The Fate of Structured Dismissals in Chapter 11 Bankruptcy Cases

Bankruptcy Exit Strategies in Chapter 11 Bankruptcy Cases Following the Decision of the Supreme Court in Jevic

Business bankruptcy lawyers carefully watched the case of Czyzewski v.  Jevic Holding Corp. as it wended its way from a bankruptcy court in Delaware, through the Court of Appeals for the Third Circuit and on to the Supreme Court.  At issue in the case was whether a bankruptcy court could enter a dismissal order that provides for distributions in defiance of the priority provisions of the Bankruptcy Code without the consent of affected creditors.  Justice Breyer, writing for the majority, explained that the Court’ simple answer to this complicated question is “no.” Czyzewski v. Jevic Holding Corp., 580 U.S. ____, No 15-649, slip op. at 11 (Mar. 22, 2017).

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Our simple answer to this complicated question is “no.”[/perfectpullquote]Justice Breyer on Chapter 11 Bankruptcy Structured DismissalsNotwithstanding the clarity and simplicity of that answer, the holding of Jevic does not spell the end of structured dismissals or even structured dismissals that depart from the priorities accorded to creditors under the Bankruptcy Code. Rather, Jevic prohibits only orders dismissing chapter 11 cases which provide for a distribution that departs from the priorities set out in the Bankruptcy Code without the consent of the side-stepped creditors with impaired claims.

The Court found important that the two other paths for resolution of a chapter 11 bankruptcy case, plan confirmation or conversion, expressly prohibit courts from circumventing the waterfall of claim priorities.  The absolute priority rule in section 1129(b)(2) prohibits cramdown of a chapter 11 plan upon impaired creditors if the holders of junior claims or interests are to receive anything under the plan.  In a case converted to a case under chapter 7, the trustee is charged with distributing property in keeping with the priority provisions of the Bankruptcy Code.  Section 726 tracks the absolute priority rule scheme set out for cases under chapter 11.

Structured Dismissal Orders in Chapter 11 Bankruptcy Cases After Jevic

We expect that many bankruptcy courts will be inclined to read Jevic narrowly and apply its bar only to those cases where parties seek structured dismissal orders that dishonor the waterfall arrangement of priority of distributions in bankruptcy cases when the adversely affected creditors object to that treatment.  We are certain that, irrespective of how structured dismissal jurisprudence may develop after the Jevic case, business bankruptcy lawyers will continue to press the envelope in terms of creative resolutions in commercial bankruptcies.


Comments are closed.