Victoria Giorgio
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In general, a successful case under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) culminates in confirmation of a plan of reorganization, pursuant to which the debtor’s liabilities will be addressed. In certain instances, confirmation of a plan may not be possible or cost-prohibitive, but the debtor and its creditors have achieved a consensus regarding the treatment of the debtor’s liabilities. There, the debtor and its creditors may agree to the treatment of claims, following which the case will be dismissed. In 2017, the United States Supreme Court addressed the possibility of such a “structured dismissal,”[1] and held that structured dismissals that do not violate the “basic priority rules” are permissible.[2] In In re KG Winddown, LLC, the United States Bankruptcy Court in the Southern District of New York approved the structured dismissal of KG Winddown, LLC’s (“KG”) Chapter 11 cases. Following the sale of substantially all of its assets, and suspension of operations, KG’s limited remaining resources were insufficient to fund a plan under the Bankruptcy Code.[3] Consequently, KG requested an order approving the structured dismissal of its bankruptcy cases.[4] The Office of the U.S. Trustee objected to the structured dismissal arguing that dismissal was premature and that it contained a distribution scheme that does not require court approval.[5] Additionally, the U.S. Trustee objected to the exculpation of the buyer which the Debtor contemplated in its proposed dismissal order as the exculpation was dependent on the survival of the sale from the outset.[6]
In Jevic, the Supreme Court held that structured dismissals are not barred so long as they do not conflict with priority rules, or any other provisions of the Bankruptcy Code.[7] Jevic bound this court’s holding that section 349(b) of the Bankruptcy Code was designed to allow bankruptcy courts “the flexibility to ‘make the appropriate orders to protect the rights acquired in reliance on the bankruptcy case.”’[8] Here, the court reasoned KG’s two-step proposed dismissal was warranted because KG sold substantially all of its assets, and has no financial resources to fund a plan.[9] KG was not seeking immediate dismissal but rather approval of an “orderly process” for dismissal of its jointly administered, but separate, cases.[10] Furthermore, the court contends that it is only logical that the debtor would seek approval in advance of its contemplated dismissals in response to the U.S. Trustee’s assertion that KG’s motion for structured dismissal is untimely.[11]
Courts are not required to approve structured dismissals under the Bankruptcy Code as the Bankruptcy Code does not even contemplate structured dismissals. However, the increasing prevalence of structured dismissals in the post-Jevic era[12] combined with the positive impact on both the creditors and KG in this case, persuaded the court to overrule objections by the U.S. Trustee and approve the KG’s request.[13] Specifically, the court opined that the purpose of the contemplated structure dismissal was to provide certainty to the involved parties and “promote the orderly winding up of the estates.” [14] The court rejected the U.S. Trustee’s objection to the sale order’s survival as “an unnecessary ‘comfort order.’”[15]
[1] Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 979 (2017).
[2] Id. at 978.
[3] See In re KG Winddown, LLC, No. 20-11723, 628 B.R. 739 (Bankr. S.D.N.Y. Jun. 9, 2021).
[4] See id. at 743–44.
[5] See id. at 746–48.
[6] See id. at 748–49.
[7] Id. at 748 (Instead, the Jevic Court noted “section 349 of the Bankruptcy Code [as] authoriz[ing] bankruptcy courts to alter the normal effects of the dismissal of a bankruptcy case if cause is shown”) (citing Richard Levin & Henry J. Sommer eds., 7 Collier on Bankruptcy ¶1112.09 (16th ed.)).
[8] Id. at 749 (quoting Jevic, 137 S. Ct. (2017) at 984 (quoting H.R. Rep., No. 95-595 at 338)).
[9] Id.
[10] Id. at 747.
[11] See id.
[12] Id. at 745 (“In Jevic, the Supreme Court noted that, ‘[a]though the Code does not expressly mention structured dismissals, they “appear to be increasingly common.”’”).
[13] See id. at 747.
[14] Id.
[15] Id. at 749.