The Supreme Court is likely to decide next year whether so-called structured dismissals are permissible in bankruptcy, because the Solicitor General filed an amicus brief on May 23 urging the justices to grant certiorari and reverse the Third Circuit.
A structured dismissal is the name euphemistically given to failed chapter 11s where liquidation of the assets – often sold in a credit bid to the secured lenders – will not generate enough cash to pay priority claims in full and permit confirmation of a plan. In the unsuccessful reorganization of Jevic Holding Corp., the official unsecured creditors’ committee sued and negotiated a settlement with the lender and owner setting aside some money for distribution to unsecured creditors following dismissal. The distribution scheme in the settlement bypassed wage priority claims by setting money aside in a trust exclusively for lower-ranked unsecured creditors.
The bankruptcy court approved the settlement and was upheld in the district court and the Third Circuit, which is home these days to many of the country’s largest chapter 11s. The decision in May 2015 was a 2-1 split in the court of appeals, with the dissenter saying that while structured dismissals are permissible, Jevic was not a proper case.
The Second Circuit ratified structured dismissals in its 2007 Iridium decision. There is a split of circuits because the Fifth Circuit barred structured dismissals when it decided Aweco in 1984 by holding that the “fair and equitable” test must apply to settlements.
After a conference in February, the justices invited the Solicitor General to file a brief “expressing the views of the United States.” Urging the Court to grant certiorari and reverse, the government’s litigator in the Supreme Court said, “Bankruptcy is not a free-for-all in which parties or bankruptcy courts may dispose of claims and distribute assets as they see fit.”
The Solicitor General went on to say that “nothing in the Code authorizes a court to approve a disposition that is essentially a substitute for a plan but does not comply with the priority scheme set forth in Section 507.”
The Solicitor General’s conclusion is not surprising because the government lost a companion case called In re LCI Holding Co., in which the Third Circuit sanctioned so-called gift plans that distribute estate property counter to bankruptcy priorities. The LCI and Jevic cases were argued the same day in January 2015, but before different panels of the Third Circuit. Although it was the primary objector in LCI, the government did not pursue a certiorari petition.
The Court should hear Jevic, the Solicitor General said, because there is a deepening circuit split and the question is “important and recurring.”
If the Supreme Court decides to hear Jevic, argument could take place around November, with a decision sometime early next year.