Over the years, companies often file Chapter 11 bankruptcy and, for a number of reasons, never make it through the entire process to approval of a Chapter 11 plan of reorganization. In some cases, the company is unable to reorganize and the case is converted to a liquidation proceeding under Chapter 7. In other instances, the court determines that the debtor did not commence the case in good faith for a proper reorganization purpose and dismisses the proceeding. In recent years, another alternative has emerged. Disputes between the debtor and its primary creditor constituencies have been resolved by the debtor requesting a “structured dismissal” of the case to implement the settlement outside of the bankruptcy process. The issue of whether a bankruptcy court should approve a structured dismissal when the distribution of proceeds under the terms of the settlement would not comply with provisions of the Bankruptcy Code had the settlement been proposed under a Chapter 11 plan of reorganization was recently addressed by the U.S. Court of Appeals for the Third Circuit in the matter of In re Jevic Holding, No. 14-1465 slip op. (3d Cir. May 21, 2015). In this case, in a split 2-1 decision, the court held that the structured dismissal of a bankruptcy case that does not adhere to the Bankruptcy Code’s priority scheme is nevertheless permitted in rare instances when virtually no other option is available.
The Facts: Jevic’s LBO
Jevic Transportation Inc. was a New Jersey trucking company. According to the opinion, as Jevic’s business declined, private equity firm Sun Capital Partners acquired the company in a leveraged buyout financed by a group of lenders led by CIT Group. The company continued to struggle. Ultimately, Jevic’s employees received termination notices and the company filed Chapter 11 bankruptcy the next day in the U.S. Bankruptcy Court for the District of Delaware.
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