Supreme Ct rules against structured dismissals of Bk
The U.S. Supreme Court on Wednesday rejected an increasingly popular bankruptcy-court tactic, structured dismissals of bankruptcy cases by way of settlements that override payment priority rules.
The ruling came in the closely watched case of Jevic Transportation, a New Jersey trucking company that shut down suddenly, throwing thousands of drivers out of work, and filed for bankruptcy in 2008.
Jevic's chapter 11 bankruptcy ran out of money and ended with a court-approved deal that meant some cash for junior creditors, but nothing for drivers that had priority claims.
Instead of a chapter 11 plan, Jevic wrapped up its affairs with a settlement and dismissed its bankruptcy case. A six-justice majority of the high court on Wednesday found that ran afoul of rules set out by Congress .
"Bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors," said Justice Stephen Breyer , writing for the majority.
Robert Feinstein , a lawyer who helped put together the settlement, said creditors "are reviewing the opinion and considering its implications" when the Jevic case heads back to bankruptcy court for more work. Over 1,000 unsecured creditors received checks years ago as the result of the settlement that has now been vacated, Mr. Feinstein said.
Jack Raisner , lawyer for the unpaid truck drivers, said he was grateful the court "preserved and reaffirmed the important right on which employees have long relied: to get paid" instead of allowing a bankrupt company to pay off lower ranked creditors.
"That no longer can happen without the employees' consent," he said
Unpaid wages, taxes and other categories of debt have been given priority in bankruptcy by Congress , and are required to be paid before other debts. Jevic's structured dismissal overran those rules, over the protests of the unpaid truckers.
Wednesday's ruling overturned the Jevic dismissal, on the grounds that beleaguered companies cannot do in a settlement what they couldn't do in chapter 11 or chapter 7, ignore the payment priority scheme set out by Congress .
As long as priority creditors don't consent to the deal, such settlements can't be approved, the high court said.
Jevic's deal didn't save the company as a business or promote the possibility a chapter 11 exit plan could be confirmed, a six-justice majority of the high court noted.
"It's an important case because it clarifies that the bankruptcy-court priority rules are guardrails that powerful claimants cannot evade just because it serves their interests," said Jonathan Lipson , a professor at Temple University Beasley School of Law , who co-authored an amicus brief signed by more than a dozen bankruptcy scholars.
Wednesday's decision overturns a bankruptcy court ruling approving the settlement and dismissal. A federal district court and the Third U.S. Circuit Court of Appeals upheld the bankruptcy judge's decision, which cited the company's " dire circumstances."
By the end of Jevic's chapter 11 bankruptcy, there was only $1.7 million in the bankruptcy coffers, all of it claimed by private-equity firm Sun Capital Partners , which had acquired the company in a 2006 leveraged buyout. Jevic owed $53 million to Sun Capital and LBO funder CIT Group , a secured debt that threatened to absorb all the cash in the chapter 11 proceeding.
Unless there was a deal with Jevic's owner, there wouldn't be cash to cover chapter 11 expenses or pay any creditors, architects of the settlement argued. According to the high court, Sun Capital didn't want a settlement that would help fund continued litigation from the out-of-work truck drivers, so the "priority-skipping" pact was negotiated and agreed to.
At the time the settlement was formulated, the truck drivers had made headway on an $8 million lawsuit premised on the Worker Adjustment and Retraining Notification Acts, state and federal labor laws designed to cushion the blow of sudden mass layoffs. Sun Capital ultimately won the WARN Act case on the grounds it wasn't the truck drivers' employer.
Advocates of structured dismissals argued that rejecting Jevic's settlement will do nothing for creditors and will erase the small benefit that some junior creditors enjoyed.
But the Supreme Court's ruling says there is no reasoning away the payment priority scheme, which expresses public policy in determining some bankruptcy claims are more important than others. Even allowing the possibility of a " priority skipping" structured settlement in rare cases shifts the bargaining power that gives unpaid workers and taxing authorities some leverage in bankruptcy, the court said.
Mr. Lipson said lower courts treated cash-strapped Jevic as a "rare case, when it was anything but rare. Companies frequently enter bankruptcy with little or no unencumbered assets and there's no reason to think that that's going to change." Allowing a "rare case" exception, he said, invited litigation, while keeping the priority scheme clear promotes settlements that bring all creditors on board.
Bankruptcy lawyer Chris Ward , who isn't involved in the Jevic case, noted that the Supreme Court didn't rule out structured dismissals. "You can still use structured dismissals as a tool to dismiss a bankruptcy case. You just need to follow the absolute priority rule," Mr. Ward said.
"The essential point is that, regardless of the reason, the proposed settlement called for a structured dismissal that provided for distributions that did not follow ordinary priority rules," Justice Breyer wrote.
While bankruptcy courts have the power to dismiss bankruptcy cases, they don't have the power to approve a settlement that distributes assets, and then dismiss the cases, the high court said.
Justice Clarence Thomas and Justice Samuel Alito dissented, saying the case law wasn't sufficiently developed to decide the question.
Write to Peg Brickley at peg.brickley@wsj.com
(END) Dow Jones Newswires
03-22-17 1403ET
