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

There are three ways a Chapter 11 filing can end. Either the debtor confirms a plan that gets voted on and approved, the case converts to a Chapter 7 liquidation, or the case gets dismissed outright. Some Chapter 11 cases get dismissed with negotiated terms attached (a “structured dismissal”) that stands in place of a plan.

Shut Down Without a Plan

Why does Chapter 11 shut down without a plan? Five ways I can think of:

• The assets get sold before a plan is needed.
• Getting a plan through proves too costly.
• Losses pile up too high to overcome.
• The debtor fails to keep up with payroll taxes and court reports.
• Key filing deadlines expire.

When the goal of the Chapter 11 filing is to shut down, not to keep operating and restructuring, a sale of the business is a way to achieve the aim of the filing. Section 363 of the bankruptcy code covers bankruptcy sales. Its what lawyers use for any debtor sale of all or a substantial part of the business. Once a bankruptcy sale is completed, and the proceeds distributed to creditors, a full plan of reorganization is often unnecessary. The remaining creditors whose rights could be affected by the form of the dismissal bargain out an agreed dismissal. The Court has to approve whatever the parties have negotiated. It acts like a plan without having to go through a disclosure statement, plan vote, and the approval process of a full plan.

Preparing and proving a full Chapter 11 plan is not a small undertaking. It can be expensive. The idea of a structured dismissal is to funnel the payments creditors would otherwise see into an accepted framework, so there is a structure to the terms of how things end. While a structured dismissal has different contours, a “structured dismissal” is often used when the assets of a bankruptcy estate are limited and cannot meet all outstanding bankruptcy costs or where bankruptcy costs would otherwise eat up the money creditors would otherwise receive.

Sadly, some businesses open their chapter 11 case too late to turn things around. The losses keep mounting to the point the business won’t make it to the finish line of a plan. Bankruptcy Code section 1112(b) spells out the ground rules. It lets a creditor ask the court to dismiss or convert the case for cause. Continuing losses combined with no reasonable likelihood of rehabilitation count as cause.

Part of chapter 11 is complying with a number of reporting and remittance obligations, such as keeping employment and other tax obligations current and submitting reports to the court or the trustee about continued operations. A bankruptcy debtor doesn’t stop paying taxes or filing tax returns. Expecting to make it stop risks problems. This goes double for payroll. Not filing payroll taxes or submitting withholding to the right agencies puts the case in peril. Every month the debtor in bankruptcy has to file monthly operating reports. Filing monthly reports is not optional. Failing to keep current on the reports can lead to dismissal. Besides the work inside and outside of court, there is the need to keep in touch with the United States Trustee’s office as well, such as paying the quarterly UST fees. If the case seems too far gone, the trustee can ask that it be dismissed.

At some point, a Chapter 11 case has to produce a plan. The Bankruptcy Code puts deadlines on Chapter 11 cases for the debtor to seek a plan and gain approval. Failure to meet the deadlines may result in the conversion or dismissal of a case. Under Subchapter V, a debtor has 90 days from the Chapter 11 bankruptcy filing to propose a plan. There are provisions to extend this timeline. When deadlines to propose plans slip, creditors in the case may seek the dismissal of the case or its conversion to a Chapter 7 liquidation. There can be consequences for slow walking the plan creation process. So making and meeting key plan milestones and deadlines are essential to completing a case.

Dismissal and Conversion

An ‘interested party’ has to file a motion, cause has to be shown, and the bankruptcy court must decide that granting a dismissal or conversion is in the best interests of creditors and the bankruptcy estate. Under Section 1112(b)(3) of the bankruptcy code, a court has to begin a hearing within 30 days after the request for dismissal or conversion is made. Don’t ignore a motion to dismiss Chapter 11 bankruptcy. A Chapter 11 debtor has no automatic right to dismiss a case. The decision to dismiss gets balanced against the interests of creditors and other stakeholders.

Even when a structured dismissal is agreed, there are limits on how broad it can be in terms of what it can cover. Understanding the doctrine begins with the Supreme Court’s 2017 Jevic opinion. That case addressed an arrangement put together in a Chapter 11 case that channeled money to only some of the creditors, to the exclusion of other creditors without their consent. The former truck drivers who worked at Jevic got shut out from the agreement. The court held that, absent the consent of the excluded creditors, the bankruptcy court could not authorize such payments. Not every agreement between a debtor in bankruptcy and its creditors passes the Jevic review. Without a robust consensus among creditors in support of the dismissal, there are limits to what it can accomplish.

After a Bankruptcy Is Dismissed

The debts don’t get the discharge that comes with confirmation of a Chapter 11 plan. You probably still owe the creditors what you owed them when you started. The idea of dismissal is for things to revert to how they would have been had the Chapter 11 not happened. Under 349(b), the parties, creditors, and the debtor go back to where they were pre-bankruptcy, both in terms of property and liens, subject to whatever orders have been entered as part of the Chapter 11 case. Generally, after a bankruptcy is dismissed, you are free to file again if you so choose. Sometimes, however, a second case is not allowed or is subject to conditions.

If your Chapter 11 case is not going well, be sure you understand the reasons why and what the options are. Putting together a plan takes time and the Bankruptcy Code imposes deadlines. Deadlines can expire. Procrastination can snowball. Stay on top of case deadlines and balance how much cash you have coming in against what is going out. Stay on top of the reporting requirements. If it isn’t going according to plan, speak to your attorney about what may be possible.