Reversing the Third Circuit in Czyzewski v. Jevic Holding Corp., the Supreme Court ruled 6/2 today in an opinion by Justice Stephen G. Breyer that the bankruptcy court, without consent from affected parties, cannot approve so-called structured dismissals that “deviate from the basic priority rules,” not even in rare cases.
Justice Breyer was careful to narrow the Court’s holding so the opinion would not be interpreted to preclude first-day wage or critical vendor orders.
Joined by Justice Samuel A. Alito, Jr., Justice Clarence Thomas dissented, saying that the writ of certiorari should have been dismissed as improvidently granted.
The Facts
In the unsuccessful reorganization of Jevic Holding Corp., the official unsecured creditors’ committee had sued the secured lender for receipt of a fraudulent transfer. The committee and the lender negotiated a settlement calling for the lender to set aside some money for distribution to general unsecured creditors following dismissal in a scheme that did not follow the ordinary priority rules contained in Section 507.
Since it would give them nothing on their $8.3 million in wage priority claims, workers objected to the settlement because some settlement proceeds were to be held in a trust exclusively for lower-ranked general unsecured creditors.
The bankruptcy court in Delaware approved the settlement and structured dismissal and was upheld in district court. The Third Circuit, in a 2-1 opinion, upheld the structured dismissal, eliminating any chance of recovery by priority wage claimants through the bankruptcy. Although the dissenter in the Third Circuit concurred that structured dismissals could be approved on occasion, he did not believe Jevic was a proper case.
The Supreme Court granted certiorari in June 2016 to resolve a split of circuits. Before granting certiorari, the Supreme Court sought comment from the Solicitor General, who subsequently urged granting the petition and reversing the court of appeals.
Justice Breyer’s Opinion
Justice Breyer cited the American Bankruptcy Institute Commission report’s definition of structured dismissals. He went on to say that the ABI report referred to structured dismissals as “increasingly common.”
Justice Breyer observed that the Bankruptcy Code “does not explicitly state what priority rules – if any – apply to a distribution” when a chapter 11 case is dismissed. He noted, however, that a chapter 11 plan cannot violate rules of priority over objection from an impaired creditor class.
Since Section 349(b) does not say when there is “cause” to depart from the ordinary rules governing the effects of dismissal, he said the propriety of structured dismissals was a “complicated question.” Nonetheless, he said, the answer is “simple”: Structured dismissals are not permissible.
The Bankruptcy Code’s “priority system constitutes a basic underpinning of business bankruptcy law,” the opinion says. Justice Breyer said the Court “would expect to see some affirmative indication of intent if Congress actually meant to make structured dismissals a backdoor means to achieve the exact kind of nonconsensual priority-violating final distributions that the [Bankruptcy] Code prohibits in chapter 7 liquidations and chapter 11 plans.”
Justice Breyer was careful to ensure that the opinion is not read broadly to prohibit common practices in chapter 11 cases that depart from the rules and timing of distributions, such as first day orders allowing payment of pre-petition wages and claims of so-called critical vendors. Those practices, he said, are designed to enhance the chance for a successful reorganization.
On the other hand, Justice Breyer said, a “priority-violating” distribution in a structured dismissal “is attached to a final disposition; it does not preserve the debtor as a going concern.”
He left the door open to other priority-defying practices if there is a “significant offsetting bankruptcy-related justification.”
Justice Breyer ended his discussion of the merits by saying that a structured dismissal is not permissible even in a “rare case.” He said that allowing them sometimes would result in “similar claims being made in many, not just a few, cases.” He concluded that “Congress did not authorize a ‘rare case’ exception.”
The Standing Question
Justice Breyer’s majority opinion had a three-page discussion of standing that may be pertinent if the question avoided in Spokeo Inc. v. Robbins, 136 S. Ct. 1540, 194 L. Ed. 2d 635 (Sup. Ct. May 16, 2016), comes back to the Supreme Court.
The respondents contended that the workers had no standing because they suffered no injury. Although they got nothing under the settlement, the bankruptcy judge said they likewise would have received nothing if the settlement were disapproved.
The workers had standing, Justice Breyer said, because “a settlement that respects ordinary priorities remains a reasonable possibility.” Furthermore, he said, the fraudulent transfer claim “could have litigation value” because the defendants were willing to pay $3.7 million in settlement. Consequently, “the structured settlement cost petitioners something. They lost a chance to obtain a settlement that respected their priorities. Or, if not that, they lost the power to bring their own lawsuit.”
On an issue that may arise if a case like Spokeo comes back to the high court, Justice Breyer cited McGowan v. Maryland, 366 U.S. 420 (1961), and said that “a loss of even a small amount of money is ordinarily an ‘injury’” that gives rise to standing.
‘Gift’ Plans
The majority opinion does not explicitly discuss the related question of so-called gift plans, where a lender allows some typically small portion of its collateral to be diverted to a low-ranking class, passing over a higher ranking class.
The holding in Jevic could be authority to bar gift plans to the extent they result from settlements negotiated by creditors’ committees based on claims that belong to the estate.
On the other hand, gift plans arguably are permissible if they promote “significant Code-related objectives” that Jevic would allow.
The Dissent
Joined by Justice Alito, Justice Thomas dissented, saying the certiorari petition should have been denied as having been improvidently granted. He said the petitioners argued a different issue from the one for which the Court granted certiorari to resolve a circuit split.
On the question presented in the petitioners’ brief, Justice Thomas said there is no circuit split.
The opinion in the Supreme Court is Czyzewski v. Jevic Holding Corp., 15-649 (Sup. Ct.). The opinion in the Third Circuit is Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. May 21, 2015).