The Third Circuit first held that, in "rare" circumstances, structured dismissals that deviate from the Bankruptcy Code's priority scheme are permissible. The Third Circuit rejected the Drivers' arguments that:

Rather, the Third Circuit concluded that, "absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition." However, the Third Circuit noted that the Drivers did not challenge the bankruptcy court's findings that there was no prospect of a confirmable plan in this case and that conversion to Chapter 7 would not have been effective.

Acknowledging that the Bankruptcy Code does not expressly authorize structured dismissals, the Third Circuit noted that the Bankruptcy Code explicitly allows bankruptcy courts to alter the effect of dismissal "for cause" and does not "strictly require dismissal of a Chapter 11 case to be a hard reset." The Third Circuit's fact-sensitive approach suggests that different facts, such as the prospect of a confirmable plan or an effective conversion to Chapter 7, might require a different result in a future case.

The Third Circuit then considered whether settlements in the context of structured dismissals may ever skip a class of objecting creditors in favor of more junior creditors. The Drivers argued that, even if structured dismissals are permissible, they cannot be approved if they distribute estate assets in a manner that violates the priority scheme of section 507 of the Bankruptcy Code which, according to the Drivers, applies to all distributions of estate property under Chapter 11.

The Third Circuit noted the split between the US Courts of Appeal for the Fifth and Second Circuits as to whether the priority scheme of section 507 must be followed when settlement proceeds are distributed in Chapter 11 cases. The Fifth Circuit, in Matter of AWECO, Inc., held that the "fair and equitable" standard that applies to plan confirmations also applies to settlements, and that "fair and equitable" means compliant with the priority system (see 725 F.2d 293 (5th Cir. 1984)).

However, the Second Circuit rejected the Fifth Circuit's reasoning and adopted a more flexible approach in In re Iridium Operating LLC (see 478 F.3d 452 (2d Cir. 2007)). The Second Circuit held that the absolute priority rule "is not necessarily implicated" when a "settlement is presented for court approval apart from a reorganization plan[.]" The Second Circuit held that whether a settlement's distribution scheme complies with the Bankruptcy Code's priority scheme must be the most important factor in a bankruptcy court's determination of whether a settlement is "fair and equitable." However, a noncompliant settlement could be approved when "the remaining factors weigh heavily in favor of approving a settlement[.]"

The Third Circuit adopted the reasoning of the Second Circuit, holding that bankruptcy courts may approve settlements that deviate from the priority scheme of section 507 only if they have "specific and credible grounds to justify [the] deviation" because settlements that skip objecting creditors in distributing estate assets raise "justifiable concerns about collusion." Noting that it was a "close call," the Third Circuit held that the bankruptcy court had sufficient reason to approve the settlement and structured dismissal of the Debtor's Chapter 11 case. The Third Circuit reasoned that this was the "least bad alternative since there was 'no prospect' of a plan being confirmed and conversion to Chapter 7 would have resulted in the secured creditors taking all that remained of the estate in 'short order.'"