High Court Hears Argument on Jevic, First Bankruptcy Case of Term

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By Daniel Gill

Dec. 7 — Supreme Court justices questioned when—if ever—a bankruptcy court can order that property be distributed in a manner inconsistent with the statutory priority schemes for paying creditors in Chapter 11 plans or Chapter 7 liquidations ( Czyzewski v. Jevic Holding Corp. , U.S., No. 15-649, oral argument 12/7/16 ).

“It was a hotter bench than expected,” Professor Jonathan Lipson of Temple University–Beasley School of Law told Bloomberg BNA after the spirited session of oral argument.

The question before the court is whether creditors and debtors in Chapter 11 can agree to settle disputes, dismiss the bankruptcy case and pay certain creditors outside of the payment priority scheme (sometimes referenced as the “Absolute Priority Rule") that would be required if creditors were paid through the bankruptcy case.

The justices’ questions probed the statutory basis—or lack thereof—for the use of these “structured dismissals,” as they’re called, as a viable means for exiting Chapter 11, alternative to converting the case to Chapter 7 or simply dismissing the case.

Significant Decision

The case is being watched closely by restructuring and reorganization professionals across the country.

“Many people use structured dismissals as a practical way out of a difficult Chapter 11 case,” Howard J. Weg, a partner with Robins Kaplan LLP in Los Angeles wrote in an e-mail to Bloomberg BNA Dec. 6. “This could be a top 10 of the century bankruptcy case if the Supremes want to rule broadly on ‘absolute priority’ or ‘fair and equitable,’” Weg said.

The case also features an unusual case of strange bedfellows. Friend of the court (or amicus) briefs were filed by groups representing both labor and institutional lenders—a rare occurrence, according to Elliot Ganz, the Executive Vice President and General Counsel for the Loan Syndications and Trading Association (LSTA), which filed a brief in support of the petitioners seeking reversal by the court.

The LSTA’s membership includes “all the big banks” and big private equity funds, Ganz told Bloomberg BNA Dec. 7. That constituency relies on the rigidity and dependability of bankruptcy priority schemes. “The Absolute Priority Rule is foundational to the lending market,” Ganz said.

Other groups, representing wage earners, also argued in favor of reversal. They—like the many states also filing a brief in support of the petitioners—expressed concerns about senior and junior creditors colluding to squeeze out their mid-level priority claims.

Leaning Toward Reversal?

Justice Samuel A. Alito, Jr. appeared to be the most challenging of the petitioners’ positions, suggesting that the question presented to the court was different from that which was submitted with the petition for hearing by the court. But counsel for the truckers denied that assertion.

Other justices asked questions or made comments which seemed to support a holding reversing the Third Circuit and finding that bankruptcy courts should not have the discretion to enter orders which finally dispose of a bankruptcy estate’s assets contrary to statutory priority schemes.

Justice Elena Kagan, for example, questioned whether structured dismissals allow Chapter 11 plans which are not confirmable under the strictures of the Bankruptcy Code to be de facto “confirmed” by “this alternate procedure.”

Justice Stephen G. Breyer expressed concerns about how the statutory priority schemes could be ignored by parties who might manipulate the system by refusing to settle unless favored, non-priority creditors enjoyed a benefit at the expense of senior creditors being squeezed by settling parties.

Elliot Ganz, general counsel for the LSTA, suggested that at least four justices were predisposed to reversing the Third Circuit, simply because it takes four to agree to hear the case in the first place. “The Supreme Court didn’t take this case to affirm it,” he told Bloomberg BNA.

How Far, Discretion?

Counsel for the respondents in the case framed the question before the court: “Are we in a world where there is any discretion at all, versus a world where the absolute priority rule applies by its terms?”

Respondents argued (and at one point Justice Breyer noted) that although no statute appears to allow such structured dismissals with distributions outside of the priority scheme, nothing in the Code appears to forbid it either.

Respondents’ counsel urged that those circuits who allowed for structured dismissals got it right, emphasizing how important the priority scheme was but giving courts flexibility in the extremely rare instances when a structured dismissal would allow some creditors to receive more than they would without the relief, without any party receiving less.

Justices Sonia Sotomayor and Anthony M. Kennedy both questioned whether there truly were “rare cases” which would justify a bankruptcy court dismissing a Chapter 11 case with an order that provided for distributions to creditors outside the statutory scheme.

Truckers’ Priority Claims Passed Over

In the Chapter 11 case of Jevic Holding Corp., a trucking company, the Committee of Unsecured Creditors in the case sued secured creditors accused of receiving fraudulent and/or preferential transfers. The parties settled the dispute, and used the “structured dismissal” contemplated in the settlement to make payments to unsecured creditors and lawyers who worked on its Chapter 11 case.

But truck drivers holding priority wage claims (senior to any unsecured claims) were left out of any distribution in the settlement, and they objected. The drivers had also sued the secured creditors and claimed damages over their mass firing when the company filed for bankruptcy. The respondents told the court that the secured creditor wouldn’t allow the truckers to receive anything from the settlement, because the truckers would use the proceeds to fund other litigation against them.

The bankruptcy court, the district court, and the Third Circuit on appeal found that the case created “exceptional circumstances” which justified allowing the structured settlement, with its payments which passed over the priority claims of the truckers. The lower courts found that the truckers wouldn’t have received anything for their claims if the settlement weren’t approved and the structured dismissal allowed. Meanwhile, those creditors who were paid something on account of their claims also wouldn’t have recovered anything (except for the senior secured creditors) absent the settlement and structured dismissal.

Danielle Spinelli, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, argued for the petitioners. The respondents were represented at argument by Christopher Landau, Kirkland Ellis LLP, Washington. Sarah E. Harrington, Assistant to the Solicitor General, Washington, argued on behalf of the United States as Amicus Curiae.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

For More Information

The argument transcript is available at: http://src.bna.com/kBq

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