{"id":1447,"date":"2018-03-02T10:33:24","date_gmt":"2018-03-02T15:33:24","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=1447"},"modified":"2018-03-02T10:33:24","modified_gmt":"2018-03-02T15:33:24","slug":"secret-life-priority","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/secret-life-priority\/","title":{"rendered":"The Secret Life of Priority"},"content":{"rendered":"

This was adapted from a post on the <\/em>Oxford Business Law Blog<\/em><\/a>.<\/em><\/p>\n

For forty years, the central goal of corporate reorganization under Chapter 11 of the United States Bankruptcy Code has been to produce a \u201cplan of reorganization\u201d for the distressed corporate debtor.\u00a0 Often viewed as a \u201cgrand bargain\u201d between the debtor and all of its stakeholders, plans require a super-majority vote of creditors, and must pay or provide for all pre-bankruptcy claims against the debtor. They often involve debt-equity conversions, extended payment terms, or simply \u201chaircuts\u201d to advance Chapter 11\u2019s larger policy aspiration of preserving going concerns and jobs where possible, and maximizing stakeholder recoveries in any event.<\/p>\n

Corporate debtors don\u2019t always succeed in negotiating and confirming a plan, in which case the court may liquidate the debtor\u2019s assets or dismiss the case to permit creditors to pursue their claims in other fora.\u00a0 But the plan of reorganization has been a central feature of reorganization both because it provides a negotiating framework and, in the absence of consent (through creditor voting), enforces a particular distributive order: \u201cabsolute\u201d priority.<\/p>\n

Academics have long-debated the merits of plans of reorganization and their underlying distributive logic.\u00a0 Many believe that \u201cabsolute\u201d priority is foundational because it creates predictability ex ante and procedural integrity ex post.\u00a0 Others, however, worry that plans are costly and courts should have discretion to alter the order of priority (sometimes thought of loosely as \u201crelative\u201d priority) in order to promote efficiency gains.<\/p>\n

As I explain in a new paper, The Secret Life of Priority: Corporate Reorganization After Jevic<\/em><\/a>, the U.S. Supreme Court\u2019s recent decision in Czyzewski v. Jevic Holding Corp. (In re Jevic)[1]<\/strong><\/a><\/em> effectively ended this debate, holding that \u201cabsolute\u201d priority governs the resolution of Chapter 11 cases.\u00a0 More subtly, but perhaps more importantly, Jevic<\/em> also saved the plan of reorganization as the principal vehicle by which to exit Chapter 11.\u00a0 This, in turn, has important procedural implications, which I explore in the paper. The \u201csecret life\u201d of priority, Jevic<\/em> suggests, is that priority is not only about the order of distributions, but also about the quality of the process by which bankruptcy courts make important distributive decisions.<\/p>\n

Priority and the viability of plans were in issue at all in Jevic<\/em> because the lower courts there had approved a so-called \u201cstructured dismissal,\u201d a procedural concoction under which senior and junior claimants sought to split the assets of the debtor, a trucking company, by skipping \u201cmid-priority\u201d wage claims held by the petitioners, the debtor\u2019s terminated drivers.\u00a0 In reversing the Third Circuit Court of Appeals\u2014one of the most important appellate courts supervising U.S. bankruptcy practice because it reviews Delaware\u2019s influential courts\u2014a 6-2 majority held that final distributions in a chapter 11 bankruptcy must follow the \u201cordinary\u201d and \u201cbasic\u201d priority rules of the Bankruptcy Code absent \u201cthe affected creditors’ consent.\u201d<\/p>\n

Jevic<\/em> did not forbid all structured dismissals. Instead, the Court held that those in control of a corporate debtor could not use a structured dismissal to evade the basic creditor safeguards of plans: creditor consent or, absent consent, absolute priority. Yet, outside a plan, \u201cconsent\u201d is difficult to pinpoint in a Chapter 11 reorganization, because these cases can involve hundreds or thousands of creditors and shareholders. In Jevic<\/em>, it was easy to see the absence of consent, because the mid-priority drivers objected to the structured dismissal. But in many cases, widely dispersed creditors will not understand or have the resources to challenge important actions in a case.\u00a0 The absence of objections presents a significant risk of false negatives, because it is not clear whether silence signals assent or ignorance.<\/p>\n

In principle, the Bankruptcy Code addresses this problem by providing that unsecured creditors will be represented by a committee, whose professionals will be paid by the corporate debtor\u2019s bankruptcy estate. But creditors\u2019 committees are problematic representatives because their statutory remit is unclear and they may be adverse to the claimants they supposedly represent. In Jevic<\/em>, for example, the creditors\u2019 committee that supported the structured dismissal also theoretically represented the truck drivers who opposed it.<\/p>\n

The Jevic<\/em> Court offered no insight into what constitutes \u201cconsent\u201d in Chapter 11 cases. Instead, I explain that the majority opinion reveals a Court concerned about three process values that proxy for it:<\/p>\n