When a Priority is Not a Priority: Structured Dismissals and the Priority Rules

(Excerpt) The culmination of a chapter 11 case is typically a plan that provides for payment to creditors in accordance with the priority rules of the title 11 of the United States Code (the “Bankruptcy Code”). In In re Jevic Holding Corp., the Third Circuit held that in certain rare circumstances, bankruptcy courts have the discretion to approve structured dismissals which do not comply with section 507 and section 1129 - the priority rules - of the Bankruptcy Code. This holding highlights several issues with which courts have been grappling. The initial issue is whether structured dismissals themselves are even permissible under the Bankruptcy Code. The next issue raised is why structured dismissals are objectionable and whether all the requirements of the Bankruptcy Code for plan confirmations, like the priority rules, apply. Then, if structured dismissals are not required to conform to requirements outlined in the Bankruptcy Code for other types of case resolutions, it must be determined what requirements do apply to structured dismissals. Finally, the requirements that do apply to structured dismissals must be defined and understood. The courts have established that structured dismissals are permissible under the Bankruptcy Code. Opponents to structured dismissals argue they provide fewer protections for creditors because they frequently deviate from the priority scheme of section 507 or violate the absolute priority rule of section 1129. While some courts have held the protections of section 507 and section 11295 do not apply to structured dismissals, there is a clear need for some standard of review to ensure that structured dismissals do not result in inequitable treatment of creditors. To ensure protection, courts have established that structured dismissals must be fair and equitable. However, this leaves a lingering issue – courts must decide what fair and equitable means in the context of structured dismissals. This issue remains unclear as only one court has found a deviation from the priority scheme and absolute priority rule to be fair and equitable