Structured Dismissal: 5 Reasons Some Chapter 11 Cases End Without a Plan

A Chapter 11 case can run out of purpose well before it runs out of docket entries. When it does, the Code offers three endings: a confirmed plan, conversion to Chapter 7, or dismissal. The Supreme Court listed exactly those three in 2017, in Czyzewski v. Jevic Holding Corp., and then described a fourth arrangement that sits inside the third: a dismissal whose ordinary consequences the court has altered "for cause," which the Court called a "structured dismissal."

The reasons a case ends this way are rarely mysterious. They are, for the most part, arithmetic, and five of them explain the form.

1. The Business Has Already Been Sold, and Nothing Remains to Reorganize

A company that sold substantially all of its assets under section 363 has converted its business into a sum of money and a list of claimants. A plan could still distribute that money; section 1123(b)(4) permits a plan that sells everything and distributes the proceeds. What the plan cannot deliver is the reward that usually justifies its cost. Under section 1141(d)(3), confirmation does not discharge a debtor whose plan liquidates all or substantially all of its property, that stops doing business, and that would be denied a Chapter 7 discharge, which every corporation and LLC would be.

No discharge, no going concern, no future operations to protect. The plan becomes a distribution mechanism with a confirmation hearing attached.

2. The Estate Cannot Pay What Confirmation Requires on the Effective Date

Section 1129(a)(9)(A) requires that administrative claims be paid "cash equal to the allowed amount of such claim" on the effective date of the plan, unless the holder agrees to something different. Administrative claims include the fees of the debtor's lawyers and financial advisers approved under section 330, and those of any committee's professionals, and section 1129(a)(12) requires that every fee owed under 28 U.S.C. 1930 be paid or provided for as well.

Suppose the estate holds $400,000 after the sale, and allowed administrative claims, professional fees among them, reach $450,000. No plan can be confirmed over the objection of an administrative claimant who insists on full cash payment, because the cash does not exist. The case is administratively insolvent, a phrase that sounds like a diagnosis and is closer to a verdict. Every dollar spent drafting a disclosure statement in that position is a dollar taken from the very claimants the plan would need to pay.

Some estates in that position negotiate reduced payment with the administrative claimants and confirm a plan anyway, since section 1129(a)(9) allows a holder to agree to different treatment. Others look for an ending that does not require a plan at all. The Code, in other words, does not force a plan on an estate that cannot afford one, and it does not provide a cheap alternative either.

3. Conversion Would Start the Administration Over

Conversion to Chapter 7 is always available in principle. Under section 348(a) it operates as an order for relief under Chapter 7, and a Chapter 7 trustee takes charge of whatever remains, with a trustee's own duties, compensation, and learning curve. The Jevic Court itself noted that the bankruptcy court "could convert the case to Chapter 7, allowing a Chapter 7 trustee to pursue the suit" that the Chapter 11 estate had settled.

Where the Chapter 11 parties have already reached an agreement over what little remains, conversion replaces the people who know the file with a trustee who must read it from the beginning.

4. A Plain Dismissal Would Undo Too Much

Section 349(b) describes an ordinary dismissal. Unless the court, "for cause, orders otherwise," dismissal reinstates transfers that were avoided and liens that were voided, vacates certain orders, including recovery orders under section 550 and setoff-related orders under section 553, and revests the estate's property in the debtor. The Jevic opinion put it this way: dismissal "ordinarily attempts to restore the prepetition financial status quo," but "if perfect restoration proves difficult or impossible, the court may, 'for cause,' alter the dismissal's normal restorative consequences."

After a sale, a settlement, and months of administration, perfect restoration is usually impossible. The buyer's title, the settled claims, and the money in escrow cannot be returned to the petition date. A structured dismissal lets the order say which of those survive.

5. A Settlement Needs a Way Out, and Jevic Narrowed the Door

By the time Jevic Transportation's case reached its settlement, the estate held two assets: a fraudulent-conveyance claim against Sun Capital Partners, the private equity firm that had bought the company in 2006, and CIT Group, whose loan had financed the purchase, and $1.7 million in cash subject to a lien held by Sun. The truck drivers held a WARN Act judgment against Jevic, some $8.3 million of which was a priority wage claim under section 507(a)(4). The settlement dismissed the lawsuit, paid administrative expenses, and routed the remaining cash to general unsecured creditors, who rank below priority wage claims, while the drivers received nothing on their priority claims, and the bankruptcy court approved it and dismissed the case, reasoning that because the payouts would occur through a structured dismissal rather than an approved plan, the priority rules did not bar approval, a view the Third Circuit affirmed by a vote of two to one and the Supreme Court, in March 2017, rejected.

The holding is a sentence long. "Bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors." The Court refused to recognize a "rare case" exception, and it distinguished interim orders entered during a case, such as first-day wage orders and critical vendor orders, which serve "significant Code-related objectives" like preserving the business as a going concern. A final distribution attached to a dismissal serves none of those.

What the Court did not decide is whether structured dismissals are permissible at all. It said so in a parenthetical ("We express no view about the legality of structured dismissals in general"), and the question remains where the Court left it. A structured dismissal that respects priority, or that the affected creditors accept, stands on ground the Court described and did not condemn.

Before the Estate Runs Dry

Many of the cases that end this way began with an owner who hoped the Chapter 11 petition would buy time to negotiate, and discovered that the case consumed the money the negotiation needed. Negotiation can happen without a petition. Delancey Street, a debt settlement company that is not a law firm and does not take bankruptcy cases, reviews merchant cash advance and other business debt at no charge and in confidence, and calls on independently licensed counsel for legal questions. A company that needs a sale order, a stay, or a court-supervised distribution needs bankruptcy counsel, and should retain one before the estate is spent.

Priority is the one promise the Code makes to every creditor at the start. The docket can close in several ways. That promise is supposed to survive all of them.