Courts May Not Depart from the Bankruptcy Priority Rule in Chapter 11 Structured Dismissals -
For more than a century, a cornerstone of federal bankruptcy law has been the absolute priority rule, which ensures that a debtor estate’s assets are distributed to senior and special classes of creditors over junior creditors. From the inception of this rule, parties have looked for ways to avoid its consequences, the most current of which was the use of a “structured dismissal.” In March of this year, the Supreme Court put an end to the use of structured dismissals as a means of bypassing absolute priority rules over the objection of an affected creditor, even in the “rarest” of cases. See Czyzewski v. Jevic Holding Corp. 137 S. Ct. 973, 978 (2017).
Legal Background -
A business may file for bankruptcy under either Chapter 7 or Chapter 11 of the United States Bankruptcy Code. In a Chapter 7 bankruptcy, a trustee liquidates the debtor’s assets and distributes them to creditors. Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973, 978 (2017) (citing 11 U.S.C. § 701 et seq.). In a Chapter 11 bankruptcy, a debtor business and its creditors negotiate a plan that will govern the distribution of the estate’s assets, often keeping the business operating as a going concern. Id. (citing §§ 1121, 1123, 1129 and 1141).
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