A "structured dismissal" of a chapter 11 case following a sale of substantially all of the debtor's assets has become increasingly common as a way to minimize cost and maximize creditor recoveries. However, only a handful of rulings have been issued on the subject, perhaps because bankruptcy courts are unclear as to whether the Bankruptcy Code authorizes the remedy. A Texas bankruptcy court recently added to this slim body of jurisprudence. InIn re Buffet Partners, L.P., 2014 BL 207602 (Bankr. N.D. Tex. July 28, 2014), the court ruled that sections 105(a) and 1112(b) of the Bankruptcy Code provide authority for such a structured dismissal, noting that the remedy "is clearly within the sphere of authority Congress intended to grant to bankruptcy courts in the context of dismissing chapter 11 cases."
In a typical successful chapter 11 case, a plan of reorganization or liquidation is proposed, the plan is confirmed by the bankruptcy court, the plan becomes effective and, after the plan has been substantially consummated and the case has been fully administered, the court enters a final decree closing the case. However, because chapter 11 cases can be prolonged and costly, prepackaged or prenegotiated plans and expedited asset sales under section 363(b) of the Bankruptcy Code have been increasingly used as methods to short circuit the process, minimize expenses, and maximize creditor recoveries.
After a bankruptcy court approves a sale of substantially all of a chapter 11 debtor’s assets under section 363(b), a number of options are available to deal with the debtor’s vestigial property and claims against the bankruptcy estate and to wind up the bankruptcy case. Namely, a debtor could propose and seek confirmation of a liquidating chapter 11 plan, the case could be converted to a chapter 7 liquidation, or the case could be dismissed. The first two options commonly require significant time and administrative costs.
As a consequence, "structured dismissals" of chapter 11 cases following a section 363(b) sale of substantially all of the debtor’s assets have become a popular exit strategy. A structured dismissal is a dismissal conditioned upon certain elements agreed to in advance by stakeholders and later approved by the court, as distinguished from an unconditional dismissal of the chapter 11 case ordered by the court under section 1112(b) of the Bankruptcy Code. Structured dismissals have typically been granted in cases where: (i) the debtor has sold, with court authority, substantially all of its assets outside a plan, but is either administratively insolvent or lacks sufficient liquidity to fund the plan confirmation process; or (ii) after approval of a section 363(b) asset sale, the debtor could confirm a liquidating chapter 11 plan, but costs associated with the confirmation process would likely eliminate or significantly reduce funds available for distribution to creditors.
Typical Terms of a Structured Dismissal
Some common provisions included in bankruptcy court orders approving structured dismissals include the following:
- Expedited procedures to resolve claims objections.
- Provisions specifying the manner and amount of distributions to creditors.
- Releases and exculpation provisions that might ordinarily be approved as part of a confirmed chapter 11 plan.
- Senior creditor carve-outs and "gifting" provisions, whereby, as a quid pro quo for a consensual structured dismissal, a senior secured lender or creditor group agrees to carve out a portion of its collateral from the sale proceeds and then "gift" it to unsecured creditors.
- Provisions that, notwithstanding section 349 of the Bankruptcy Code (vacating certain bankruptcy court orders when a case is dismissed), prior bankruptcy court orders survive dismissal and the court retains jurisdiction to implement the structured dismissal order; to resolve certain disputes; and to adjudicate certain matters, such as professional fee applications.
Sources of Authority for Structured Dismissals
The Bankruptcy Code does not expressly authorize or contemplate structured dismissals. Even so, sections 1112(b), 305(a)(1), and 105(a) are commonly cited as predicates for the remedy.
Section 1112(b) authorizes a bankruptcy court to convert a chapter 11 case to a chapter 7 liquidation or to dismiss a chapter 11 case, "whichever is in the best interests of creditors and the estate, for cause." "Cause" is defined in section 1112(b)(4) to include, among other things, "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation" and "inability to effectuate substantial consummation of a confirmed plan." Dismissal or conversion of a chapter 11 case under section 1112(b) is a two-step process. First, the court must determine whether "cause" exists for dismissal or conversion. Second, the court must determine whether dismissal or conversion of the case is in the best interests of creditors and the estate. See Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d 240, 242 (4th Cir. 1994).
Section 305(a)(1) of the Bankruptcy Code provides that a bankruptcy court can dismiss or suspend all proceedings in a bankruptcy case under any chapter if "the interests of creditors and the debtor would be better served by such dismissal or suspension." Section 305(a)(1) has traditionally been used to dismiss involuntary cases where recalcitrant creditors involved in an out-of-court restructuring file an involuntary bankruptcy petition to extract more favorable treatment from the debtor. However, the provision has also been applied to dismiss voluntary cases, albeit on a more limited basis. Because an order dismissing a case under section 305(a) may be reviewed on appeal only by a district court or a bankruptcy appellate panel, rather than a court of appeals or the U.S. Supreme Court (see 11 U.S.C. § 305(c)), section 305(a) dismissal is an "extraordinary remedy." See In re Kennedy, 504 B.R. 815, 828 (Bankr. S.D. Miss. 2014); see also Gelb v. United States (In re Gelb), 2013 BL 166941, *6 n.13 (B.A.P. 9th Cir. Mar. 29, 2013) (dismissal or suspension order under section 305(a) reviewable by bankruptcy appellate panel).
Section 105(a) of the Bankruptcy Code provides that a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions" of the Bankruptcy Code. However, section 105(a) " 'does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code.’ " Law v. Siegel, 134 S. Ct. 1188, 1194 (2014) (quoting 2 Collier on Bankruptcy ¶ 105.01, pp. 105‒6 (16th ed. 2013)).
Most structured dismissals are consensual. The few reported and unreported decisions on the issue reflect that some courts have been willing to order structured dismissals due to the consent of stakeholders and because a structured dismissal is a more expeditious, cost-effective, and beneficial means of closing a chapter 11 case. See, e.g., In re Felda Plantation, LLC, 2012 WL 1965964 (Bankr. N.D. Fla. May 29, 2012) (granting chapter 11 debtor’s motion for structured dismissal in order providing that, notwithstanding dismissal, all orders entered in bankruptcy survived dismissal, court retained jurisdiction to rule on fee applications, and debtor was obligated to pay U.S. Trustee and professional fees, as well as creditors, as specified); Omaha Standing Bear Pointe, LLC v. Rew Materials (In re Omaha Standing Bear Pointe, LLC), 2011 BL 69859 (Bankr. D. Neb. Mar. 17, 2011) (noting that chapter 11 debtor’s motion for structured dismissal was granted after real property was sold free and clear and proceeds were distributed to secured creditor); see also In re Fleurantin, 420 Fed. Appx. 194, 2011 BL 80633 (3d Cir. Mar. 28, 2011) (ruling that bankruptcy court did not abuse its discretion in approving structured dismissal of individual chapter 7 case, which trustee argued "was in the best interests of the parties, particularly in light of the estate’s continued expenditure of legal fees in response to [debtor’s] motions and other efforts to obstruct its administration"). But see In re Strategic Labor, Inc., 467 B.R. 11, 11 and n.10 (Bankr. D. Mass. 2012) (stating that "[t]his matter offers an object lesson in how not to run a Chapter 11 case"; denying debtor’s post-asset sale motion for approval of a structured dismissal, where, among other things, debtor intentionally mischaracterized secured claim of Internal Revenue Service and used cash collateral without authority; and instead granting U.S. Trustee’s motion to convert to chapter 7).
Regardless of stakeholder consent, the Office of the U.S. Trustee, a division of the U.S. Department of Justice entrusted with overseeing the administration of bankruptcy cases, frequently objects to structured dismissals. Among other things, the U.S. Trustee has argued that structured dismissals: (i) distribute assets without adhering to statutory priorities; (ii) include improper and overbroad releases and exculpation clauses; (iii) violate the express requirements of section 349(b); (iv) may constitute "sub rosa" chapter 11 plans which seek to circumvent plan confirmation requirements and creditor protections; (v) improperly provide for retention of the bankruptcy court’s jurisdiction; and (vi) fail to reinstate the remedies of creditors under applicable non-bankruptcy law. See Nan Roberts Eitel, T. Patrick Tinker & Lisa L. Lambert, "Structured Dismissals, or Cases Dismissed Outside of Code’s Structure?", 30 Am. Bankr. Inst. J. 20 (March 2011).
A Recent Case Study: In re Buffet Partners
Buffet Partners, L.P., and its affiliates (collectively, "Buffet") owned and operated Furr’s—a buffet-style restaurant chain that, at its height in 2009, had 50 locations, primarily in the southwestern United States. Buffet filed for chapter 11 protection in the Northern District of Texas on February 14, 2014. Shortly afterward, Buffet sought court authority to sell substantially all of its assets under section 363(b) to stalking-horse bidder and secured lender Chatham Credit Management III, LLC ("Chatham").
The official committee of unsecured creditors performed substantial due diligence regarding Buffet’s business, the liens and claims against Buffet’s assets and estate, and various restructuring alternatives. After completing due diligence, the committee and Buffet jointly filed a motion for approval of a settlement that would resolve the open issues in the case, pay allowed administrative and priority claims in full, and provide a meaningful recovery for general unsecured creditors.
In particular, under the proposed settlement: (i) Buffet’s assets would be sold to Chatham or any qualified overbidder; (ii) the purchaser would pay $500,000 into a trust created for the benefit of unsecured creditors; (iii) the purchaser would pay administrative expenses, provided that the fees and expenses of professionals retained by Buffet and the committee would be capped, respectively, at $600,000 and $250,000; (iv) the committee would support entry of a final cash collateral order in the case; (v) Chatham would waive any unsecured deficiency claim; and (vi) Chatham, Buffet, and the committee would exchange releases.
The court approved the settlement on April 16, 2014. Chatham’s $25 million bid prevailed at an auction conducted the following week. On June 19, 2014, Buffet and the committee jointly moved to dismiss the chapter 11 cases. In their motion, they proposed that the Buffet cases be dismissed upon certification that: (i) the committee has completed the claims reconciliation process; (ii) all U.S. Trustee fees have been paid; (iii) funds have been distributed to unsecured creditors; and (iv) the court has ruled on professional fee applications.
In addition, the proposed dismissal order provided that: (a) any orders entered by the court during the case would remain in force, notwithstanding section 349; (b) Buffet was authorized to take appropriate action to wind up and dissolve as a corporate entity without further approval by the board of directors, shareholders, or any other entities; and (c) the court retained jurisdiction to review fee applications and to resolve disputes regarding any orders entered during the case (including the dismissal order).
Only the U.S. Trustee objected to the structured dismissal motion, arguing that, after approval of the sale to Chatham, the case should be converted to chapter 7 or, in the alternative, Buffet should seek confirmation of a chapter 11 plan.
The Bankruptcy Court's Ruling
The bankruptcy court approved the structured dismissal as being in the best interests of creditors and the estate. The court acknowledged that "[n]ot much law, statutory or otherwise, exists regarding structured dismissals of this type." Even so, it reasoned that both alternatives proposed by the U.S. Trustee would add significant and unnecessary time and expense. The court also emphasized that "the economic value of the Debtor in this case will be served by dismissing the case, rather than converting it" and that the parties do not wish "to go through the time and expense of a plan, which will cause the pool of money left to be greatly diminished." Given appropriate notice and a process that does not "illegally or unfairly trample on the rights of parties," the court concluded, the structured dismissal should be approved.
However, the court cautioned that "parties do not have carte blanche to enter into any settlement they choose." Among other things, a proposed settlement must comply with the Bankruptcy Code’s distribution rules and cannot "short circuit" the chapter 11 plan confirmation requirements by establishing the terms of a sub rosa plan in connection with a section 363(b) asset sale. "While the proposed dismissal does have certain plan aspects," the court wrote, "it does not cut off the rights of any parties without giving them the chance to voice an objection and it does not violate the absolute priority rule." Finally, the court characterized as "worthy of consideration," albeit not "outcome determinative," the fact that "not one party with an economic stake in the case has objected to the dismissal in this manner."
The court concluded its ruling by unequivocally endorsing a structured dismissal in an appropriate case:
11 U.S.C. §§ 1112(b) and 105(a) provide this court with the requisite authority to fashion the dismissal order that the parties seek. Although this process is not explicitly spelled out in § 1112(b), it is clearly within the sphere of authority Congress intended to grant to bankruptcy courts in the context of dismissing chapter 11 cases. This dismissal, which all of the economically-interested parties support, is in the best interests of the creditors and the estate. For the following reasons, the proposed dismissal is hereby GRANTED.
Buffet Partners does not signal a significant departure from existing bankruptcy jurisprudence or practice—structured dismissals are becoming more commonplace as a way to minimize costs and maximize creditor recoveries. Still, the decision is important because it is one of the few published rulings on the issue. Moreover, the court expressly identifies the source of its authority—sections 1112(b) and 105(a)—to approve a structured dismissal. As such, Buffet Partners may be viewed as a positive development both for debtors considering the structured dismissal as a possible strategy for exiting from chapter 11 and for bankruptcy courts contemplating whether they have authority to order a structured dismissal and, if so, under what circumstances.