(by Dave’s iPhone)
The American Bankruptcy Institute held its 20th Annual Southeast Bankruptcy Workshop on Amelia Island last week. At the conference, we heard Prof. Michelle Harner, the Reporter for the ABI Commission Report, talk about the Commission’s recommendations regarding “structured dismissals.” That’s fitting because that is the focus of this post in Plan Proponent’s series on the plan confirmation-related recommendations in the ABI Commission Report (and, in particular, its Exiting the Case piece). In this post, we’ll wrap-up the Exiting the Case piece by covering Section G of the Report regarding “Orders Resolving Chapter 11 Cases.”
The Commission primarily focuses on “structured dismissals” as an alternative to the traditional means of exiting a case (confirmation orders, dismissal orders, and conversion orders). As the Commission explains, a structured dismissal is a “hybrid dismissal and confirmation order in that it typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third party-releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case.” They’re usually the result of settlement negotiations between the debtor and key parties in the case.
The Commission notes that structured dismissals are controversial depending on their terms (the “bells and whistles”). The Commission points to common features with structured dismissals:
- Substantially all of the debtor’s assets have been sold under Section 363.
- The debtor’s estate is reduced to cash that’s to be distributed.
- Secured creditors are undersecured and the case is administratively insolvent.
- A court-approved settlement is in place that resolves major case issues and includes third-party releases.
- The settlement provides for distributions to the secured creditor.
- There is an alternative claims-allowance process.
- Some of the sale proceeds are to be “gifted” to lower priority creditors who would likely not be entitled to those proceeds under a plan.
- The court retains jurisdiction and all prior orders survive the dismissal.
Most agree, points out the Commission, that (i) courts can issue plain dismissal orders when they’re in the best interests of creditors and the estate and (ii) the Code is silent regarding what dismissal orders can provide. Proponents of structured dismissals rely on Section 1112(b) and Section 305(a) which emphasize conversions, dismissals, and suspensions when they’re in the best interests of the debtor and creditors. Opponents of structured dismissals focus on Section 349 (which addresses the effect of a dismissal order) and stress that Section 305 is an extraordinary remedy because it’s not subject to appeal.
The Commission recognizes that structured dismissals, which are on the rise due to the increasing use of 363 sales, can facilitate efficient resolutions of Chapter 11 cases. However, the Commission believes that such efficiencies should not come at the expense of or short-circuit Bankruptcy Code creditor protections. The Commission is particularly concerned about structured dismissals that might violate the absolute priority rule, deviate from the Code’s claims allowance process, and provide third-party releases that wouldn’t be available under a plan–a concern that the Commission has expressed in other areas (see, e.g., our posts on 363 sales and 9019 settlements). Ultimately, the Commission concluded that its “recommended principles for section 363x sales should render the use of structured dismissals unnecessary.”
Therefore, the Commission recommends “strict compliance with the Bankruptcy Code in terms of orders ending the chapter 11 case,” such that a court may confirm a plan under section 1129, convert a case under section 1112, or dismiss a case (but only if the dismissal complies with, rather than works around, other applicable Code provisions).
In our experience, debtors, especially those who are forced into Chapter 11 by a single, senior creditor or who file to leverage a settlement with a single creditor, tend to forget that Chapter 11 invokes a process that encompasses all of the debtor’s creditors and parties-in-interest, not just a single creditor. Therefore, the second that debtors have a term sheet with the senior creditor, they’re ready to dismiss the case altogether without providing for the remaining, “innocent” constituencies.
In fact, debtors who aren’t coached on that point can chill settlement with the senior creditor in a number of ways (e.g., mismanaging expectations with a take-out lender who would prefer to loan over a dismissal versus a plan, underestimating the time that it will take to effectuate a settlement with the court, accepting settlement terms that are incompatible with the treatment of other claims, etc.). Thus, not only are the Commission’s recommendations good ones, but debtors should also be educated about them.