The past 150 years have served as a legal battleground for the debate on structured dismissals. The debate is hotly contested over whether senior creditors whose liens have exhausted a bankruptcy estate can combine with junior creditors or equity holders who have the control over the bankruptcy proceeding. In this scenario, the combination would give the option to divide value that would skip over intervening creditors without giving them the ability to object.

Structured Dismissals

The Supreme Court has given its ruling in the latest case, Czyzewski v. Jevic Holding Corp., on March 21. The ruling has shot down the use of non-consensual, priority-skipping structured dismissals, reversing the Third Circuit Court of Appeals’ earlier affirmance. The previous ruling approved distributing bankruptcy estate settlement proceeds.

The Supreme Court asked whether a bankruptcy court has the legal power over this type of distribution scheme and found that such a court should not have that type of power. The second question the Court aimed to answered was whether a bankruptcy court could approve such a dismissal that doesn’t follow ordinary rules without the affected creditors’ consent, which they also did not believe a court should be able to do.

This Court ruling reinforces that priority line jumping when it comes to structured settlements will not be permitted. The case is set to head back to bankruptcy court for more work.

Takeaways

There has recently been a rise of structured dismissals in bankruptcy cases. Typically, this comes after a sale of a substantial portion of the debtor’s assets. This ruling is unlikely to affect these types of cases, as the ruling does not say dismissals are not allowed.

Instead, the Court found structured settlements cannot violate the bankruptcy code’s priority scheme. This means structured dismissals are still an appropriate option in many cases so long as they adhere to codes and don’t skip a class of creditors when deciding how settlement assets will be distributed.

In cases where a plan within a bankruptcy case has a priority class that chooses to voluntarily gift some of the recovery are still up for debate. This ruling has raised many questions on the specifics of what is permissible and what is not.

If you have concerns about your bankruptcy case, the Philadelphia bankruptcy lawyers at Erik B. Jensen & Associates can help. With our years of experience, we can help navigate the complicated process of declaring bankruptcy.