In our last column we reported on the U.S. Supreme Court’s decision in Czyzewski v. Jevic Holding, 137 S. Ct. 973 (2017). In that decision, the court ruled a bankruptcy court may not order a structured dismissal of a Chapter 11 case that provides for estate assets to be distributed in violation of the Bankruptcy Code’s distribution scheme. The decision was widely discussed by bankruptcy practitioners, in part because there are a number of common practices in Chapter 11 that also distribute estate assets in violation of the bankruptcy code’s distribution scheme. The Supreme Court’s opinion, in dicta, distinguished those practices because they often serve an appropriate bankruptcy purpose. Today we review two recent opinions that consider the Jevic decision’s impact on two of these common practices.
The ‘Jevic’ Ruling
In Jevic, the debtor, its secured creditor, equity holder, and the creditors’ committee entered into a settlement agreement that provided, among other things, that estate funds would be distributed to general unsecured creditors while certain priority claimants would receive nothing, and the chapter 11 case would be dismissed. The priority claimants and U.S. Trustee objected, arguing that the distribution scheme of the bankruptcy code prohibited distribution of estate assets to general unsecured creditors unless priority creditors were paid in full. The Bankruptcy Court overruled their objection, observing that in the absence of the settlement and dismissal, no creditor would receive anything. After the Bankruptcy Court’s decision was affirmed by the District Court, the U.S. Court of Appeals for the Third Circuit again affirmed, noting that while Congress codified the distribution scheme in plan or liquidation contexts, courts could ” … in rare instances like this one, approve structured dismissals that do not strictly adhere to the Bankruptcy Code’s priority scheme.”
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