When Is a Structured Dismissal Appropriate in Chapter 11?

A structured dismissal of a Chapter 11 bankruptcy case is a court order that includes special provisions. Unlike a standard dismissal, which ends the case unconditionally, a structured dismissal resolves certain issues through agreements among the debtor, creditors and other stakeholders. It may call for distributing the debtor’s remaining funds in a manner considered fair by all parties and by the court.

Structured dismissals, although not expressly provided for by the Bankruptcy Code, have been found to be implicitly authorized under 11 U.S.C. § 349(b). They have become practical alternatives in Chapter 11 cases where traditional outcomes are not viable or beneficial for the stakeholders involved. The reorganization may have become impractical due to few remaining assets, ongoing losses or insufficient creditor support. At the same time, conversion to Chapter 7 might be undesirable because it could lead to lower creditor recoveries, higher costs or disruptive liquidation. 

Compared to converting a case to Chapter 7, structured dismissals offer flexibility for the parties to negotiate terms that better reflect their priorities and circumstances. Structured dismissals can be less costly and quicker to implement than the process of appointing a Chapter 7 trustee and liquidating assets. For debtors, they allow for a more orderly wind-down of operations, potentially preserving jobs and maintaining critical business relationships. Because they are negotiated, structured dismissals can lead to more amicable resolutions and prevent protracted litigation.

The court’s order for a structured dismissal may include various provisions such as:

• a specific asset distribution plan that may not adhere strictly to the statutory priority scheme
• procedures for resolving outstanding claims, possibly including the appointment of a trustee or agent to manage this process
• releases and injunctions that protect certain parties from future litigation related to the debtor’s bankruptcy 
• approval of a budget for winding down the debtor’s operations
• retention of court jurisdiction to resolve disputes arising from the implementation of the dismissal order

Provisions can also be made for handling or terminating pending litigation or motions within the bankruptcy case.

Note that a structured dismissal cannot violate the Bankruptcy Code’s absolute priority rule regarding order of repayment without the consent of all creditors. As such, it requires careful drafting of a detailed agreement, with the aid of a skilled Chapter 11 attorney, to ensure the court will find it fair and compliant with all bankruptcy code provisions.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company is struggling with debt, call 310-271-6223 or contact us online to schedule a consultation.