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Structured Dismissals Remain Uncertain Despite Third Circuit Ruling

Structured Dismissals Remain Uncertain Despite Third Circuit Ruling

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It can surprise many laypeople how expensive a bankruptcy can be for a debtor, especially in complicated chapter 11 proceedings. As creditors have no desire to see recoverable assets wasted in lengthy courtroom wrangling, Bankruptcy Code section 363(b) has provided an expedited process for selling a debtor’s assets. Unfortunately, even this process can become bogged down, especially when the debtor’s final remaining assets require chapter 7 conversion or a chapter 11 plan for liquidation. In response, bankruptcy courts began granting “structured dismissals,” in which debtors and creditors come to an agreement, approved by the court, to end the case. There remains, however, a problem with structured dismissals: they are not explicitly allowed by the Bankruptcy Code.

Most judges that have upheld structured dismissals have done so based on readings of sections of the Bankruptcy Code that prioritize “the best interests of creditors and the estate” while offering “dismissal or suspension” as a reasonable alternative to other processes if it serves those best interests. However, the US Department of Justice, via its Office of the US Trustee, has criticized structured dismissals frequently in the courts, pointing to sections of the Bankruptcy Code that seem to specifically forbid these actions and present other challenges. Most recently, the issue came to a head in the Third Circuit Court of Appeals with In re Jevic Holding Corp., which offers insights into the use of structured dismissals and how they impact the Bankruptcy Code’s claim priority scheme.

The chapter 11 bankruptcy of Jevic Transportation, Inc., ended in a structured dismissal that did not include a settlement with the company’s former employees, who had claimed damages through the Worker Adjustment and Retraining Notification (WARN) Acts. In the Third Circuit, the structured dismissal was affirmed in a split decision that revealed an important divide. Writing for the majority, Judge Thomas M. Hardiman noted that creditor priority in structured dismissals had been treated in opposite ways during similar cases in the Fifth and Second Circuits, and chose to side with the Second. He noted that flexibility can be more important in bankruptcy courts than rigidity, and because the employees would have received nothing had Jevic followed the rules and converted to chapter 7 or confirmed a chapter 11 liquidation plan, the structured dismissal was acceptable, if “a close call.” The dissenting Judge Anthony J. Scirica agreed with the Office of the US Trustee, declaring that the dismissal’s disregard for proper accounting of priority undermines “the goals of the Bankruptcy Code.”

The Third Circuit’s decision is a positive step for proponents of structured dismissals, though other parties have continued to lobby Congress to alter the Bankruptcy Code to include these dismissals explicitly. Meanwhile, the employees of Jevic remain unconvinced; they have petitioned for an en banc rehearing of the Third Circuit ruling in hopes of receiving a more clear answer on the subject.

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