John P. Campo and Susan F. Balaschak ()
On March 22, 2017, the Supreme Court issued its opinion in Czyzewski v. Jevic Holding,1 Case No. 15-649, 580 U.S. ___ (2017). In its decision, the court concluded that the bankruptcy court does not have the power to order, in connection with the dismissal of a Chapter 11 case, a distribution scheme that deviates from the basic priority provisions of the Bankruptcy Code without the consent of the parties negatively impacted by the deviation. While the decision does not put an end to so-called “structured dismissals”2 in bankruptcy, the decision restricts the dismissal of a Chapter 11 case when combined with a final distribution to creditors that skips over a class of creditors without the latter’s consent. Jevic leaves intact structured dismissals of Chapter 11 cases that adhere to the priority scheme, as well as structured dismissals that deviate therefrom with the consent of the affected creditors.
Jevic Transportation, a trucking company, was the target of a leveraged buyout in 2006. The buyer borrowed money from a lending institution to finance the purchase, leaving Jevic with more than $50 million of new secured debt obligations to the lender and the buyer. Within two years, Jevic ceased all operations, terminated substantially all of its employees, and filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code.
After filing the bankruptcy case, two lawsuits were commenced against Jevic. The first was a lawsuit under the WARN Act, brought by a group of recently terminated truck drivers (the WARN Act claimants), alleging that Jevic failed to comply with the notice and payment requirements under the WARN Act. The WARN Act claimants sought $12.4 million in damages, of which they estimated $8.3 million was entitled to priority. The second was a lawsuit filed by the official committee of unsecured creditors against the buyer alleging that the leveraged buyout constituted a preferential and fraudulent transfer.
The buyer and the committee reached a settlement that provided, among other things, that certain assets of the estate would be distributed directly to general unsecured creditors, without distributing anything to the WARN Act claimants, and the case would immediately be dismissed. The WARN Act claimants opposed the settlement, arguing that the Bankruptcy Code entitled $8.3 million of their claims to priority payment before unsecured creditors. The “structured dismissal” that the buyer and the committee proposed would skip the priority payments to the WARN Act claimants, thereby deviating from the priority scheme under the Bankruptcy Code. The Bankruptcy Court approved the settlement over the WARN Act claimants’ objection. The District Court and the Third Circuit affirmed. The Third Circuit concluded that the only alternative would have been to convert the case to a Chapter 7 case, leaving both the WARN Act claimants and the general unsecured creditors with no possibility of a distribution. The Supreme Court departed from the views of the three lower courts, holding instead that a dismissal of a Chapter 11 case may not be structured so as to avoid the Bankruptcy Code’s priority distribution scheme unless the affected creditors consent.
The Supreme Court intended its decision to be interpreted narrowly and limited to structured dismissals that deviate from the priority scheme of the Bankruptcy Code without the consent of the affected creditors. The Supreme Court went to significant lengths to highlight common practices that it did not intend to disrupt, despite the fact that these practices provided for distributions that deviated from the priority scheme of the Bankruptcy Code. Thus, so-called “First-Day” motions that result in payments in violation of the priority scheme, which include payment of pre-bankruptcy claims of critical vendors and employees that serve the purpose of preserving estate value in the turbulent early days following bankruptcy, are permissible.
The distinction between permissible and impermissible deviations from the priority scheme of the Code is related to timing. If otherwise impermissible distributions are made early in a Chapter 11 case for the purpose of preserving the value of the estate and continuing the case, and thereby increasing the chance for all other creditors to receive distributions, they should be permitted even over the objection of affected creditors. If made at the end of the case, however, as part of the dismissal of the proceeding, they will not likely be permitted over the objection of the affected creditors because there is no case to preserve and no chance for other creditors, including the affected creditors, to receive a distribution. The continued existence of the case and the ability of creditors to assert their rights, coupled with the possibility of future distributions to the affected creditors, seem to be an acceptable “cause” for permitting deviations from the priority scheme under the Bankruptcy Code. At the end of the case when dismissal is sought, none of these possibilities exist and, hence no “cause” exists for deviation from the priority scheme, over an affected class’ objection.
Jevic is narrowly focused on structured dismissals that deviate from standard bankruptcy distribution priorities. Structured dismissals that adhere to the priority scheme under the Code and those that deviate but have the consent of the affected creditors are alive and well, and not restricted by Jevic. Several pre-Jevic cases give a roadmap for structured dismissals that should still be permissible. See, e.g., In re Buffet Partners L.P., 2014 WL 3735804 (Bankr. N.D. Tex. July 28, 2014) and In re Olympic 1401 Elm Associates, Case No. 16-30130-hdh (Bankr. N.D. Tex. 2016).
Jevic is solely applicable to structured dismissals of Chapter 11 cases that deviate from the priority scheme under the Bankruptcy Code over the opposition of an affected class. Structured dismissals that deviate from the priority scheme with the consent of the affected class are not affected by the decision. Similarly, Bankruptcy Rule 9019 settlement agreements, gifting, first-day motions and other forms of distributions that deviate from the priority scheme and that occur at the outset or during the case are alive and well after Jevic. Objecting parties in affected classes may try to argue Jevic limits these practices, but as long as the case continues, all creditors retain their rights to participate in the case, and there remains a likelihood that the objecting class will receive a distribution, those objections are not likely to succeed.
After Jevic, parties seeking a structured dismissal will have to put up more money either to get the consent of potentially affected creditors or ensure the distribution is consistent with the priority scheme under the Bankruptcy Code. In short, bankruptcy lawyers shouldn’t rush to throw out their structured dismissal strategies because of Jevic. However, those strategies will now need a little fine-tuning, perhaps a little more money, and will no longer be available to settle disputes with lower priority creditor classes at the expense of higher priority creditors.
1. The issues of “standing” in the majority opinion and the “bait and switch” of the issue presented on appeal as discussed by the dissent of Justices Clarence Thomas and Samuel Alito are beyond the scope of this Article.
2. Generally, “structured dismissals” contain provisions typically found in Chapter 11 reorganization plans, including broad releases of debtors, officers and directors, secured lenders and certain creditors, without the protections provided for confirmation of such plans under the Bankruptcy Code. The primary justification is economics—the debtor simply cannot afford the plan process.