March 22, 2017

Supreme Court Decides Czyzewski v. Jevic Holding Corp.

On March 22, 2017, the Supreme Court of the United States decided Czyzewski v. Jevic Holding Corp., No. 15-649, holding that a structured dismissal under Chapter 11 of the Bankruptcy Code must follow ordinary priority rules unless affected creditors consent.

Petitioners, a group of former truck drivers for bankruptcy debtor Jevic Transportation, were awarded a judgment in bankruptcy court against Jevic for its failure to provide proper notice of their termination in violation of various state and federal laws. About $8.3 million of that judgment counted as a priority wage claim. In a second lawsuit in the bankruptcy, a court-sanctioned committee of Jevic’s unsecured creditors brought fraudulent-conveyance claims against the private equity firm that had acquired Jevic and that firm’s lender. That suit resulted in a settlement that resolved both the fraudulent-conveyance suit and required the dismissal of Jevic’s Chapter 11 bankruptcy petition, with an agreement that the former truck drivers would receive nothing but lower-priority general unsecured creditors would receive something. The truck drivers appealed from the bankruptcy court’s order dismissing the bankruptcy petition on these terms.

Both the district court and the Third Circuit affirmed, but the Supreme Court reversed and held for the truck drivers. First, it held that they had standing to sue because a settlement under the ordinary priority rules remained a reasonable possibility. Second, it held that, absent consent by the affected creditors, bankruptcy courts cannot approve structured dismissals that alter the Bankruptcy Code’s ordinary priority rules for making distributions. The Code failed to indicate that Congress intended to make such a major departure. Chapter 11 dismissals foresee restoration of the prepetition financial status quo to the extent possible. The provision allowing for dismissals to result in anything other than the financial status quo is designed to provide flexibility to protect the reliance interests acquired in bankruptcy, not make general end-of-case distributions that Chapter 11 plans and Chapter 7 liquidations prohibit.

Cases in which courts have approved deviations from the ordinary priority rules involve interim distributions serving significant Code-related objectives. Here, the debtor ceased to be a going concern, disfavored creditors were not better off, chances of a plan confirmation did not improve, the status quo was not restored, and reliance interests were not protected.

Even allowing a court to alter the priority rules without consent in a “rare case” would undermine the Bankruptcy Code by creating uncertainty. This uncertainty would result in particular classes of creditors lacking protection, alter respective bargaining powers, create collusion risks, and make settlements more difficult to achieve.

Justice Breyer delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Ginsburg, Sotomayor, and Kagan joined. Justice Thomas filed a dissenting opinion in which Justice Alito joined.

Download Opinion of the Court

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