New Opinion on Structured Dismissals in Bankruptcy: Naartjie Custom Kids, Inc.

A copy of the opinion is embedded below.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF UTAH
In re: Bankruptcy No. 14-29666
NAARTJIE CUSTOM KIDS, INC., Chapter 11
Debtor. Chief Judge William T. Thurman
MEMORANDUM DECISION
Naartjie Custom Kids, Inc. (“Naartjie” or the “Debtor”), joined by the Unsecured Creditor’s
Committee (the “Committee”), moves this Court to dismiss its Chapter 11 case (the “Motion to
Dismiss”). Upon dismissal, however, the Debtor requests that the orders of this Court remain in full
force and effect and that release and exculpation provisions be included in the order dismissing the
case. Only the United States Trustee objected to the Motion to Dismiss, arguing that there is no
statutory authority to grant the relief sought. The Court conducted a hearing on June 23, 2015, where
it received evidence1 and heard oral argument. Annette W. Jarvis, Michael F. Thomson, and Jeffrey
M. Armington appeared on behalf of the Debtor. Michael R. Johnson, Bradford J. Sandler, and
1 The only evidence offered was the testimony of Jeffrey Nerland, the Debtor’s Chief
Restructuring Officer.
1
U.S. Bankruptcy Judge
WILLIAM T. THURMAN
Dated: July 13, 2015
This order is SIGNED.
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Teddy M. Kapur appeared on behalf of the Committee, John T. Morgan appeared on behalf of the
United States Trustee (the “Trustee”), and Engels Tejeda appeared on behalf of Target Ease
International (“Target Ease”). Based on the evidence, the submissions of the parties, oral argument,
and the Court’s own independent research, the Court issues the following Memorandum Decision,
which constitutes the Court’s findings of fact and conclusions of law under Federal Rule of Civil
Procedure 52, made applicable to these matters by Federal Rules of Bankruptcy Procedure 9014 and
7052.2
I. JURISDICTION, NOTICE, AND VENUE
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. The
matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). Venue is proper in this
district pursuant to 28 U.S.C. §§ 1408 and 1409. The Debtor sent notice to all parties listed on the
creditor matrix,3 and the Court finds that notice was proper in all respects.
II. BACKGROUND
Naartjie filed for Chapter 11 relief on September 12, 2014 (the “Date of Petition”).4 The
Trustee appointed the Committee on September 22, 2014.5 On its statement of financial affairs, the
2 Any of the findings of fact herein are also deemed, to the extent appropriate, to be
conclusions of law, and any conclusions of law herein are also deemed, to the extent appropriate,
to be findings of fact, and they shall be equally binding as both.
3 Case No. 14-29666, Docket 519. Hereinafter, any reference to the docket is to that in
Case No. 14-29666.
4 Docket 1.
5 Docket 69.
2
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Debtor lists $18,277,965.01 in liabilities and $10,199,003.64 in assets.6 Prior to and on the Date of
Petition, Naartjie intended to obtain approximately $8,500,000 in debtor in possession (“DIP”)
financing in an attempt to reorganize its business, but the expected financing did not come to
fruition.7 Naartjie quickly shifted from the prospect of reorganization to an orderly liquidation mode
and obtained $1,000,000 in DIP financing from Salus Capital Partners, LLC (“Salus”).8 After
appropriate notice and hearings, the Court subsequently approved three sales, which comprise
substantially all of the Debtor’s assets: (1) a “going out of business” sale;9 (2) a sale of its intellectual
property rights and shareholder rights in its South African subsidiary ZA One;10 and (3) a sale of the
Debtor’s remaining IT equipment and furniture.11
The deadlines to file a proof of claim were January 14, 2015 for nongovernmental creditors
and March 11, 2015 for governmental units.12 As of May 4, 2015, two hundred and twenty-seven
claims have been filed, many of which asserted administrative claims. Upon motion of the Debtor,
the Court ordered that all parties seeking allowance of administrative claims, other than retained
professionals, file a motion seeking such no later than April 20, 2015 (the “Bar Date”).13 On April
6 Docket 89.
7 See Docket 48.
8 See Docket 66.
9 Docket 132.
10 Docket 290.
11 Dockets 462 and 498.
12 Docket 68.
13 Docket 448.
3
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23, 2015, the Debtor filed a Notice of Administrative Expense Allowance Motion and Proofs of
Claim and Notice of Hearing, objecting to the administrative claims of all parties that had not met
the Bar Date,14 and the Court sustained the objections.15
Three of the more active creditors in this case are Target Ease, Mid-America, Overseas, Inc.
(“MAO”), and the Secured Noteholders.16 The Secured Noteholders claimed a second position lien
against virtually all of the Debtor’s assets in the amount of $8,884,959.91.17 Target Ease filed a proof
of claim in the amount of $7,081,991.61, which included an administrative claim of $2,157,968.50.18
Target Ease also asserted a reclamation claim of $2,655,315.20, part of which was included in its
administrative claim.19 MAO filed a proof of claim in the amount of $339,923.47, asserting that its
claim was secured by a maritime lien.20 Early in the case and upon the sale of substantially all of the
Debtor’s assets, the Debtor and the Committee entered into settlement negotiations with Target Ease,
MAO, and the Secured Noteholders.
14 Docket 489.
15 Docket 535.
16 Collectively, the Secured Noteholders are Nogales Investors Fund II, L.P., Zions SBIC,
L.L.C., The Brent L Bishop Trust under agreement dated February 8, 1995, Bishop Special Asset
Management, LLC, and The B. Attitudes Foundation.
17 See Docket 89, Schedule D. Salus, as the DIP financer, held the first position lien on
virtually all of the Debtor’s assets. Pursuant to the DIP Term Sheet, Docket 48, Exhibit A at 5, if
there was a sale of substantially all of the Debtor’s assets, Salus was to be paid in full. There was
such a sale, and the Debtor paid Salus in full, which included pre-petition debt of approximately
$3,490,000. See infra note 46. Accordingly, Salus was not a party to the Settlement Agreement as
defined herein.
18 Proof of Claim No. 47.
19 See Proof of Claim No. 47 and Docket 104.
20 Proof of Claim No. 44.
4
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The parties reached an agreement (the “Settlement Agreement”) whereby the Debtor will,
subject to either a confirmed Chapter 11 plan or a structured dismissal,21 distribute the estate assets
as follows: (1) all allowed administrative claims, which are subject to the Settlement Budget,22 and
priority claims, not to exceed $382,000, will be paid in full; (2) MAO will receive $140,000 in full
satisfaction of its claim; and (3) all remaining amounts will be distributed by the following
percentages in full satisfaction of the Secured Noteholders and Target Ease’s claims: (a) 45% to the
Secured Noteholders; (b) 30.5% to Target Ease; and (c) 24.5% to allowed unsecured creditors.23 The
Settlement Agreement also provided that customary release and exculpation provisions will be
included in the order resolving the case.24 On February 25, 2015, the Court conducted a hearing on
the Debtor’s Motion to Approve the Settlement Agreement. Finding that notice was proper, there
were no objections, and the Settlement Agreement satisfied the Kopexa factors,25 the Court approved
the Settlement Agreement.26
21 Docket 424, Exhibit A at 1; Audio Transcript of Court Hearing February 25, 2015,
10:45:04 a.m.
22 See Docket 424, Exhibit 1 of Exhibit A (showing an estimated incurred net balance of
$1,292,700 and projected balance of $600,000 for professionals of the Debtor and the
Committee, with a funded escrow amount of $1,524,000 as of December 13, 2014).
23 Docket 424, Exhibit A.
24 Id. at 3.
25 Kopp v. All Am. Life Ins. Co. (In re Kopexa Realty Venture Co.), 213 B.R. 1020, 1022
(B.A.P. 10th Cir. 1997) (describing the factors necessary to approve a compromise and
settlement under Rule 9019).
26 Audio Transcript of Court Hearing February 25, 2015, at 10:51:02 a.m. (weighing the
probability of success of the underlying litigation on the merits, the difficulty in collection, the
complexity and expense of the litigation, and the best interest of creditors); see also Docket 424.
5
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On May 1, 2015, the Court authorized the Debtor to enter into rejection agreements with
certain real property lessors, i.e. SVN Nobbs East Saharah, LLC, LM Wasatch, LLC and BSFMT
Wasatch, LLC.27 Pursuant to the rejection agreements, Naartjie rejected the lease on its corporate
headquarters in Salt Lake City, Utah, but was allowed to remain in a small portion of the property
rent-free through June 1, 2015, or through June 30, 2015 if necessary, for its four remaining
employees to address and supervise the claims reconciliation process.28 As of June 30, 2015,
objections to proofs of claim remain,29 but the Debtor proposes that its Chapter 11 case not be
dismissed until the completion of the claims reconciliation process.30
At this point in time, the Debtor is winding down and, pursuant to the Settlement Agreement
and the sale of substantially all of its assets, the Debtor moves this Court to dismiss its case, but
requests that certain provisions be included in the order of dismissal. These provisions include: (1)
all of the Court’s orders will remain in full force and effect upon dismissal; (2) the Court shall retain
jurisdiction to review and approve professional fees of the Debtor and the Committee; (3) the Court
shall retain jurisdiction over any dispute that arises from the interpretation or implementation of the
proposed dismissal order; (4) exculpation clauses and general releases shall be included in the
dismissal order as contemplated in the Settlement Agreement; and (5) the Debtor and the Committee
shall be authorized to make distributions pursuant to the Settlement Agreement. The Debtor’s
27 Dockets 502.
28 See Id. and Docket 474.
29 See, e.g., Dockets 546 and 560 (pending objection to claim number 81 filed by James
A. McGuire and creditor’s response).
30 Docket 513, Exhibit B, ¶¶ 1 and 2.
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requested relief is commonly referred to as a “structured dismissal.”
The Debtor argues that the Court can grant a structured dismissal in this case for two reasons.
First, citing to several cases throughout the country that have granted a structured dismissal, the
Debtor argues that a structured dismissal is within this Court’s authority pursuant to §§ 105(a),
305(a), and 349(b) and Rule 1017(a).31 Second, the Debtor contends that a structured dismissal is
appropriate in this case because there are no causes of action for the Debtor or Committee to
prosecute, there are no pending adversary proceedings, the claims reconciliation process will be
completed before the case is dismissed, the Debtor gave notice of the Motion to Dismiss to all parties
in interest, and no party with an economic stake has objected. Further, the Debtor is joined in its
Motion to Dismiss by the Committee, and Target Ease advocated for the relief requested. The Debtor
asserts that its proposal is straightforward and is the most efficient and economical way to administer
the estate assets. Accordingly, the Debtor contends that it is in the best interests of all parties for the
Court to grant a structured dismissal.
The Trustee urges this Court to deny the Motion to Dismiss, arguing that the Bankruptcy
Code does not authorize the Court to grant a “structured dismissal” and that the Debtor has a viable
option of proposing and confirming a plan of reorganization. In advancing his argument, the Trustee
31 The Trustee argues that a Chapter 11 case may only be dismissed pursuant to § 1112(b).
In reply, the Debtor claims that the Court can also grant the Motion to Dismiss pursuant to §
1112(b) as there is no reasonable likelihood of rehabilitation and the estate is suffering a
diminution of assets. Although it appears that § 1112(b) may have been an easier standard to
meet than the standard required under § 305(a), because the Debtor elected not to move under
that provision, the Court will not address it. See Local Rule 9013-1(e)(2) (“A reply memorandum
is limited to rebuttal of matters raised in the response.”); see also E.E.O.C. v. Outback Steak
House of Fla., Inc., 520 F. Supp. 2d 1250, 1260 (D. Colo. 2007) (“When a party puts forth new
arguments in a reply brief, a court may avoid error by either: (1) choosing not to rely on the new
arguments in determining the outcome of the motion; or (2) permitting the nonmoving party to
file a surreply.”).
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first explains that there are only three ways to exit a Chapter 11 case: (1) by confirmation of a plan
pursuant to § 1129; (2) by dismissal of the case pursuant to § 1112(b); or (3) by conversion of the
case pursuant to § 1112(b). Thus, as the Trustee argues, the Court would have to rely on its inherent
authority under § 105(a) to approve the proposed relief, which, citing to Law v. Siegel,32 the Trustee
contends would amount to a “statutory work-around.” The Trustee does not address the Debtor’s
argument under § 305(a), but claims that the proposed dismissal is contrary to Federal Rule of
Bankruptcy Procedure 3021 and that the sale of substantially all of the Debtor’s assets should not
permit the Debtor to evade the requirements of Chapter 11. Lastly, despite the Debtor’s contention
that confirming a plan would cost the estate over $300,000, the Trustee asserts that confirmation
would be straightforward and less costly based on the Settlement Agreement.
III. DISCUSSION
There are two issues that the Court must address. First, whether this Court has the statutory
authority to grant a structured dismissal, and, if so, whether the Debtor has met its burden in
establishing cause for the Court to grant the requested relief.33 In addressing these issues, the Court
addresses for the first time the application of what appears to be a growing trend of structured
dismissals.
32 — U.S. —-, 134 S. Ct. 1188, 1194–95 (2014) (“We have long held that whatever
equitable powers remain in the bankruptcy courts must and can only be exercised within the
confines of the Bankruptcy Code.”).
33 The Trustee and the Debtor both address conversion of the Chapter 11 case to one
under Chapter 7, but neither party advocates that position. Further, § 305(a) provides for
dismissal or abstention, not conversion. Accordingly, based on the Motion to Dismiss, the Court
should either grant a structured dismissal, if possible, or the Debtor should continue with the
confirmation process.
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A. Structured Dismissal
The Tenth Circuit Court of Appeals has not addressed the issue of whether a bankruptcy
court can authorize a structured dismissal. Several courts throughout the nation have addressed the
issue, the majority of which appear to agree that the bankruptcy court can grant a structured dismissal
in appropriate circumstances.34 In arguing that the Bankruptcy Code does not statutorily authorize
a bankruptcy court to grant a structured dismissal, the Trustee relies, in part, on a report and
recommendation of the American Bankruptcy Institute’s Commission to Study the Reform of
Chapter 1135 and the legislative history of § 349. Before addressing these arguments, however, the
Court must begin its analysis with the plain language of the statute,36 “with the understanding that
Congress ‘says in a statute what it means and means in a statute what it says.”37 If the statute’s
34 See Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic
Holding Corp.), 787 F.3d 173 (3d Cir. 2015) (affirming order granting structured dismissal); In
re Biolitec, Inc., 528 B.R. 261 (Bankr. D.N.J. 2014) (denying structured dismissal because the
proposed dismissal sought to “alter parties’ rights without their consent and lack[ed] many of the
Code’s most important safeguards”); In re Buffet Partners, L.P., No. 14-30699-HDH-11, 2014
WL 3735804 (Bankr. N.D. Tex. 2014) (granting a structured dismissal pursuant to §§ 1112(b)
and 105(a)).
35 Am. Bankr. Inst., Comm’n to Study Reform of Chapter 11, 2012–2014 Final Report
and Recommendations 269–73 (2014).
36 See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240–41 (1989) (“[W]here . . .
the statute’s language is plain, ‘the sole function of the courts is to enforce it according to its
terms.’”) (citation omitted).
37 Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)
(citation and internal quotation marks omitted); see also Wadsworth v. Word of Life Christian
Ctr. (In re McGough), 737 F.3d 1268, 1276 (10th Cir. 2013) (“The words chosen by Congress
are a restraint upon the courts . . . . If a party is unhappy with a statute’s plain meaning, it may
always seek an amendment from Congress.”) (citations and internal quotation marks omitted).
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language is clear and unambiguous, the Court’s inquiry normally ends.38
The Trustee argues that dismissal of a Chapter 11 case is only permitted under § 1112(b). The
Debtor does not dispute that § 1112(b) authorizes dismissal if cause is shown. However, the Debtor
is not moving under § 1112(b), but rather § 305(a). Section 305(a) provides in relevant part that
“[t]he court, after notice and a hearing, may dismiss a case under this title . . . at any time if — (1)
the interests of creditors and the debtor would be better served by such dismissal or suspension.” The
language of § 305(a) is plain: if dismissal of a case, no matter the chapter, would better serve the
interests of creditors and the debtor, then the case may be dismissed at any time, whether a plan, if
required, has been confirmed or not. There is no ambiguity in the statutory language. Accordingly,
the Trustee’s argument that a Chapter 11 case can only be dismissed pursuant to § 1112(b) does not
withstand closer examination.
A case under Chapter 11 may be dismissed pursuant to §§ 305(a)(1) or 1112(b) if cause is
shown, but does the Court have the statutory authority to grant a structured dismissal? In other
words, may the Court alter the effect of dismissal? In answering this question, the Court looks to the
plain language of § 349(b), which provides:
Unless the court, for cause, orders otherwise, a dismissal of a case . . .
(1) reinstates—
(A) any proceeding or custodianship superseded under section 543 of
this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549,
or 724(a) of this title, or preserved under section 510(c)(2), 522 (i)(2),
or 551 of this title; and
(C) any lien voided under section 506(d) of this title;
(2) vacates any order, judgment, or transfer ordered, under section 522(i)(1),
542, 550, or 553 of this title; and
38 See State Bank of S. Utah v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir.
1996).
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(3) revests the property of the estate in the entity in which such property was
vested immediately before the commencement of the case under this title.
This subsection describes the effect of dismissal, but it qualifies the effect by providing that the
Court may, for cause, order otherwise. It follows that, if cause is shown, a bankruptcy court may alter
the effect of dismissal.39 The statute’s language is clear and unambiguous on this point.
Generally, the Court’s inquiry ends if the language of the statute is clear, but the Trustee
raises the concern that the plain language of § 349 is in direct conflict with the legislative intent. In
Ron Pair, the Supreme Court explained that the plain language controls unless “the literal
application of a statute will produce a result demonstrably at odds with the intentions of its
drafters.”40 Citing to the legislative history, the Trustee argues that Congress intended the effect of
dismissal to “undo the bankruptcy case, as far as practicable, and to restore all property rights to the
position in which they were found at the commencement of the case.”41 The selection relied upon,
however, is taken out of context. Prior to the language quoted, the House Report enumerates the
results of dismissal and explains that “[t]he court is permitted to order a different result for cause.”42
The House Report also states: “Where there is a question over the scope of [§ 349(b)], the court will
39 See In re Jevic Holding Corp., 787 F.3d at 181 (“And though § 349 of the Code
contemplates that dismissal will typically reinstate the pre-petition state of affairs by revesting
property in the debtor and vacating orders and judgments of the bankruptcy court, it also
explicitly authorizes the bankruptcy court to alter the effect of dismissal ‘for cause’—in other
words, the Code does not strictly require dismissal of a Chapter 11 case to be a hard reset.”).
40 Ron Pair, 489 U.S. at 242.
41 H.R. Rep. No. 95–595, at 338 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6294.
42 Id.
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make the appropriate orders to protect rights acquired in reliance on the bankruptcy case.”43 Taking
the legislative history as a whole, it is clear that the plain language of the statute is not contrary to,
but rather consonant with, the intent of the drafters. The effect of dismissal is to put the parties, as
much as practicable, back in the positions they occupied pre-bankruptcy. But, if cause is shown,
such as when a structured dismissal will better serve the interests of the creditors and the debtor, the
bankruptcy court may order otherwise and alter the effect of dismissal.44 This interpretation is
“coherent and consistent” with the statutory scheme.45
The Trustee also argues that Federal Rule of Bankruptcy Procedure 3021 does not allow a
distribution to creditors until a Chapter 11 plan is confirmed.46 Rule 3021 provides in part that “after
a plan is confirmed, distribution shall be made to creditors whose claims have been allowed.” This
rule “assumes that distribution will occur only after a plan is confirmed.”47 Although Rule 3021
43 Id.
44 See supra note 34 and accompanying text. The Trustee also raises the concern that any
reliance on § 105(a) would be an abuse of this Court’s authority. The Court disagrees. Based on
the Court’s analysis, if cause is shown under §§ 305(a) or 1112(b), the Court may grant a
structured dismissal pursuant to § 349. Unlike the bankruptcy court in Law v. Siegel, the Court is
not providing relief contrary to an express provision in the Bankruptcy Code, but rather acting
within the confines of it.
45 See Ron Pair, 489 U.S. at 240.
46 As stated in note 17, the DIP Term Sheet provided that Salus would be paid in full if
substantially all of the Debtor’s assets were sold. This included a pre-petition debt, which was
paid prior to confirmation of a plan. See supra note 17. Notably, the Trustee endorsed the
Debtor’s proposed interim order authorizing the Debtor to enter into the DIP Term Sheet on
September 19, 2014, but raised no concern about the application of Rule 3021.
47 State of Ohio Dept. of Taxation v. Swallen’s, Inc. (In re Swallen’s, Inc.), 269 B.R. 634,
637 (B.A.P. 6th Cir. 2001) (finding that the bankruptcy court erred in ordering distribution of
estate assets over the objections of two creditors where no disclosure statement or plan had been
filed). The Sixth Circuit BAP in In re Swallen’s, Inc. discusses that a bankruptcy court cannot
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requires plan confirmation before any distribution to creditors, courts recognize that a bankruptcy
court may order otherwise in extraordinary circumstances.48 The Court likens those extraordinary
circumstances to those that are required in obtaining dismissal under § 305(a)(1).49 As discussed
below, § 305(a)(1) is an extraordinary remedy, and, if the Debtor can satisfy § 305(a)(1), the Court
determines that such a showing in this case will suffice to allow a distribution outside of a confirmed
plan.50
B. Dismissal Under § 305(a)(1) and Cause Under § 349(b)
Section 305(a)(1) is a narrower provision for dismissing a Chapter 11 case than § 1112(b).51
Granting relief under § 305(a) is an “extraordinary remedy,”52 and “should be invoked sparingly.”53
bypass the requirements of Chapter 11 when parties object, but emphasizes that its ruling does
not address when interested parties agree to such an order, id. at 638 n. 1, as is the case here.
48 See Rosenberg Real Estate Equity Fund III v. Air Beds, Inc. (In re Air Beds, Inc.), 92
B.R. 419, 422 (B.A.P. 9th Cir. 1988) (“When a sale of all or substantial assets of the estate is
proposed in a Chapter 11 case under the aegis of § 363(b)(1), there is the potential for
circumventing the requirements attendant to the confirmation of a Chapter 11 plan.”); see also In
re Conroe Forge & Mfg. Corp., 82 B.R. 781, 784 (Bankr. W.D. Penn. 1988) (“It is within the
discretion of the Bankruptcy Court to determine whether extraordinary circumstances exist so
that sale proceeds may be paid to creditors outside the confines of a plan.”).
49 Cf. In re Conroe Forge & Mfg. Corp., 82 B.R. at 786 (noting that under the Bankruptcy
Act, a sale outside of a plan was allowed only in exigent circumstances, and thus determining
that distribution outside of a confirmed plan would “require, at a minimum, a showing of similar
immediate need”).
50 The Court questions whether Rule 3021 would be applicable when a bankruptcy court
grants a structured dismissal. Here, the distribution will occur pursuant to the Settlement
Agreement once the case is dismissed. If a case is dismissed, the Federal Rules of Bankruptcy
Procedure do not apply unless otherwise specified in the order dismissing the case. No such
provision is included in the Debtor’s proposed order.
51 Cf. Eastman v. Eastman (In re Eastman), 188 B.R. 621, 624 (B.A.P. 9th Cir. 1995)
(comparing § 305(a)(1) to § 707(a)).
52 In re Monitor Single Lift I, Ltd., 381 B.R. 455, 462 (Bankr. S.D.N.Y. 2008).
53 In re Colonial Ford, Inc., 24 B.R. 1014, 1023 (Bankr. D. Utah 1982).
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The design of § 305 itself calls for such a cautionary application because § 305(c) limits appellate
review of any order granting relief under § 305(a).54
To obtain relief under § 305(a)(1), the Court must find that dismissal would “better serve”
both “creditors and the debtor.”55 Determining whether to grant such relief is “more than a simple
balancing of harm to the debtor and creditors; rather, the interests of both the debtor and its creditors
must be served by granting the requested relief.”56 It is the moving party’s burden to establish that
such relief will better serve the interests of both.57 “[A] bankruptcy court is not bound by a
prescriptive template; it may consider any factors it deems relevant to the determination of whether
it is in the best interests of the parties to the suit to seek dismissal. Reasoned judgment based on
articulated facts is the only test which the statute itself requires.”58 That stated, courts generally
consider seven factors in determining whether to dismiss under § 305(a)(1): (1) the economy and
54 Section 305(c) provides: “An order under subsection (a) of this section dismissing a
case . . . is not reviewable by appeal or otherwise by the court of appeals . . . or by the Supreme
Court of the United States.” See In re Efron, 529 B.R. 396, 404 (B.A.P. 1st Cir. 2015)
(“[Section] § 305(c) imposes certain limitations on the appellate review available for abstention
orders under § 305(a), [but] a bankruptcy court’s order dismissing a case under § 305(a)(1) is
subject to review by a bankruptcy appellate panel [or a district court].”); see also In re Colonial
Ford, Inc., 24 B.R. at 1018–19 (“[T]he Code encourages workouts outside, or concluded inside,
Chapter 11. . . . [The limited appealability of § 305(a)(1)] insulates the workout from timeconsuming
and expensive litigation and thus underscores the role of Section 305(a)(1) in
furthering out-of-court solutions to the rehabilitation of debtors.”).
55 § 305(a)(1); see also In re Monitor Single Lift I, Ltd., 381 B.R. at 462.
56 In re Monitor Single Lift I, Ltd., 381 B.R. at 462 (addressing a motion to abstain under
§ 305(a)(1)).
57 See id. at 462–63.
58 In re First Assured Warranty Corp., 383 B.R. 502, 530 (Bankr. D. Colo. 2008) (citation
omitted).
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efficiency of administration; (2) whether another forum is available to protect the interests of the
parties; (3) whether federal proceedings are necessary to reach a just and equitable solution; (4)
whether there is an alternative means of achieving an equitable distribution of assets; (5) whether
the debtor and creditors can do an out-of-court work out; (6) whether a non-federal insolvency
proceeding is far advanced; and (7) the purpose for which the bankruptcy jurisdiction has been
sought.59 Not all factors are given the same weight, and the inquiry is made on a case-by-case basis.60
Here, the sixth and seventh factors do not weigh heavily into the Court’s decision: There
were no previous non-federal insolvency proceedings, and the Debtor filed, in good faith, for
bankruptcy relief to reorganize, which quickly shifted to an orderly liquidation. The first through
fifth factors appear more significant for the Court to consider. As to the first factor, there is no
dispute that the economy and efficiency of administration would be better served through a
structured dismissal. The Debtor has sold substantially all of its assets, and the Court approved the
Settlement Agreement, which lays out the structure of distribution. Further, the case will not be
dismissed until the Debtor submits a certification that: (1) the claims reconciliation process is
completed; (2) all proceeds from the sales have been transferred to the Debtor’s estate; (3) the Debtor
has given at least fourteen days’ notice to all creditors of its estimated distribution funds and that any
59 See In re Zapas, 530 B.R. 560, 572 (Bankr. E.D.N.Y. 2015) (considering seven factors
in determining a motion to abstain) (citations omitted); In re AMC Investors, LLC, 406 B.R. 478,
488 (Bankr. D. Del. 2009) (noting that all seven factors are considered in determining a motion
to abstain); In re RCM Global Long Term Capital Appreciation Fund, Ltd., 200 B.R. 514, 525
(Bankr. S.D.N.Y. 1996) (determining that four of the seven factors were relevant in deciding a
motion to dismiss under § 305(a)(1)); In re Picacho Hills Util. Co., No. 11-13-10742 TL, 2013
WL 1788298, at *9 (Bankr. D.N.M. Apr. 26, 2013) (applying seven factors in determining
motion to abstain).
60 In re Monitor Single Lift I, Ltd., 381 B.R. at 464.
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objections to the proposed distribution have been resolved; (4) the Trustee’s fees are paid in full; and
(5) the Court has entered orders with respect to final fee applications. There is a finite amount of
assets, and to deny the request and have the Debtor move forward with confirmation would diminish
the return to the general unsecured creditors, though likely not by $300,000.61 It is clear and
undisputed that the proposed structured dismissal is the most efficient and economic way to
administer the case.
To the second factor, other forums are available to the Debtor and the creditors. The parties’
rights will be protected and preserved with a structured dismissal as this Court’s orders will remain
in full force and effect. The parties can enforce those orders in this Court or another, just as they
would if a Chapter 11 plan was confirmed. To the third factor, federal proceedings are not necessary
to reach a just and equitable solution. The parties have already reached such a resolution through the
Settlement Agreement, which this Court found to be in the best interests of creditors and the estate.
There were no objections to the Settlement Agreement, and, based on the record, the Settlement
Agreement will allow for a distribution to general unsecured creditors where there otherwise may
not have been one. To the fourth and fifth factors, the Settlement Agreement is the out-of-court work
out and the alternative means for an equitable distribution of estate assets. By dismissing the case,
the creditors will be better served because they will receive a larger return faster, and the Debtor will
be better served because it will be able to wind down its affairs more quickly. Even the Trustee
agreed at oral argument that dismissing this case made sense.
61 The Court received testimony from Mr. Nerland regarding the cost to confirm a
Chapter 11 Plan. The Court finds Mr. Nerland’s testimony to be credible, but questions whether
the $300,000 figure that the firms estimated to Mr. Nerland would be found by this Court to be
actual, reasonable, and necessary pursuant to § 330(a).
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In weighing the above factors, the Court finds that the Debtor has met its burden under
§ 305(a), but only if the Court dismisses the case as provided in the requested relief, i.e. through a
structured dismissal as allowed by § 349(b). Accordingly, the Court weighs three additional factors
in determining whether cause exists to alter the effects of dismissal.62 First, the Court considers the
notice provided to parties in interest and, second, the objections filed. All parties in interest have
received notice of the Motion to Dismiss. The Trustee objected, but no economic stakeholder has
objected. Target Ease even appeared before the Court and expressed its support. The Committee,
which has been active in the case, joins in the motion. On top of this, the order dismissing the case
will require the Debtor to provide a minimum of fourteen days’ notice for parties in interest to object
to the estimated distribution of funds. Also, the Motion to Dismiss was not the first time that parties
in interest had notice of the proposed distribution structure. The Debtor gave notice to all parties in
interest when it sought the Court’s approval of the Settlement Agreement, and no party objected.
Notice being proper in all respects, support from a major creditor, and no economic stakeholder
objecting all weigh in favor of finding cause to alter the effect of dismissal.
Lastly, the Court considers whether the Debtor is attempting to work around the protections
of the Bankruptcy Code. The Court determines that the Debtor is not. Pursuant to the certification
that the Debtor must file before the case is dismissed, there will be little left for the Debtor to do
other than distribute the assets upon dismissal. There are no adversary proceedings pending, no
causes of action that require prosecution, and the Motion to Dismiss is supported by the Committee
and Target Ease. The Court’s orders will remain in full force and effect, which will serve to protect
62 See, e.g., In re Biolitec, Inc., 528 B.R. at 269–70 (denying a structured dismissal when
creditor protections provided by the Bankruptcy Code were not present and all interested parties
had not consented).
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and preserve the rights of the parties, and the proposed structured dismissal is not a sub rosa plan.
The Motion to Dismiss is not an attempt to work around the protections of § 1129; it is simply that
rare case where cause is shown to alter the effect of dismissal. Had there been even a lone voice of
a creditor arguing against this, the Court may have arrived at a different conclusion.
Accordingly, the Court determines that there is cause to alter the effect of dismissal and that
both the creditors and the Debtor are better served if the case is dismissed.
IV. CONCLUSION
The Court appreciates the attention that the Trustee has given this and the other cases in this
District. The Trustee’s arguments against the structured dismissal appear to be better suited to those
cases where there are a myriad of loose ends, lack of unanimity of support from creditors, and a
failure to address the needs of creditors. In this particular case, the Court is persuaded that the
moving parties have carried their burden of persuasion.
As stated herein, the Court will overrule the Trustee’s objection and grant the relief sought
by the Debtor. The Debtor is to prepare the appropriate order for the Court’s consideration, which
should refer to this Memorandum Decision.
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