Outnumbered almost six to one by legal scholars from other universities, three law professors filed an amicus brief urging the Supreme Court to affirm Czyzewski v. Jevic Holding Corp. and permit a so-called structured dismissal where the bankruptcy court approves a settlement, dismisses the chapter 11 case, and authorizes distribution of settlement proceeds that contravene the priorities set forth in Section 507.
The three professors – David Gray Carlson, Jack F. Williams and David R. Kuney – were keen to ensure that the Supreme Court does not hand down an opinion broadly applying the absolute priority rule to all aspects of bankruptcy. They are concerned that “an expansive view of the absolute priority rule will have harmful consequences in other areas of bankruptcy practice,” such as single-asset real estate cases and individual chapter 11s.
The amicus brief explains, historically, why the absolute priority rule is a “limited doctrine” that does not control “all dispositions” of property in bankruptcy.
The three professors’ brief, filed on Oct. 17, effectively explains why Jevic should turn on the applicability – or not – of Section 507’s priorities, rather than the congressionally modified notion of the judge-made absolute priority rule invoked today when cramdown is employed under Section 1129(b).
The amicus brief traces the history and evolution of the absolute priority rule, relying in large part on a 2016 Fordham Law Review article by Prof. Stephen J. Lubben from Seton Hall Univ. School of Law. From Supreme Court authority, they explain why “absolute priority is not always mandated, and must, at times, give way to practical necessity.”
With regard to Section 507, the three professors said it is “not accurate” to say that “all distribution schemes require adherence to the ‘statutory priority’ scheme.”
Urging the Supreme Court to reverse Jevic, the amicus brief filed by 17 professors on Sept. 2 says that the Third Circuit’s 2-1 decision “threatens the foundations of the bankruptcy system – its priority scheme.” They said that nothing in the Bankruptcy Code “permits this kind of priority-skipping settlement in the absence of creditor consent.”
Affirming Jevic and permitting an “end run” on the priority system, the 17 professors said, would foster “perverse incentives: powerful parties will increasingly seek to resolve corporate bankruptcy cases through structured dismissals which lack creditor safeguards that Congress built into the bankruptcy process.”
The 17 law professors advocating for reversal of Jevic include Ralph Brubaker, Bruce A. Markell, David A. Skeel and Jay L. Westbrook. Their brief was submitted by Professors Melissa B. Jacoby and Jonathan C. Lipson. The three professors’ amicus brief was submitted by David R. Kuney from Whiteford Taylor & Preston in Washington, D.C.
To read the three professors’ brief, click here. For the 17 professors’ submission, click here. To read ABI’s discussions of Jevic, click here and here.