An article in the April edition of the ABI Journal proposes that changes be made to the Bankruptcy Code to allow for a “structured dismissal,” as well as a joint plan and disclosure statement process to maximize distributions to unsecured creditors. “Increasingly, chapter 11 is a tool for a failing company to shed its assets and distribute its unencumbered cash proceeds, if any, to creditors,” Brent Weisenberg of Cooley LLP (New York) writes in his article
“Expediting Chapter 11 Debtor’s Distribution to Creditors.” “The exit strategies clearly provided for chapter 11 debtors—confirmation of a liquidation plan or conversion of the case to chapter 7, with their attendant delay, expense and risk—no longer adequately address the goals of the various constituencies within a liquidating chapter 11.”

Weisenberg’s proposal centers on two parts: (1) a “structured” dismissal of the chapter 11 case, i.e., a dismissal of the case, along with a grant of authority to the estate fiduciaries to make a distribution to creditors; and (2) a
combined disclosure statement and plan hearing (similar to the procedure embodied in §1125(f) of the Bankruptcy Code for small business debtors). “While many bankruptcy courts have authorized these alternative exit strategies as being permitted by the Code, the time is ripe to make crystal clear that these procedures are in fact authorized by the Code,” Weisenberg writes.

Weisenberg said that conditions to use the structured dismissal “should include (1) the debtor holding less cash to be distributed than some maximum amount, and (2) establishing, by a preponderance of the evidence, that (a) proceeding in the requested fashion is in the best interests of all creditors and (b) confirming that a chapter 11 plan of liquidation would be overly burdensome or impractical under the specific facts of the case.” He cautions that until changes are made, creditors and bankruptcy professionals “will be forced to expend funds on an overly complicated and cumbersome plan-confirmation process, or be compelled to fight over whether utilizing these alternative exit strategies is permitted under the Code.”

To obtain a copy of “Expediting Chapter 11 Debtor’s Distribution to Creditors,” published in the April edition of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at jhartgen@abiworld.org