Structured Dismissals are Ripe for Mediation – But are They a Bridge Too Far?

By Donald L Swanson

A “structured dismissal” of a Chapter 11 bankruptcy involves a settlement agreement among major parties that liquidates substantially all of debtor’s assets, distributes the proceeds, grants releases, and dismisses the bankruptcy case—all as a negotiated package deal.

Most everyone will agree that a bankruptcy settlement with the following terms is a good thing and has become standard bankruptcy procedure:

–promptly turning debtor’s assets into cash (e.g., through a sale of assets or settlement of a lawsuit), followed by:

–distributing sale proceeds to claims of creditors under the Bankruptcy Code’s priority scheme.

A structured dismissal involves all of that.  Plus, it adds such bells and whistles as:

(i) carving-out and gifting portions of a secured creditor’s lien to unsecured creditors,

(ii) releasing the gifting party,

(iii) expediting the claims resolution process, and

(iv) dismissing the bankruptcy.

Will structured dismissals become generally accepted procedures in bankruptcy – just like standard sale and distribution processes?

–A structured dismissal is quick and efficient and maximizes recoveries for creditors.  Compared to the delays and costs of a plan confirmation process, these benefits are huge.

–But not everyone approves of structured dismissals.  Some believe such dismissals go too far in skirting protections established by the Bankruptcy Code.

A Structured Dismissal Example

A recent example is the Third Circuit’s In re Jevic Holding Corp. ruling that approves a structured dismissal — the U.S. Supreme Court granted certiorari on June 28, 2016, and held oral argument on December 7, 2016: we await a ruling.

The Appellant’s Petition for a Writ of Certiorari, in the In re Jevic  case contains an appeal-to-authority argument.  The Petition cites the Final Report and Recommendations of the American Bankruptcy Institute’s Chapter 11 Commission, that:

–“debtors should be able to sell all or substantially all of their assets under section 363(b) when that is the best and most efficient way to maximize value and potentially rehabilitate the business”;

–but structured dismissals are not recommended because they lack “strict compliance with the Bankruptcy Code” for “ending the chapter 11 case.”

It will be interesting to see how the Supreme Court handles the In re Jevic appeal.  Will the Supreme Court address the structured dismissal issue at all?  And if so, will it:

–approve the structured dismissal?

–or decide that a structured dismissal is a bridge too far?

Negotiations for a structured dismissal would be a perfect context for utilizing mediation.