Supreme Court Will Review Jevic to Rule on Structured Dismissals and Gift Plans

The Supreme Court granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether bankruptcy courts are allowed to dismiss chapter 11 cases when property is distributed in a settlement that violates the priorities contained in Section 507 of the Bankruptcy Code.

Although Jevic deals with structured dismissals, the high court’s decision might also have the effect of allowing or barring so-called gift plans where a secured creditor or buyer makes a payment, supposedly from its own property, that enables a distribution in a chapter 11 plan not in accord with priorities.

Jevic creates two circuit splits, one explicit, the other implicit. The explicit split reflects disagreement between the Fifth and Third Circuits over the role that priority in right of payment should play in final distributions in bankruptcy. The implicit circuit split reflects a disagreement between the Seventh and Third Circuits regarding a Bankruptcy

Issue

The case is about “structured dismissals.” A “structured dismissal” is “a hybrid dismissal and confirmation order in that it typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third party releases, [and] enjoining certain conduct by creditors . . . .” American Bankruptcy Institute, 2012-2014 Final Report and Recommendations, Commission to Study the Reform of Chapter 11, at 270 (2014), https://commission.abi.org/full-report, (“ABI Commission Report”).

Structured dismissals can be “troubling” because “these new forms of a la carte bankruptcy relief are typically accompanied by few of the procedural protections found in the more traditional resolutions—disclosure, creditor voting, claim resolution standards, [or] the oversight of a trustee (in a Chapter 7).” See Christopher W. Frost, Structured Dismissals: Smooth Off-Ramp or Artful Dodge?, 35 Bankr. L. Letter 10, 3 (2015).

Case History

Jevic Transportation, Inc. (“Jevic,” or the “Debtor”) was a New Jersey trucking company. Pet. App. B 2a.2 A subsidiary of Respondent Sun Capital Partners, a private equity firm, acquired Jevic in a leveraged buyout (LBO) in 2006. Id.3 After the LBO, Jevic refinanced its debt with CIT Group (“CIT”), which lent Jevic $85 million in revolving credit secured by Jevic’s assets. Pet. 8.

Jevic could not service this debt. It filed a Chapter 11 bankruptcy on May 20, 2008, one day after terminating 90% of its employees, including Petitioners, Jevic’s truck drivers (the “Drivers”). Id. at 9; see also Joint Motion of the Debtors, CIT, Sun Capital and the Official Committee of Unsecured Creditors Pursuant to 11 U.S.C. §§ 105(a), 349 and 1112(b) and Fed. R. Bankr. P. 9019 for Entry of an Order: (I) Approving Settlement Agreement and Releasing Claims; (II) Dismissing the Debtors’ Cases Upon Implementation of Settlement; and (III) Granting Related Relief at 2, ¶ 1 (“Settlement Motion”). Petitioners hold about $8.3 million in priority wage claims against Jevic for termination in violation of the New Jersey analogue to the federal Worker Adjustment and Retraining Notification (“WARN”) Act, which requires notification before mass layoffs. See Pet. at 9; 29 U.S.C. §§ 2101–2109; N.J. Stat. Ann. §§ 34:21-1 to -7.

The Official Committee of Unsecured Creditors (“Committee”) sued Sun and CIT, alleging that the LBO transfers were avoidable fraudulent and preferential transfers (the “Adversary Proceeding”). Pet. App. A 3a. Sun and CIT moved to dismiss the Adversary Proceeding. The Bankruptcy Court denied the motion, concluding that the Committee adequately pleaded such claims. Id. at 3a–4a. If the Adversary Proceeding succeeded, the estate could avoid liens and potentially recover more than $100 million from CIT and Sun. Pet. 10.

Jevic borrowed more from CIT during its case on a “super-priority,” secured basis. Settlement Motion at 3–4, ¶ 8. Jevic was left “administratively insolvent” because its administrative expense and other priority claims exceeded the value of its unencumbered assets. Pet. 6; see also Pet. App. A 12a. All major parties except the Drivers entered into an agreement (the “Settlement Agreement”) settling the claims in the Adversary Proceeding. Pet. App. A 4a. The Settlement Agreement included a structured dismissal with two main elements:

• First, Sun and CIT would pay about $3.7 million to satisfy certain first-priority administrative expenses, such as fees of the Committee’s counsel, with the remainder going to general unsecured creditors— failing to pay the priority claims of the Drivers. Pet. 11.
• Second, Sun and CIT would be released from— any and all claims or counterclaims, causes of action, remedies, damages, liabilities, debts, suits, demands, actions, costs, expenses, fees, controversies, set-offs, third party actions or proceedings relating in any way to, or arising from any transaction with or in connection to, the Debtors or their estates of whatever kind or nature . . . including, without limitation, any and all claims asserted in or which could have been asserted in, or which related to the subject matter of the Adversary Proceeding, or which are based on any avoidance or other powers afforded the Estate Releasing Parties under the Bankruptcy Code . . . . ” Settlement Agreement ¶ 2(c)(i), (ii), at 4–6 (emphasis supplied) (exhibit A to the Settlement Motion).

The Bankruptcy Court entered an order over Petitioners’ objection approving the Settlement Agreement December 4, 2012 (the “Dismissal Order”). Pet. App. D.

The Bankruptcy Judge granted the Dismissal Order because, he reasoned, the estate was administratively insolvent and the Bankruptcy Code’s priority scheme did not apply in a settlement, as distinct from a Chapter 11 reorganization plan or Chapter 7 liquidation. Pet. App. E 58a. The Bankruptcy Court rejected the suggestion that the case should be converted to a Chapter 7 liquidation because “it does not appear that a Chapter 7 Trustee would have any money to operate, investigate or litigate.” Id.

Whether this was true depended on the viability of the Adversary Proceeding. The Bankruptcy Judge approved the Settlement Agreement because, he said, the Committee’s “prospect[s] for success” were “uncertain at best.” Id. at 60a. Because the estate was administratively insolvent, it lacked funding to pursue the lawsuit. Id. Yet, because the litigation was “in its earliest stages” (id.), he could not have known the strength of the claims in the Adversary Proceeding—except that he had denied motions to dismiss them.

The District Court and the Third Circuit Court of Appeals affirmed the Bankruptcy Court.