Presenting a live 90-minute webinar with interactive Q&A Chapter 11 Structured Dismissals: Viable Exit Strategy or Impermissible Under Bankruptcy Code? Evaluating Benefits to Debtors and Creditors, Provisions of Dismissal Orders, and Key Objections to Structured Dismissals TUESDAY, OCTOBER 28, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Jay R. Indyke, Partner, Cooley , New York Michael J. Lichtenstein, Co-Chair Bankruptcy Creditors Rights Group, Shulman Rogers Gandal Pordy & Ecker , Potomac, Md. David M. Posner, Member, Otterbourg , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Chapter 11 Structured Dismissals: Viable Exit Strategy or Impermissible Under Bankruptcy Code? Evaluating Benefits to Debtors and Creditors, Provisions of Dismissal Orders and Key Objections to Structured Dismissals Presented by: Jay R. Indyke Michael J. Lichtenstein David M. Posner October 28, 2014
What is a Structured Dismissal? • Three primary options for exit vehicles following the liquidation or sale of substantially all of a debtor’s assets: • Liquidating Chapter 11 Plan • Conversion to Chapter 7 • Dismissal of Chapter 11 Case • Considerations • Is estate administratively solvent? Can priority claims be paid? • Can and how will estate professionals be compensated? • How will settlements with creditors be implemented? • Are there are remaining assets in the estate? • Is there a need for a claims resolution process? • Have claims been paid? • Finality (i.e., releases, exculpations) for officers, directors and stakeholder groups? 5
What is a Structured Dismissal? • A dismissal with “bells and whistles” • Involves traditional dismissal of chapter 11 case coupled with some or all of the following “structured” components: • Procedures for reconciling and paying claims • “Gifting” of recoveries to unsecured creditors • Releases and exculpations • Provisions for the Bankruptcy Court’s continued retention of jurisdiction over certain post - dismissal matters • Conditions to effectiveness of dismissal • Provisions that, notwithstanding § 349, prior bankruptcy court orders survive dismissal • Bankruptcy Courts in DE, NY and elsewhere have been approving structured dismissals with increasing frequency • However, there are few published decisions that have squarely addressed the issues that arise in structured dismissals • Exception: Buffet Partners (discussed herein) 6
Conditions for Structured Dismissals • Three scenarios typically lead to structured dismissals • Minimal asset sale proceeds leave estate administratively insolvent or unable to fund a plan process • Minimal asset sale proceeds (or secured lender settlement) provide minimal distribution to unsecured creditors; conducting plan process would eliminate or deplete funds available for distribution to general unsecured or administrative creditors • Proponents can demonstrate that reorganization outside bankruptcy is prudent and likely (even where a plan may otherwise be feasible) • Key Factor: demonstrating that there are no assets remaining to make meaningful distributions to creditors 7
Benefits of Structured Dismissals • Eliminate cost and delay of plan process • Eliminate cost, delay, uncertainties and loss of control over causes of action associated with chapter 7 process and trustee • Streamline claims resolution process • May be the difference between administrative solvency and insolvency (i.e., if plan process uses remaining funds that would otherwise be used to pay administrative and priority claims) • Preserve Bankruptcy Court jurisdiction over matters Bankruptcy Court is best suited to address • Effect terms of settlements with creditors without burdensome plan process 8
Alternatives to Structured Dismissals in the Liquidation/Post-Sale Context • Liquidating Plan • Time Consuming – typically 75-90 days from the date of filing the plan to confirmation thereof • 28 days’ notice of disclosure statement hearing • 28 days’ notice of confirmation hearing • Additional service time • Expensive • Drafting fees (plan, disclosure statement, disclosure statement approval motion, notices, ballots, etc.) • Service/solicitation costs • Retention of claims and noticing agent • Implementation of plan, including paying post-effective date professionals 9
Alternatives to Structured Dismissals in the Liquidation/Post-Sale Context (cont.) • Conversion to Chapter 7 • Additional time necessary for chapter 7 trustee to “get up to speed” and fees associated therewith • Loss of control over causes of action/preferences • If causes of action/preferences were not sold to the buyer or otherwise transferred, a chapter 7 trustee may spend time and money investigating and pursuing these claims, even in cases where a creditors’ committee determined that pursuit of such causes of action was (i) inequitable to unsecured creditors in cases where unsecured creditors are unlikely to receive a substantial recovery, (ii) likely to further delay distributions, and (iii) otherwise not a worthwhile use of time and resources, including delaying distributions. • Additional layer of fees and expenses associated with (i) possible litigation regarding whether case should be converted, (ii) subsequent chapter 7 trustee fees and chapter 7 trustee’s counsel fees, and (iii) payment of U.S. Trustee fees. • However, conversion to chapter 7 incorporates certain checks and balances that certain dismissals arguably do not offer (i.e., chapter 7 trustee issues a “final report” identifying assets liquidated, claims quantified and proposed distributions and chapter 7 trustee is an independent fiduciary to examine claims and causes of action). 10
Legal Bases for Structured Dismissals – § 1112(b) • “[T]he court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause.” ( § 1112(b)) • Section 1112(b)(4) contains a non-exhaustive list of factors justifying “cause” • Two most common justifications for structured dismissals: • “a substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation” exists ( § 1112(b)(4)(A)) • the debtor is unable to effectuate substantial consummation of a plan ( § 1112(b)(4)(M)) • If “cause” is shown, court is required to convert or dismiss case, “absent unusual circumstances … that the requested conversion or dismissal is not in the best interest of creditors and the estate.” ( § 1112(b)(1)) 11
Legal Bases for Structured Dismissals – §§ 305(a)(1) and 105(a) • T he court may dismiss a case under any chapter of the Bankruptcy Code if “the interests of creditors and the debtor would be better served by such dismissal” ( § 305(a)(1)) • § 305 specifically refers to the debtor’s interests, as well as those of the creditors and estate • Typically relied upon in out-of-court workout scenario (Colonial Ford) • The remedy is extraordinary, because under § 305(c), dismissal under § 305 is not appealable. It requires more than a simple balancing of the harm to the debtor and its creditors. • Requires near universal agreement among stakeholders • Parties requesting structured dismissal under either § 1112(b) and/or § 305(a)(1) often include a request pursuant to § 105(a) that allows the court to enter orders necessary or appropriate to carry out the provisions of the Bankruptcy Code • Parties often assert that the costs of converting to and administering a case under chapter 7, as well as the enhanced provisions in the structured dismissal order, are in the best interests of creditors and the estate and is the preferable remedy. 12
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