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The United Supreme Court held on March 22, 2017, in Czyzewski v. Jevi Holding Corp., 580 U.S. ____ (2017), that a structured dismissal of a Chapter 11 bankruptcy case cannot deviate from the basic priority scheme set forth in the Bankruptcy Code, unless adversely-affected parties consent.

Chapter 11 & Its Outcomes

Chapter 11 is the most complex type of bankruptcy and is usually reserved for businesses. Some individuals can file for bankruptcy if, for example, they do not qualify for Chapter 7 and their debt exceeds the limits for a Chapter 13 debtor.

In a Chapter 11, there are three potential outcomes. First, the court could confirm a Chapter 11 Plan. The Plan would govern the post-confirmation relationship between the debtor and its creditors. The second possible outcome is that the bankruptcy case could be converted to Chapter 7. And the final possible outcome is that the case could be dismissed.

Dismissal of a Chapter 11 bankruptcy usually leaves the parties where they were prior to the bankruptcy itself, though the parties may enter into an agreed order to structure the dismissal.

This is particularly useful where the assets of the debtor have been largely liquidated through a 363 Sale and the only remaining thing to do is distribute the remaining funds. Rather than incur administrative fees through the plan confirmation process, a structured dismissal allows for a distribution of those funds outside of the ordinary plan process.

The Czyzewski Ruling

The facts of the case were relatively simple: employee truck drivers of the debtor were terminated en masse and were therefore entitled to receive compensation under the WARN Act. A portion of these claims is often entitled to priority treatment under the Bankruptcy Code. 11 U.S.C. 507(a)(4).

But the structured dismissal provided the truck drivers with nothing while providing monies to creditors on lower rungs of the bankruptcy priority scheme. Thus the appeal of the structured dismissal.

Justice Breyer delivered the opinion of the Court which you can read by clicking here.