Up the Chute, Down the Ladder: Shifting Priorities Through Structured Dismissals in Bankruptcy
By Bethany K. Smith
In a structured dismissal of a Chapter 11 bankruptcy case, a bankruptcy court approves case dismissal alongside a stakeholder agreement as to the manner in which the estate is to be dealt with once the case has been dismissed. Such orders are controversial in that they are not explicitly authorized through the U.S. Bankruptcy Code (“the Code”) and are especially controversial where the accompanying agreement seeks to distribute estate property in contravention of the priority scheme laid out in § 507 of the Code. Where the agreement violates this so-called waterfall payment method, bankruptcy courts are faced with difficult questions: Should structured dismissals be strictly governed by the Code’s priority regime? Should they ever be approved where they deviate from priorities? If so, what standard should a bankruptcy court apply in deciding whether deviation is proper?
This Note explores a recent decision by the Third Circuit, In re Jevic Holding Corp., where the court affirmed a bankruptcy court’s approval of a structured dismissal that cut against priorities, relying heavily on principles of economic efficiency and stakeholder compromise in reaching its holding. This Note argues that, while priority deviation is sometimes proper, the standard applied by the Third Circuit for approval of priority-noncompliant structured dismissals does not go far enough to ensure that the procedural safeguards of Chapter 11 are upheld. This Note therefore proposes a multifactor analysis that would provide a more transparent system for approval of structured dismissals that do not comply with priorities.