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It’s Complicated — Structuring a Bankruptcy Settlement to Avoid Employment Claims

On March 22, 2017, the Supreme Court limited the use of “structured dismissals” in chapter 11 cases, overturning a ruling of the Third Circuit that would have wiped out employee WARN Act claims while paying out lower-priority, general unsecured creditors. It stressed that any distribution scheme in connection with a proposed chapter 11 structured dismissal must follow the basic priority rules of the Bankruptcy Code absent consent of the affected parties. Notably, the Supreme Court avoided determining that interim modifications of the priority scheme cannot be permitted at any time during a case. The key question the Court considered was:

  • Whether a bankruptcy court, in considering a proposed structured dismissal of a chapter 11 case, can provide for distributions that deviate from the ordinary priority rules that would apply in a chapter 7 liquidation or a chapter 11 plan without the consent of the affected creditors?

Read the full e-communication update here.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.