Commentary: Yes, Virginia, There Is a Code Priority Scheme: Supreme Court Strikes Down Structured Dismissals in Jevic



by Charles Tabb

Mildred Van Voorhis Jones Chair in Law, University of Illinois

Of Counsel, Foley & Lardner LLP



A potential threat to the Code’s priority scheme is the allowance of “structured dismissals,” which include a settlement as part of the dismissal of a chapter 11 case that would distribute estate assets in a manner that contravenes the Code’s priority rules. Such priority-altering distributions could not be approved pursuant to a confirmed chapter 11 plan absent the consent of the class that is adversely affected, because of the absolute priority rule (§§ 1129(a)(8) and 1129(b)), nor would they be possible if the chapter 11 case were converted to a chapter 7 liquidation, because of the Code’s strict distributional priority rules (§ 726). If such structured dismissals were permitted, a debtor and collaborating creditors effectively could do an end-run around the absolute priority rule by exiting chapter 11 via a “dismissal,” before the confirmation cramdown rules are formally applied, but with final, binding distributions made as part of the “structured” dismissal in derogation of absolute priority. In an important 2017 decision, the Supreme Court in Czyzewski v. Jevic Holding Corp. held that “[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 that apply under the primary mechanisms the Code establishes for final distribution of estate value in business bankruptcies.” Importantly, the Court, with Justice Breyer writing the majority opinion, emphasized that “a bankruptcy court does not have such a power.”



 

ABI will be holding a media webinar tomorrow at 10 a.m. ET with experts examining the decision. The includes Prof. Jonathan Lipson, who is Counsel of Record for an amicus brief from law professors in favor of the petitioner, David R. Kuney, Senior Counsel at Whiteford Taylor Preston LLP, who is the Counsel of Record for an amicus brief by another set of law professors in support of the respondents, and ABI Resident Scholar Prof. Andrew Dawson. The moderator will be ABI Editor-at-Large Bill Rochelle. A limited number of spots are available for ABI members to participate in the hour-long program. If you are interested in participating, please register by clicking here.

House Financial Services Subcommittee Examines Constitutionality of CFPB



A hearing of the House Financial Services Subcommittee on Oversight and Investigations on Tuesday focused on the checks and balances of the Consumer Financial Protection Bureau (CFPB), according to an ACAInternational.org summary. The hearing was held against the backdrop of the landmark case between PHH Corp. and the CFPB in which the bureau’s leadership structure is being challenged as unconstitutional. The case is being considered in the U.S. Court of Appeals for the District of Columbia Circuit. On Friday, the Justice Department filed a brief telling a federal appeals court that it disagreed with the CFPB’s argument that the president can only fire the director for cause. Witnesses at Tuesday's hearing spoke on the court and constitutional precedent for removing the director of a federal agency for cause and, specific to the CFPB, the president’s current authority to remove the director under the Dodd-Frank Act. They also discussed the level of accountability of a single agency director compared to a five-person commission at the CFPB to replace the single-director structure and bring it under the congressional appropriations process. Click here to view the hearing, witness list and prepared hearing materials.

 

Fed Rate Increase Makes 0 Percent Financing Deals Pricier for Retailers



Years of rock-bottom interest rates have led to a proliferation of no-interest financing offers for people looking to buy everything from cars to lawn mowers, jewelry and furniture. Manufacturers and retailers have come to lean heavily on these deals, which are an inducement for shoppers considering large or discretionary purchases, the Wall Street Journal reported today. Now, with interest rates climbing, the cost of these arrangements will also rise, pinching profits at companies that derive a large chunk of their sales from shoppers who prefer to pay in installments. The cost of providing 0 percent financing varies from company to company, but generally retailers pay a middleman — usually a bank or finance company — a few percentage points of a product’s purchase price upfront. The 0 percent deals will now get more expensive, says Mike Rittler, head of retail card services at TD Bank, which provides no-interest financing to customers of 25 U.S. retailers, including sellers of furniture and tractors. Retailers could limit their costs by providing no-interest financing for shorter terms, he notes. Companies in many cases say they don’t plan to ditch the offers, which have become a cornerstone of their marketing efforts since the financial crisis. But if profit margins get compressed, analysts say companies may be forced to act.



 

Morgan Stanley: Rising Pension Debts Checking Muni Supply

A drop in the sales of state and local government debt this year may have a culprit other than rising interest rates. Analysts at Morgan Stanley, led by Michael Zezas, said that rising retirement-system costs have made governments more leery of running up new debts, Bloomberg News reported on Tuesday. State and local revenues have not kept pace with growth in total liabilities, which now amount to $4.97 trillion, the analysts say. Despite January seeing a year-over-year rebound in tax revenues, the pressures from unfunded pension liabilities “would make this a hollow victory if they aren’t sustained,” the analysts added. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007, according to data compiled by Bloomberg.



 

ASM Spotlight: Panel to Examine Nonbankruptcy Alternatives to Restructuring Student Loans



Join Edward M. King of Frost Brown Todd LLC (Louisville, Ky.) and Shahien Nasiripour of The Huffington Post (Boston) for their session, “Nonbankruptcy Alternatives to Restructuring Student Loans,” at the upcoming Annual Spring Meeting (April 20-23). Don't miss this session and other engaging speakers at the 2017 Annual Spring Meeting! Click here for more information and to register.

 

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