Normal Chapter 11 priority rules apply to structured dismissals of Chapter 11 cases, so that in a structured dismissal, lower priority creditors may not be paid over the objection of higher priority creditors whose claims have not been fully satisfied. A Chapter 11 case may end three ways—with approval of a Chapter 11 plan, with a conversion to a Chapter 7 liquidation, or with a dismissal. Either of the first two alternatives must obey priority rules which govern which claims must be paid first from bankruptcy estate assets unless an adversely affected creditor with priority objects to a priority-violating plan provision. On dismissal of a Chapter 11, the bankruptcy court is required to attempt to place the parties back in the same position they occupied before the bankruptcy was filed. But if perfect restoration cannot be achieved, the court may, for cause, alter the dismissal’s normal restorative consequences—i.e., order a structured dismissal. This decision holds that a structured dismissal’s terms cannot violate the priority rules that govern approval of a Chapter 11 plan or a Chapter 7 liquidation. That is, the structured dismissal cannot provide for distribution of estate assets to lower priority creditors before higher priority creditors’ claims are satisfied, unless no higher priority creditor objects.
United States Supreme Court (Breyer, J.; Thomas & Alito, JJ., dissenting); March 22, 2017; 2017 WL 1066259