{"id":1171,"date":"2017-04-05T15:21:45","date_gmt":"2017-04-05T19:21:45","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=1171"},"modified":"2017-04-05T15:21:45","modified_gmt":"2017-04-05T19:21:45","slug":"supreme-courts-jevic-opinion-affirms-central-role-priority-structure-chapter-11-reorganizations","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/supreme-courts-jevic-opinion-affirms-central-role-priority-structure-chapter-11-reorganizations\/","title":{"rendered":"Supreme Court\u2019s Jevic Opinion Affirms Central Role of Priority Structure in Chapter 11 Reorganizations"},"content":{"rendered":"

The U.S. Supreme Court decided late last month the closely-watched case, Czyzewski v. Jevic Holding Corp<\/a>.<\/em>, in which I (along with Professor Melissa Jacoby, currently of the University of North Carolina Law School, formerly of Temple Law) coauthored a brief for amici curiae law professors<\/a> in support of Petitioners, truck drivers whom Jevic terminated shortly before it filed for bankruptcy.<\/p>\n

Holding about $8.3 million in priority wage claims, these workers objected to a settlement that Jevic\u2019s shareholders and senior lenders reached with the creditors\u2019 committee. The settlement denied the workers their priority payment, dismissed the bankruptcy, and foreclosed the workers\u2019 rights to challenge under state law the leveraged buyout (LBO) that led to the bankruptcy. The Third Circuit concluded that such a settlement was permissible in \u201crare\u201d circumstances. The Supreme Court disagreed, holding that such so-called \u201cstructured dismissals\u201d\u2014an order dismissing the bankruptcy with strings attached\u2014must comply with priority rules absent consent of the affected parties.<\/p>\n

Justice Breyer\u2019s majority opinion is notable for at least two reasons. First, it recognized what was ultimately at stake: the integrity and efficiency of the chapter 11 process. The consequences of failing to reverse, the Court explained, \u201care potentially serious,\u201d and include \u201crisks of collusion,\u201d \u201cmaking settlement more difficult to achieve,\u201d and eroding procedural protections that \u201cCongress granted particular classes of creditors,\u201d such as unpaid workers. The Court found no basis in bankruptcy law to allow for exceptions to priority rules in \u201crare\u201d cases, and seemed to doubt that Jevic<\/em> was such a case in any event.<\/p>\n

Second, consider what Justice Breyer\u2019s opinion did not do. It did not, contrary to some reports, prohibit all structured dismissals, which are seen as a new and potentially valuable mechanism for resolving certain bankruptcies: \u201cWe express no view about the legality of structured dismissals in general,\u201d Justice Breyer noted. The decision also distinguished the impermissible final distribution in Jevic<\/em> from interim distributions, such as \u201ccritical vendor orders,\u201d that permit special priority treatment for claims of those who supply vital goods or services to a corporate debtor. These payments might deviate from bankruptcy\u2019s priority rules temporarily, Justice Breyer noted, but serve other fundamental objectives. By contrast, the Court in Jevic<\/em> could not find \u201cany significant offsetting bankruptcy-related justification.\u201d The opinion also avoided related, controversial issues, such as the propriety of so-called \u201cgift plans\u201d or third-party releases. It shows, however, that Justice Breyer may be the best Justice for the job, if or when the Court chooses to tackle those questions.<\/p>\n

Structured dismissals have become an important technique for resolving chapter 11 bankruptcies because they are viewed as less expensive than the traditional exit mechanism\u2014a \u201cplan of reorganization\u201d\u2014and yet can provide many of the benefits of a plan. They are especially attractive in cases where a debtor\u2019s assets have been sold, and all that remains in the bankruptcy is distribution of the sale proceeds. Justice Breyer\u2019s opinion is important because it reminds practitioners and courts that, while there is nothing inherently wrong with that approach, the distributions must respect foundational principles of payment priority.<\/p>\n

Although not central to the holding, Justice Breyer cited a paper I authored<\/a> on the structure of LBOs that are challenged as fraudulent transfers, as happened here. Professor Jacoby and I recently published a short post about the case on Harvard\u2019s Bankruptcy Roundtable<\/a>. If you still haven\u2019t had your fill of Jevic, <\/em>you can listen to a webinar on the case produced by the American Bankruptcy Institute<\/a> in which I participated along with others involved in the case.<\/p>\n

\n

Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University Beasley School of Law<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Prof. Lipson highlights SCOTUS\u2019s decision to award wage claims to Jevic drivers despite \u201cstructured dismissal\u201d<\/p>\n","protected":false},"author":60,"featured_media":1172,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[47,8],"tags":[77,337,338,339,340,341,342],"coauthors":[44],"class_list":["post-1171","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bankruptcy","category-faculty-authored","tag-bankruptcy","tag-chapter-11","tag-jevic","tag-justice-breyer","tag-lbo","tag-structured-dismissals","tag-supreme-court","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\nSupreme Court\u2019s Jevic Opinion Affirms Central Role of Priority Structure in Chapter 11 Reorganizations - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/supreme-courts-jevic-opinion-affirms-central-role-priority-structure-chapter-11-reorganizations\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Supreme Court\u2019s Jevic Opinion Affirms Central Role of Priority Structure in Chapter 11 Reorganizations - 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