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Chapter 11 Lawyers Anxiously Await the Supreme Court’s Decision in Jevic

Article

The Business Advisor

December 2016

On December 7, 2016, the Supreme Court heard oral argument on its certiorari review of the decision of the U.S. Court of Appeals for the Third Circuit in Czyzewski v. Jevic Holding Corp., 15-649 (Sup. Ct.) (“Jevic”). Jevic is generating much interest and discussion among chapter 11 lawyers, as it presents a case in which the Court’s decision could impact the use of “structured dismissals” as an alternative to the more traditional ways to resolve chapter 11 bankruptcy cases.

By way of background, under the Bankruptcy Code, there have been three traditional ways to exit a chapter 11 case; namely, confirmation of a plan, conversion to a chapter 7 liquidation, and dismissal of the case. The so-called “structured dismissal” concept has only recently gained momentum as an alternative to the traditional exits to a chapter 11 case which are sanctioned by the Bankruptcy Code. In Jevic, the Third Circuit Court of Appeals upheld a settlement of fraudulent conveyance litigation reached by and between the debtor, the debtor’s subsidiary, the official unsecured creditors’ committee, and the debtor’s secured lenders, which provided for dismissal with prejudice of the litigation and the exchange of releases among the parties, as well as the dismissal of the chapter 11 case, in consideration for the lenders’ funding of a $3.7 million trust for distributions to tax and administrative claimants and a small pro rata distribution to general unsecured creditors. Left out of the settlement were Jevic’s terminated truck drivers who had filed a class action under the WARN Act against the debtor and its subsidiary for failure to give the requisite 60 days’ written notice of termination and had an uncontested Section 507 priority WARN Act claim in the amount of $8.3 million. Official Comm. of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re: Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015). Under the Bankruptcy Code, this disregarded priority wage claim is senior to the priority tax claims and the claims of general unsecured creditors which were afforded a distribution under the approved settlement.

Acknowledging there is no basis in the Bankruptcy Code for this method of exiting chapter 11, the Third Circuit Court of Appeals affirmed the decision of the District Court below (which had also affirmed the Bankruptcy Court below), finding it clear that none of the other traditional exits to chapter 11 were practicable under the facts and circumstances of this case, as there was a lack of any realistic prospect of confirming a chapter 11 plan and conversion to a chapter 7 case was impractical due to a lack of funds. The Appeals Court justified the settlement/dismissal effectuated in Jevic by noting: [“s]tructured dismissals are simply dismissals that are preceded by other orders of the bankruptcy court (e.g., orders approving settlements, granting releases, and so forth) that remain in effect after dismissal.” Id. at 181. The Circuit Court left no doubt that its decision upholding a deviation from the Bankruptcy Code’s priority scheme is a narrow one, limited to cases where there are “specific and credible grounds to justify [the] deviation.” In so ruling, the Third Circuit followed an earlier decision of the Second Circuit Court of Appeals in In re Iridium Operating LLC, 448 F.3d 452,466 (2d Cir. 2007).

The parties to the Jevic argument before the Supreme Court approached the issue from disparate viewpoints. The respondent (the victorious debtor trucking company) argued that the case is not about “structured dismissals” at all, but instead is about the proper standards to approve a bankruptcy settlement, that there is nothing which requires settlements to conform to the Code’s priority provisions, and, that because the petitioners were non-settling parties who are out-of-the-money, they lack standing to oppose the settlement. The debtor respondent therefore took the position that the Court should not have granted certiorari to review the decision below. The petitioning former employees argued that the result below was unlawful because it allowed the distribution of the proceeds of the settlement through a dismissal order which left them with no rights to either pursue litigation against the released settling parties or to share in any distribution of the estate’s assets, in violation of their rights and the Code’s priority provisions. Such a result would clearly not be allowed under either a chapter 11 plan or chapter 7 liquidation.

Whether viewed under the guise of a “structured dismissal” or approval of a settlement, there is no doubt that, at its essence, the decision under review in Jevic sanctioned a disposition of the chapter 11 case in a manner which deviated from the priority scheme in the Bankruptcy Code and the Supreme Court will have to weigh in on that practice in some manner. Some (many) believe that Jevic was not the best case to test the concept of “structured dismissals.” The consternation among chapter 11 lawyers is over the potential for the Court to wreak havoc by a ruling which unnecessarily hamstrings the ability of bankruptcy courts to exercise their discretion in a wide range of cases. For example, the Court may outright reject the Jevic settlement/dismissal structure due to its non-conformance with the Code’s priority scheme. In the perception of many chapter 11 practitioners, this result will do significant damage to a number of frequently employed practices which effect pre-plan distributions of estate property, such as critical vendor motions, “gifting” transactions, distribution of sale proceeds, and a large number of financings and settlements, all typically accomplished in scenarios that do not involve a “structured dismissal.” The United States Solicitor General, as a “friend of the court,” weighed in at this end of the spectrum, urging the Court to reverse the Third Circuit’s approval of “structured dismissals” as unlawful under the Bankruptcy Code. On the other end of the spectrum, the Court may sanction the Jevic structure in a ruling which can be broadly applied in future cases, even those which do not present the “special” Jevic considerations that were compelling to the bankruptcy court below. This result could be a deterrent to the negotiation of chapter 11 plans in favor of more creative approaches to exiting chapter 11 through dismissals orders which impact parties’ substantive rights. As has been the case with several of the recent decisions argued before the Supreme Court regarding the scope of the bankruptcy courts’ jurisdiction and power, Jevic presents the potential for a “game-changer” in the world of chapter 11 practitioners.