Business Law

In re KG Winddown, LLC (Bankr. S.D. N.Y.)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), analyzing a recent decision of interest:

SUMMARY

So long as a structured dismissal does not violate the absolute priority rule, a bankruptcy court may approve it notwithstanding the Supreme Court’s decision in Czyzewski v. Jevic Holding Corp (In re Jevic Holding Corp.), 137 S. Ct. 973 (2017), according to a bankruptcy court in the Southern District of New York (the “Court”). In re KG Winddown, LLC, 2021 WL 2350839 (Bankr. S.D. N.Y. June 9, 2021).

To view the opinion, click here.

FACTS

Numerous debtors, referred to here by their new company name “KG Winddown, LLC” after the sale described below, filed voluntary chapter 11 petitions in July 2020. The cases were administratively consolidated and their joint assets offered for sale shortly after the cases commenced. In December 2020 substantially all assets were sold to BSP Agency, the debtors’ prepetition and DIP lender, for a partial credit bid against the prepetition secured claim, $100,00 in cash reserved for distribution to holders of allowed general unsecured claims, and assumption of certain liabilities and executory contracts (which included curing defaults).

After the sale, the debtors had a cash balance of a little over $1.1 million, which decreased with time. With a discount from debtors’ counsel, the cash on hand was sufficient to pay administrative priority claims but nothing more. Since the debtors had insufficient remaining cash and assets to propose a plan and perceived no value in conversion to a chapter 7, the debtors filed a motion for a structured dismissal which would pay the remaining administrative expenses including professional fees and United States Trustee’s fees before the dismissal orders were entered. The debtors also asked the Court to order that all prior orders of the Court remain in full force and effect, notwithstanding the provisions of Section 349 of the Bankruptcy Code, and that the Court retain jurisdiction over a “related to” adversary proceeding between BSP and a third party.

The United States Trustee objected to the proposed dismissal order, not because of Jevic or the proposed distributions before dismissal, but rather because it believed an order was unnecessary for payment of the administrative expenses upon dismissal, retention of jurisdiction over the adversary was unwarranted, and maintaining the prior orders violated Section 349. The Court overruled all objections and approved not only the structured dismissal but also the retention of jurisdiction over the adversary and the continued effect of the prior orders.

REASONING

The Court first observed that dismissal of the cases was warranted where no plan could be proposed and the costs entailed with conversion to a chapter 7 would diminish the funds available to pay administrative expenses while providing no value to creditors. On its own inquiry, the Court then looked at the holding in Jevic to determine whether it forbade all structured dismissals or only those that violated the distribution scheme established by the Code. It noted that the Jevic court acknowledged the potential propriety of dismissals with conditions and that they were quite common in the bankruptcy system. The Supreme Court had declined to “express a view about the legality of structured dismissals in general” and instead had limited the scope of its holding to preventing a bankruptcy court from approving “a structured dismissal that provides for distributions that do not follow ordinary priority rules without the affected creditors’ consent.” The Court then cited to Collier’s which had opined that Jevic did not entirely close the door on structured dismissals, only those which violated the distribution order set by the Code. 7 COLLIER ON BANKRUPTCY ¶ 1112.09. Since the distributions proposed in the dismissal motion were only to the administrative priority claimants, the Court saw no prohibition on approving a structured dismissal here.

With regard to retaining jurisdiction of the related-to adversary, the Court cited to prevailing Second Circuit precedent which held that although it would ordinarily be prudent to dismiss pending adversaries when a bankruptcy main case was dismissed, such termination was neither required nor automatic. The case law in the Circuit, similar to that in many other circuits, established criteria to be weighed by the bankruptcy court—judicial economy, convenience to the parties, fairness and comity—in making the discretionary decision to retain jurisdiction of a proceeding over which it had jurisdiction when the adversary was filed despite the dismissal of the underlying case. Here, because the adversary arose from issues established by the sale order, retaining jurisdiction was in the sound discretion of the court.

Finally, the Court noted that Jevic had addressed the constraints of Section 349: “section 349(b) ‘appears designed to give courts the flexibility to make the appropriate orders to protect rights acquired in reliance on the bankruptcy case.’” 137 S.Ct. at 984. Of particular concern to the US Trustee was an exculpation clause in favor of BSP as the buyer in the sale order which would remain in effect if the relief requested by the debtors was granted. The Court reasoned that BSP had relied on that provision when it bought the assets. Therefore, the Court had the flexibility to continue the effectiveness of its prior orders notwithstanding the dismissal.

AUTHOR’S COMMENTS

I have no doubts that structured dismissals can survive Jevic so long as the mandated distribution schemeisnot violated. I must admit I am puzzled by the courts which have declined to approve them only because of the Jevic ruling. The Supreme Court carefully limited the scope of its holding and declined to express an opinion on structured dismissals in general. Such dismissals are vital to the efficiency of many chapter 11 cases, which often result in a Section 363 sale of all assets, with limited remaining funds. In those cases, as here, no plan can be proposed and conversion to a chapter 7, with its attendant administrative costs, could only harm creditors because those costs would eat up the precious funds available. Therefore, I applaud the Court for publishing a well-reasoned opinion which supports such dismissals.

These materials were written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.


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