Traditional “exit strategies” for a company filing for bankruptcy include a debt-restructuring or liquidating plan under chapter 11, a going-concern sale under section 363 of the Bankruptcy Code, or a liquidation under chapter 7. Recently there has been an increasing use of “structured dismissals” as an alternative strategy for exiting bankruptcy. A company may opt for a structured dismissal when it has no assets remaining to reorganize or sell under a chapter 11 plan and a conversion of the case to a liquidation under chapter 7 would not be cost-effective.
While structured dismissals have been around for years, their use has been controversial, largely because they ignore the liquidation options expressly built into the federal bankruptcy code. Further, in a 2017 decision, Czyzewski et al. v. Jevic Holding Corp., 137 S. Ct. 973, the Supreme Court ruled that a structured dismissal that violated the Bankruptcy Code’s distribution priority provisions was impermissible absent the consent of the adversely affected creditors.
Jevic added to the uncertainty surrounding the use of structured dismissals. Nonetheless, over the last year structured dismissals have seen growing acceptance as a legitimate and useful option by which businesses with limited remaining assets and operations may exit bankruptcy. These cases comport with the priority scheme set forth in sections 507 and 726 of the bankruptcy code and therefore do not run afoul of the provisions of Jevic. For example, the Bankruptcy Court for the Eastern District of Virginia recently approved a structured dismissal in In re PSI Liquidation, Inc. f/k/a Paper Source, Inc.
The debtors in the Paper Source case filed for bankruptcy to facilitate a sale of their assets and to minimize their store lease obligations. The debtors were successful in selling most of their assets, which allowed them to repay substantial secured debt and to assign many of their leases to third-parties. Still, the debtors were left with significant debt, which made neither a chapter 11 plan of liquidation nor a conversion to chapter 7 economically practical.
The asset purchase agreement (APA) in Paper Source provided for the wind-down of what remained of the debtors and provided for payment of all administrative expenses and certain priority claims held by vendors. In September of this year, the Bankruptcy Court in Richmond, Virginia, approved the implementation of the wind-down in the APA through a two-step structured dismissal of the bankruptcy case. First, the Court’s order approved the debtors’ proposed treatment of administrative claims, timelines for contesting the treatment professional claims, and the distributions to creditors. Second, once the foregoing process was complete, the order provided for formal dismissal of the case. The wind-down was completed in less than two months and dismissal of the case should occur shortly.
The Richmond bankruptcy court has proven itself accommodating and experienced in handling all forms of exit strategies in a chapter 11 bankruptcy from a typical reorganization or sale and liquidation to a prepackaged case and now, a structured dismissal. Hirschler’s Bankruptcy, Restructuring and Creditors Rights practice group regularly handles such matters before the Richmond court and the other bankruptcy courts throughout Virginia, Maryland and the District of Columbia. We would welcome the opportunity to apply our expertise to your bankruptcy needs.
Stephanie A. Hood