Supreme Court to Resolve Circuit Split Over Structured Dismissals

posted in: Cramdown and Priority | 0

By Douglas Mintz, Robert Loeb and Monica Perrigino of Orrick, Herrington & Sutcliffe

The Supreme Court recently granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether a bankruptcy court may authorize the distribution of settlement proceeds through a “structured dismissal” in a way that violates the statutory priority scheme in the Bankruptcy Code.  Specifically, the Court must decide whether Section 507 of the Bankruptcy Code, which details the order of payment of certain priority claims, must be followed outside of a plan when distributing proceeds pursuant to a structured settlement of a bankruptcy case.

The Supreme Court’s decision should resolve an important circuit split.  There is a strong textual argument to permit such distributions and structured dismissals, given the lack of provisions in the Bankruptcy Code dictating that priorities apply to settlements (as opposed to plans).  A ruling in favor of structured dismissals would serve to channel cases away from chapter 11 plans and toward consensual settlements, thereby reducing administrative costs and facilitating quicker bankruptcy resolutions.  However, this could also lead to settlements that run counter to the expected results under the absolute priority rule.  The Supreme Court’s decision may also indirectly permit “gifting” payments outside the scope of a plan – as courts have generally limited gifts in the plan context.

The full article is available here.

Delaware District Court Affirms Order Approving Gifting In Chapter 11 Case

posted in: Avoidance | 0

Author: Mindy Mora of Billzin Sumberg Baena Price & Axelrod, LLP

In an unusual but practical decision, the U.S. District Court for the District of Delaware affirmed a bankruptcy court order which approved both a sale of the debtors’ assets and the establishment of an escrow account to provide a “gift” to fund a distribution to the debtors’ unsecured creditors.  What is significant about this decision is that it approved the use of gifting in a chapter 11 bankruptcy case.  LCI Holding Company, Inc., civ. no. 13-924 (D. Del. March 10, 2014).

The concept of gifting in a bankruptcy case allows a secured creditor or purchaser to overcome objections to a sale of assets interposed by the debtor’s unsecured creditors.  Often, the gift consists of a pool of funds for distribution to the debtors’ unsecured creditors, and bypasses the claims of priority creditors with more senior claims.  See In re SPM Mfg. Corp., 984 F.2d 1305 (1st Cir. 1993).

A distribution that bypasses priority claims raises the issue of whether gifting is permissible in a chapter 11 case, based upon the requirement that distributions under a plan of reorganization must comply with the Bankruptcy Code, including the priority scheme for distributions to creditors and the absolute priority rule set forth in Bankruptcy Code § 1129(b)(2)(B).  This type of compliance is not mandated in chapter 7 cases, in which bankruptcy courts have authorized gifting more regularly.  See id.  Apparently in Delaware, gifting is permitted in a chapter 11 case, so long as the sale of assets is followed by a dismissal of the case without the confirmation of a plan.

Link to full articlehttp://www.financeandrestructuringblog.com/2014/06/delaware-district-court-affirms-order-approving-gifting-in-chapter-11-case/