter 11 plan or converting the case to Chapter 7 following a sale of substantially all of a debtor's assets under section 363(b) of the Bankruptcy Code, structured dismissals of Chapter 11 cases have become a popular exit strategy. A structured dismissal is conditioned upon certain elements agreed to in advance by stakeholders and then approved by the court, as distinguished from an unconditional dismissal of the Chapter 11 case ordered by the court under section 1112(b).
In In re Jevic Holding Corp., the Third Circuit ruled that "absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition." The court also held that "bankruptcy courts may approve settlements that deviate from the priority scheme of [the Bankruptcy Code]," but only if the court has "specific and credible grounds" to justify the deviation. The Third Circuit approved a structured dismissal of a Chapter 11 case that incorporated a settlement under which unsecured creditors would receive a distribution from secured creditors' collateral, but certain holders of priority wage claims would receive nothing. "Dire circumstances" justified the remedy—the debtor had no prospect of confirming a plan, and conversion of the case to Chapter 7 would mean that only secured creditors would recover anything.
The Supreme Court reversed. Writing for the 6–2 majority, Justice Breyer stated that "we would expect to see some affirmative indication of intent if Congress actually meant to make structured dismissals a backdoor means to achieve the exact kind of nonconsensual priority-violating final distributions that the Code prohibits in Chapter 7 liquidations and Chapter 11 plans." The majority found no expression of any such intent in the Bankruptcy Code, nor did it find any "significant offsetting bankruptcy-related justification" that would warrant a violation of the ordinary priority rules in the case before it. Thus, it concluded that Congress did not authorize a "rare case" exception to the ordinary priority rules.
However, Justice Breyer wrote, "[w]e express no view about the legality of structured dismissals in general."
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