"Keep Things from Going Left... Utilizing Structure Dismissal and Save Money for Your Estate"

Despite the Supreme Court's 2017 denial of structural termination[1], the bankruptcy court ruled against structural termination of a Chapter 11 case after a successful sale of the debtor's assets under Section 363 of the Bankruptcy Code. There is a growing tendency to approve A structured indemnity is a cost-effective way for a company to get out of Chapter 11 by either (a) reviewing a post-sale liquidation plan, which is costly and not always feasible, or (b) Instead of moving the action to Chapter 7 ., the appointment of a trustee to replace the administrator, leading to significant uncertainties and unpredictability. Private lenders should be careful with this approach. Because a structured exit cuts significant costs from the already expensive Chapter 11 process. In this article, we'll discuss when to consider structural exits, what options you have after a successful Section 363 sale, and why structural exits are gaining popularity. Context Private Lenders have a simple investment theory. That game plan doesn't work when the borrower's business deteriorates to the point where there is no realistic prospect of loan repayment either through refinancing, merger or sale or an "amend & extend" to allow for performance and profitability to rebound. In this downside scenario, lenders pivot to "Plan B," which sometimes involves-as the option of last resort-acquiring or selling to a third party the borrower's business through a Section 363 sale in Chapter 11 free and clear of all or most all its debt. In this scenario, a lender may feel like an "ATM machine" routinely disbursing cash to preserve and protect its investment, including through: (a) agent advances and rescue loans in the period leading up to bankruptcy as the parties develop and document a sale strategy, (a) new money DIP loans to pay for the costs of the bankruptcy case from the filing date through consummation of the sale, and (a) post-closing working capital for the new business in those situations where the lender's credit bid is the successful bid. In these situations, the final expense of the lender's tab is the funding needed for post-closing "wind-down " expenses (or " burial expenses") of the estate for the period after the Section 363 sale is consummated. Bankruptcy courts generally refuse to allow themselves to be used to sell businesses if the interested parties will not allocate funds to a soft landing, as opposed to a situation where administrative expenses are left unpaid and the debtor's shell is left in shambles. Execution costs, which vary by business and industry, typically include (a) the costs to sell, dispose of, or otherwise monetize non-core assets (if any) excluded in the 363 sale; costs of completing the employee benefits plan, filing final tax returns and dissolving the company in accordance with state law; and (d) other miscellaneous charges. Application for real estate professional fees, and other agency matters. These costs are typically covered by excluding cash collateral (equal to the settlement amount) from the property purchased from the lender / buyer. Post-Sale / Settlement Path Anyone who has experienced the above scenario knows that settlement negotiations are inevitably a means to complete the settlement. There are three options: (1) Confirmation of the Chapter 11 Liquidation Plan, (2) Conversion of a Chapter 11 case to a Chapter 7 case, or (3) " Structural Dismissal " of bankruptcy proceedings. Negotiations are conducted between the creditors who will fund the settlement, the debtor, and the experts who guide the company's insolvency proceedings, and sometimes a legally mandated creditors' committee. Plan Pathways Most debtors, directors and private equity sponsors strongly prefer (and often advocate) the path through which a company can approve a Chapter 11 liquidation plan. This path is the traditional exit path from Chapter 11, reaching the final stage in the "formal" sense at the entry of the Plan Approval Decision. Companies, boards of directors, sponsors, and their respective advisors also usually include (at least by agreement) comprehensive waivers and expulsion clauses that provide immunity from lawsuits by disgruntled creditors. I prefer the planned route. However, planning paths are expensive. Most of the costs are determined by professional fees for preparing and following up disclosure statements and liquidation plans, obtaining creditor votes, and resolving claims. In addition to cost, the planned path can also be uncertain. Approval includes, among other things, acceptance by classes of creditors with limited acceptance (excluding insiders) and " payment in cash in full of all administrative claims, including Section 503(b)(9) claims. " The plan may not be feasible because it requires " he give administrative priority to claims from pre-claim providers who have shipped goods received by the debtor within 20 days of filing. A planning path may be the "gold standard," but there are many cases where this path is not feasible or simply too expensive compared to other options. Transform Path The transform is another option. The cheapest route is to remodel the 11th chapter incident to the 7th chapter incident. The debtor files a lawsuit and the board walks away. A Chapter 7 trustee is appointed and disposition of the business and ancillary assets becomes a headache for the trustee. Despite the cost savings, this option is widely perceived as the least desirable by debtors, directors, sponsors, and purchasers of loan offerings due to the uncertainty created by the Chapter 7 trustee . increase. Chapter 7 The Trustee is indemnified only if it forms a pool of unencumbered assets to be distributed to the creditors. This fee structure often leads to situations where trustees take overly enthusiastic legal positions to extract value from stakeholders such as lenders, suppliers, owners, directors and officers. Bankruptcies are most effective when carefully planned and when there is consensus on how best to maximize value. Adding new players to the mix introduces uncertainty into conversion paths, and uncertainty carries risk. For this reason, cases are rarely moved from Chapter 11 to Chapter 7 by mutual consent. is not. Structured Exit Method The final option is structured exit. A structured termination will be recorded in a negotiated order approved by the bankruptcy court dismissing the action under Chapter 11. It also entails other terms that provide a final sense of more than just dismissal of the lawsuit. The terms of structured termination orders are case-specific and the result of coordinated negotiations, but often include clauses that: (ii) determine the procedure for final payment of fees; (iii) permit the destruction or abandonment of non-core assets; (iv) Establishment of claims reconciliation procedures to enable distribution of cash to eligible claim holders. This usually includes administrative fee claimants, but less frequently senior unsecured claims and general unsecured creditors. (v) Cross-Release. A structured closing order typically takes into account a number of conditions that precede the effectiveness of closing a case (e.g. completion of distribution, sale of non-core assets). A structured exit is much quicker and cheaper than a planned route. Yet there is often reluctance to accept this strategy as the best post-sale exit option. Critics have developed two of his claims: (1) Bankruptcy law does not specifically provide for structured terminations, and (2) the Supreme Court ruled out structured terminations in his Czyzewski v. Jevic Holding Corp. Denied.137 S.Ct. 973 (2017) ("Device"). The critics are wrong. First, the Bankruptcy Code is considering dismissing Chapter 11 proceedings in Sections 305(a) and 1112(b) of the Bankruptcy Code. [2] Each statute gives bankruptcy courts broad discretion to determine whether there are "reasons" to dismiss a case and whether the interests of debtors and creditors are best served by dismissal. The argument that a termination order is "simple" and that the bankruptcy action must simply be dismissed implies that many bankruptcy court decisions (such as DIP orders and sale orders) contain conditions that go beyond the common language of applicable licensing law. It ignores the fact that it says bankruptcy courts have discretion to formulate injunction clauses that go beyond simple dismissal. The key is to limit the additional terms to what the bankruptcy law allows. Section 105(a) of the Bankruptcy Code allows the court to " make any order it deems necessary or appropriate to enforce the provisions of the Bankruptcy Code. " Therefore, the terms of a termination order are permissible if they are "necessary or reasonable" to enforce Section 305(a) and/or Section 1112(b) of the Bankruptcy Code. The Supreme Court has not banned all structured layoffs at Jevic. In Jevic, the Supreme Court dealt only with one particular function of structured termination orders: "contribution" distributions, which violated the preemptive rule of bankruptcy law. Jevic simply said that structured terminations cannot be approved if distributions to creditors are made in violation of the overriding rules of bankruptcy law and the affected creditors do not consent. identificationAt 983-7. Jevic is not the death knell of structured layoffs. In fact, the Supreme Court found that structured layoffs were "increasingly common " and" has expressed no opinion on the legality of structured layoffs in general. " identification. at 979 (citing Commission to Study Reform of Chapter 11 of the American Bankruptcy Association Commission, Final Report 2012-2014 and Recommendations 270, n. 973 (2014)) structured There have been at least 21 bankruptcies with closed terminations. Siehe Dennis J. Connolly & Christopher K. Coleman, The Increased Use (and Challenges) of Structural Layoffs as an Alternative Disposition in Bankruptcy Cases, 2021 Ann. Uberleben Bankr. Law 1 (Okt. 2021). In almost all of these lawsuits (17 out of 21), interested parties have challenged the motions to dismiss. Many of these challenges focused on addressing defendants' individual claims rather than on the reasonableness of structural termination per se. Contrasted the justification of structural termination with prosecution targeting specific violations of the law. Nevertheless, in 18 of these 21 cases, bankruptcy courts issued structured termination orders. It's an impressive record and provides a strong and credible foundation for pushing for structured layoffs in the right circumstances. In summary, the trend towards structured terminations is a positive development for private lenders and adds a practical and efficient instrument to the judicial restructuring toolbox. _ [1] Czyzewski v. Jevic Holding Ltd. 137 S.Ct. 973 (2017). [2] Section 305(a)(1) states, "The court may, at any time after notice and hearing, dismiss an action in this case or stay all proceedings in an action in this case ." ". Section 1112(b) provides that " At the request of any interested party, after notice and hearing, the court shall withdraw the action under this chapter to the court. " Either an action under Chapter 7 or dismissal of an action under this Chapter may be made on the basis of whichever is in the best interest of the creditors and estate. Creditors and property interests. "