According to a recent Supreme Court decision, Chapter 11 Bankruptcy priority rules can no longer be sidestepped by what is known as a “structured dismissal.” This essentially means that corporations or LLCs involved in bankruptcy proceedings will have a harder time bypassing rules designed to ensure fair payment to all creditors. This could be a boon to workers seeking compensation from an employer who has filed for Chapter 11 bankruptcy.
To comprehend the recent ruling in Czyzewski v. Jevic Holding Corp., it is important to understand the events leading up to the case. To begin, in 2006, Jevic Transportation Corporation (Jevic) was purchased in a leveraged buyout, after which the company filed for Chapter 11 bankruptcy. The bankruptcy provoked two lawsuits. The first involved a group of truck drivers employed by Jevic (petitioners) who successfully sued the company after being terminated without proper notice, a direct violation of the Worker Adjustment and Retraining Notification (WARN) Act. Part of that judgment involved priority wage claims, meaning the drivers were entitled to payment before lower-level unsecured creditors as per § 507 of the Bankruptcy Code. In the second lawsuit, Jevic’s unsecured creditors sued the buyers (Sun Capital and CIT Group) for fraudulent-conveyance. This lawsuit resulted in a settlement that gave way to a structured dismissal, which allowed Jevic and the buyers to ignore the priority wage claims, meaning the unsecured creditors were paid, while the drivers were not.
Justice Stephen Breyer and five other Justices of the high court decided to overturn the decisions of the lower courts, that ruled that no better alternative was available to the petitioners, as all other options would have left them in the same predicament – i.e. no harm, no foul. According to the majority opinion of the Supreme Court, this claim rests on two questionable assumptions: first, without the structured dismissal, Sun Capital and CIT Group wouldn’t have settled; and second, without the settlement money, Jevic would have had nothing to offer the drivers. But according to Justice Breyer, the structured dismissal also kept the drivers from pursuing their own lawsuit against Sun Capital and CIT Group. In such a case, the drivers could have won at least a small sum. Given this hypothetical situation, the higher court found that there was a better alternative to the structured dismissal.
The Implications of the Ruling
Beyond ruling in favor of the petitioners, the Supreme Court changed the game for Chapter 11 bankruptcy cases. A Chapter 11 case can end in one of three ways:
- a plan can be confirmed
- assets can be converted to Chapter 7 liquidation
- or the court can dismiss the case, altogether
While these options all enforce priority rules, a structured dismissal does not have such requirements, meaning certain parties might not get paid, as with the Jevic truck drivers. However, according to the majority opinion of the Supreme Court, “A distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules,” meaning structured dismissals are no longer a viable option for bankruptcy practitioners. This is good news for employees who are promised compensation for wages earned within 180 days leading up to the company’s folding, according to § 507 of the Bankruptcy Code.
According to Daniel Bussel, writer for ScotusBlog.com, there may still be methods available to bankruptcy specialists who wish to bypass priority rules. However, these methods (gifting and Section 363 orders) were significantly weakened by the recent ruling, so it’s difficult to say with certainty how the bankruptcy community will respond to the Supreme Court’s decision.