A bankruptcy judge in New Mexico avoided the controversy to be resolved by the Supreme Court in Czyzewski v. Jevic Holding Corp. by concluding that an order calling for distribution to “general unsecured creditors” means that priority claimants must be paid in advance of other unsecured creditors.

The issue arose in a chapter 11 case where the official creditors’ committee had sued to recover a fraudulent transfer. When the defendant settled, the approval order drafted by the committee provided that the $60,000 in proceeds would first pay the committee’s counsel, with the remainder distributed to “general unsecured creditors.”

After the case converted to chapter 7, the trustee proposed distributing proceeds pro rata among all unsecured creditors, making no distinction between creditors with priority and those without. A New Mexico taxing authority objected, contending it was entitled to payment on its priority unsecured tax claim before other unsecured creditors received anything.

In Jevic, the Supreme Court will hold argument on Dec. 7 to decide whether the bankruptcy court can use a so-called structured dismissal to distribute settlement proceeds to creditors with non-priority unsecured claims, bypassing creditors with priority unsecured claims. To read an ABI discussion of Jevic, click here.

In a Nov. 30 opinion, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., began his analysis by noting that “general unsecured creditor” is not defined in the Bankruptcy Code or Rules and is ambiguous because it has “no specialized meaning.”

Since “general unsecured creditor” is an “imprecise term,” he said the settlement approval order did not indicate whether the distribution was intended to be contrary to the priority scheme in Section 507 of the Bankruptcy Code.

Given the ambiguity, Judge Jacobvitz said the approval order might mean that proceeds should go to nonpriority unsecured creditors, bypassing holders of priority claims, or spread among all unsecured creditors regardless of priority or lack of it.

Judge Jacobvitz then cited authority for the proposition that interpretation of an ambiguous term should be construed against the drafter. Since the unsecured creditors’ committee had drafted the approval order, the judge concluded that proceeds should be distributed in line with the Code’s distribution scheme, with payment first to the priority claimant “before any payment to any holders of nonpriority unsecured claims.”