Most debtors, boards and private equity sponsors strongly prefer (and often insist on) a path that allows the company to confirm a liquidating chapter 11 plan. This path is the conventional exit path from chapter 11 and it achieves finality in an “official” sense with the entry of a plan confirmation order. The company, the board, the sponsor and their respective advisors also prefer the plan path because it customarily includes broad releases (at least on a consensual basis) and exculpation provisions providing immunity from suits by disgruntled creditors.
The plan path, however, is expensive. The expense is driven, in large part, by professional fees to prepare and prosecute a disclosure statement and plan of liquidation, the solicitation of votes online payday loans Junction City no credit check from creditors and a reconciliation of claims. A plan ong other things, acceptance by an impaired accepting class of creditors (excluding insiders) and payment in full of all administrative claims in cash, including “Section 503(b)(9) claims,” which affords administrative priority status to the claims of pre-petition vendors who shipped goods that were received by the debtors within 20 days before the filing. While the plan path might be the “gold standard,” there are many cases where that path is not feasible or is simply too expensive relative to other options.
The Conversion Path
Conversion is another option. Converting the chapter 11 case to a case under chapter 7 is the least expensive path. The debtor files the case and the board of directors walks away. A chapter 7 trustee is appointed and disposition of the business and ancillary assets is the trustee’s headache. Despite the cost savings, this option is universally recognized by debtors, boards, sponsors and credit bidding buyers as the least desirable because it creates uncertainty stemming from the chapter 7 trustee. Chapter 7 trustees are compensated only when they create a pool of unencumbered assets to be distributed to creditors. This fee structure often creates situations where trustees take overzealous legal positions in an effort to extract value from stakeholders, including lenders, suppliers and owners, directors and officers. Bankruptcy works best when it is carefully planned and there is consensus on the best path to maximize value. By adding a new player into the mix, the conversion path introduces uncertainty and with uncertainty comes risk. For this reason, cases are rarely converted from chapter 11 to chapter 7 on a consensual basis.
The Structured Dismissal Path
The final option is a structured dismissal. A structured dismissal is memorialized in a negotiated order approved by the bankruptcy court that dismisses the chapter 11 case together with other provisions and conditions that provide some sense of finality beyond merely dismissing the case. The terms of a structured dismissal order are case specific and the product of bespoke negotiations, but often include provisions (i) recognizing the continued effectiveness of the bankruptcy court’s prior orders, particularly the order approving the sale; (ii) setting procedures for final payment of professional fees; (iii) authorizing the destruction or abandonment of non-core retained assets; (iv) establishing claims reconciliation procedures to provide for the distribution of cash to holders of allowed claims, which typically include administrative expense claimants and, with less frequency priority unsecured claims and general unsecured creditors; and (v) consensual releases. Structured dismissal orders usually contemplate a number of conditions precedent to effectiveness of the dismissal of the case (e.g., finalizing distributions, selling non-core assets).
A structured dismissal is much faster and cheaper than the plan path. Yet there is often resistance to embrace this strategy` as the best post-sale exit option. Critics make two arguments: (1) the Bankruptcy Code does not specifically contemplate structured dismissals and (2) the Supreme Court rejected the structured dismissal in Czyzewski v. Jevic Holding Corp. 137 S. Ct. 973 (2017) (“Jevic”). The critics are wrong.