Jennifer L. Marines, Andrew Kissner, and Raff Ferraioli
Business Restructuring + Insolvency
On June 27, 2018, Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware ruled that a dismissal order in a bankruptcy case could provide for exculpation of the estate fiduciaries and their respective professionals. The ruling is a welcome result for all estate fiduciaries whose tireless efforts during a complex bankruptcy case fail to culminate in an approved plan of reorganization. Morrison & Foerster LLP represents the debtors in the matter.
Real Alloy Recycling, Inc. and its affiliated operating entities (“Real Alloy”) are large-scale recyclers of aluminum with operations throughout the United States, Canada, Mexico, and Europe. Real Alloy’s parent company, Real Industry, Inc. (“Real Industry,” and together with Real Alloy, the “Debtors”), was a publicly traded holding company that acquired operating businesses in undervalued industries. At the time of filing, Real Industry held nearly a billion dollars of net operating losses.
On November 17, 2017, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in order to preserve the company’s tax attributes and to restructure over $475 million in funded debt and other obligations. Real Industry emerged from bankruptcy through a plan of reorganization in May 2018, while Real Alloy pursued a sale of their ongoing operations and assets (the “Sale”). In connection with the Sale, the purchaser of Real Alloy’s assets agreed to assume substantially all valid, allowed administrative expense and priority tax claims. The purchaser also agreed to pay creditors holding claims entitled to priority under Bankruptcy Code section 503(b)(9) in full on account of those claims (as well as providing some distribution on account of certain general unsecured claims) in exchange for the provision of favorable credit terms to the company going forward. The Sale closed on May 31, 2018.
The Motion to Dismiss the Real Alloy Debtors’ Cases
After the close of the Sale, no assets or operations remained in the estates and Real Alloy decided to exit the bankruptcy cases through a structured dismissal. On June 1, 2018, Real Alloy filed a motion for entry of an order seeking, among other things, dismissal of the cases (the “Motion to Dismiss”). In connection with the dismissal, Real Alloy sought approval of a provision that exculpated Real Alloy, their directors and officers, estate professionals, and the Official Committee of Unsecured Creditors (the “Committee”) and its members (collectively, the “Exculpated Parties”) from any liability for postpetition acts or omissions relating to the chapter 11 cases (the “Limited Exculpation”). The Limited Exculpation notably carved out all claims or causes of action arising from fraud, gross negligence, or willful misconduct. In addition, the Exculpated Parties were limited to “estate fiduciaries”—i.e., those parties with pre-existing fiduciary duties to the Debtors’ estates under the Bankruptcy Code or principles of corporate law.
Out of the nearly 9,000 parties that received notice of the Motion to Dismiss, the United States Trustee filed the sole objection. The United States Trustee argued, generally, that exculpation is impermissible in the dismissal context and instead may only be approved in connection with a confirmed chapter 11 plan of reorganization. The United States Trustee also asserted that prior orders from the District of Delaware approving exculpation in the dismissal context were no longer viable in light of the Supreme Court’s ruling in Czyzewski v. Jevic Holding Corp.
The Court Approved the Exculpation
In an oral decision from the bench, the court overruled the United States Trustee’s objection to the Motion to Dismiss and approved the Limited Exculpation. The court cited the Supreme Court’s decision in Jevic, which stated that there are three permissible paths for exiting bankruptcy: (1) confirmation of a chapter 11 plan; (2) conversion to a liquidation under chapter 7; and (3) dismissal. Acknowledging that the Bankruptcy Code neither explicitly prohibits nor permits exculpation in the dismissal context, and that the court was writing on a “clean slate” post-Jevic, the court turned to the standard for dismissal under the Bankruptcy Code.
The Bankruptcy Code provides that a court can dismiss a case “for cause,” which, in the court’s view, includes approving provisions that do not run afoul of the priority scheme if cause has been shown. In finding cause for the dismissal and approval of the Limited Exculpation, the court found it significant that, after the Debtors had served over 9,000 parties with notice of the Motion to Dismiss, no creditors—in other words, those parties that could potentially be affected by the Limited Exculpation—objected to the Motion to Dismiss. The court also noted that the United States Trustee’s objection was not based on a violation of the Bankruptcy Code’s priority scheme, the only aspect of structured dismissals affected by the Supreme Court’s decision in Jevic.
The court also pointed out that the Limited Exculpation did not provide an explicit release of particular claims, only applied to postpetition acts and omissions related to the chapter 11 cases, and carved out liability for fraud, gross negligence, and willful misconduct. In the interest of finality, and particularly in the absence of any hint of any wrongdoing, the court found cause to approve the Limited Exculpation, noting that the Exculpated Parties “have done what they should have done in connection with trying to maximize the assets of the estate and to make the best of what was obviously not an ideal situation.”
The court’s ruling on the Real Alloy Motion to Dismiss adds clarity to the developing jurisprudence on structured dismissals. Indeed, by granting the Motion to Dismiss and overruling the United States Trustee’s objection to the Limited Exculpation, the court affirmed that exculpation provisions may still be appropriate in the dismissal context post-Jevic, depending on the facts and circumstances of the case.
 See, e.g., In re Coach Am Grp. Holdings Corp., Case No. 12-10010 (KG) (Bankr. D. Del. May 31, 2013) [D.I. 1568]; In re City Sports, Inc., Case No. 15-12054 (KG) (Bankr. D. Del. Mar. 4, 2016) [D.I. 647].
 137 S.Ct. 973 (2017).
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