Tennessee companies considering undergoing a Chapter 11 bankruptcy may be interested to learn about a March 2017 U.S. Supreme Court decision. The court ruled 6-2 that bankruptcy courts do not have the authority to allow select creditors to bypass others in the order of repayment.
Under Chapter 11, a bankruptcy plan assigns claims to a specific class and determines how each class of claims is to be handled. A company that employs structural dismissal agrees to pay one group of creditors that have priority, but not the other creditors that have the same type of priority. The bankruptcy can then be dismissed.
A trucking company based in New Jersey used a structured dismissal to make sure that the attorneys that worked on its Chapter 11 bankruptcy and other creditors were paid. The company’s drivers who had the same priority were not paid. In response, the drivers filed a lawsuit for $8 million in damages, which was approved by the bankruptcy court.
Another suit was filed by a group of unsecured creditors against two entities that possessed liens against the trucking company. The trucking company and the creditors eventually settled. However, the drivers opposed the settlement because they should have had a higher priority than some of the other creditors. The bankruptcy court approved the settlement and the ruling was confirmed by a district court and then a circuit court before it was heard by the Supreme Court, which reversed the ruling and determined that structured dismissals that do not adhere to normal priority rules require the approval of affected creditors.
Chapter 11 can be an effective form of debt reorganization for businesses that are facing temporary financial issues. One key is to getting the restructuring plan approved, and an attorney who has experience with these matters can often be of assistance in this regard.