Growing Alternative to Asset Sales in California

California Chapter 11 Bankruptcy: Structured Dismissal

Chapter 11 debtors in recent times have found it convenient to utilize bankruptcy as a means of effectuating the orderly disposal of their assets to repay their debts with their creditors.

Clause 363 of the California bankruptcy laws recognize Chapter 11 debtors’ concerns regarding their assets when liquidation comes to play. As such, a debtor is given the leeway to proceed with the Chapter 11 plan, given that it complies with clauses 1123 and 1129.

A structured dismissal allows the trustees in a bankruptcy case to minimize costs and maximize creditor recoveries by selling off virtually all of the debtor’s assets.

In a typical Chapter 11 California bankruptcy case, the parties in a suite propose a reorganization or liquidation plan that is subject to confirmation by the court. The court enters the final decree in this aspect after substantial consummation and administration.

The entire process takes up time to complete, thereby increasing the costs of enacting the bankruptcy reorganization plan. A structural dismissal will come in handy in this case as it would expedite the processes necessary to go through with the Chapter 11 bankruptcy plan.

After the court has approved a proposed debt reorganization plan and the sale of the debtor’s assets under section 363(b), a debtor in a regular California Chapter 11 bankruptcy would typically be given a chance to seek confirmation of the liquidation plan or seek to have the case converted to a Chapter 7 liquidation. Such a process would inevitably take up significant time and administrative costs.

A structured dismissal makes the process shorter as the debtor would, in most cases, have sold their assets but only lack sufficient liquidity to fund the plan confirmation process.

Under California law, a structured dismissal would include provisions such as expedited procedures to resolve objections to claims, provisions specifying the manner and amount of distribution to creditors as well as gifting arrangements. These provisions notwithstanding however, the prior court orders issued before the dismissal would remain standing and exercisable by law.