In re KG Winddown, LLC: Bankruptcy Court Approves U.S. Supreme Court Authorized Structured Dismissal to Jevic
Jun 15, 2021 – In In re KG Winddown, LLC, the US Bankruptcy Court for the Southern District of New York City approved structured rejections by debtors in the Chapter 11 joint cases. The court quashed the US trustee and found that the debtors’ proposal did not violate the absolute priority rule and otherwise complied with the applicable provisions of the Bankruptcy Code.
On June 9, 2021, the U.S. Bankruptcy Court for the Southern District of New York ruled that structured dismissals offered by debtors were the best choice under Section 1112 (b) (4) after a sale under the section 363 and when the debtors were administratively insolvent. (In re KG Winddown, LLC, 2021 WL 2350839 (Bankr. SDNY June 9, 2021)).
Debtor KG IM, LLC and 14 affiliates filed Chapter 11 petitions in July 2020. The debtors owned seven Il Mulino restaurants in various locations. After almost all of the assets were sold to multiple entities, collectively known as BSP, in December 2020, the debtors filed a motion to dismiss the Chapter 11 cases, seeking approval of the structured layoffs.
The purchase price consisted of:
A credit offer in an amount equal to the sum of:
$ 2,000,000 made up of a portion of the outstanding debts under the DIP facility at the closing date; and
$ 16,000,000 made up of part of the debts resulting from the credit documents prior to IL Mulino’s request.
A cash payment of $ 100,000 reserved for distribution to holders of authorized general unsecured debt.
A payment or other satisfaction of all amounts of the cure in cash.
The assumption of responsibilities assumed under the Stalking Horse APP by the Purchaser of the Stalking Horse.
The sell order included buyer’s releases for acts regarding Purchase and Transition Services Agreements (TSA) for the transition of liquor licenses and other permits to BSP for IL Mulino restaurants in Florida, New York and New Jersey. CSTs must end when buyers receive liquor permits.
As part of the rejection, counsel for the debtors agreed to a fee reduction so that the administrative claims could be paid in full with the amount of money the debtors had on hand. The debtors also requested that all court orders survive rejection.
The US trustee opposed the motion to dismiss on the grounds that the motion was premature, unnecessary and inappropriate. The US trustee argued that the petition was premature because the debtors did not intend to terminate until the liquor licenses were transferred. Although the court rejected this objection, the court demanded that debtors review structured dismissals to include that when debtors file a certification of closing a case, the parties have seven days to object to the closing of the case. ‘case.
The second part of the US Trustee’s objection was that the US Trustee did not believe approval was necessary with respect to the payment of administrative claims. The court responded that while the approval may not be necessary, it would provide certainty to the parties “and promote the orderly liquidation of estates, which is precisely the purpose of the proposed structured dismissal.”
The third aspect of the US trustee’s objection related to the sale order’s exemption clauses releasing buyers. Noting that the US trustee had not objected to the exoneration clauses in the sale order itself, the court underscored Jevic’s core principle that structured terminations under Section 349 are intended to protect employees. rights invoked in the bankruptcy case.
The court’s legal analysis centered on Section 1112 (b) and the United States Supreme Court’s decision in Czyzewski v. Jevic Holding Corp. (In re Jevic Holding Corp.), 137 S. Ct. 973 (2017). In Jevic, the Supreme Court overturned the Third Circuit decision in In re Jevic Holding Corp. 787 F.3d 173 (3d Cir. 2015) which allowed a structured layoff that paid no dividends to senior claimants, while general unsecured creditors received a distribution (see Legal Updates, Czyzewski v. Jevic Holding Corp .: US Supreme Court Prohibits Nonconsensual Priority-Violating Structured Dismissals and In re Jevic Holding Corp: Third Circuit Allows Structured Dismissal of Chapter 11 Case that Violates the Bankruptcy Code’s Priority Scheme).
In Jevic, the Supreme Court recognized that a structured dismissal is a viable method “to protect the trust interests vested in bankruptcy”. Jevic’s court allowed the possibility of a structured settlement if the settlement did not violate the allocation scheme set out in the Bankruptcy Code and the top priority rule.
In approving the structured terminations in In re KG Winddown, LLC, the court concluded that under Section 1112 (b) the termination was appropriate, explaining that “[t]Debtors have sold almost all of their assets, no longer have operations and do not have enough resources to finance a plan. The other alternatives under Article 1112 (b) (1) – converting to Chapter 7 or appointing a trustee or reviewer – would impose costs that would only further erode the value of the assets already. administratively insolvent without any apparent benefit, and therefore not in the best interests of creditors and the estate[s]. ‘”Under Section 349, termination under Section 1112 (b) (4) returns all parties to the state they were in prior to the filing of the Chapter 11 case.”[u]unless the court, for a valid reason, orders otherwise[.]”
As Section 363 sales have become more common, debtors’ reliance on structured layoffs is increasing. Structured dismissals offer debtors several advantages as an alternative tool when holding a sale under section 363. This ruling provides a model for debtors to pursue a structured dismissal after the sale of substantially all actives. When the debtor complies with the first priority rule, demonstrates a reason under section 1112 (b) (4) (A), and the termination is in the best interests of the creditors, a structured termination may be more profitable and viable than the confirmation process or a Chapter 7 bankruptcy case. A structured dismissal may also allow a greater distribution to unsecured creditors than they might normally receive. As in KG Winddown, the debtor may be able to obtain approval for third party releases as part of the termination process.
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