Do you remember Jevic?
That’s the case where the Supreme Court held in March 2017 that a so-called structured settlement ending a chapter 11 case cannot include a distribution to creditors in violation of the priorities in Section 507(a). Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 197 L. Ed. 2d 398, 85 U.S.L.W. 4115 (Sup. Ct. March 22, 2017).
Guess how the case ended up after being remanded to the bankruptcy court in Delaware (answer: conversion to chapter 7).
In an opinion read from the bench on May 21, Bankruptcy Judge Brendan L. Shannon rejected a new settlement proposed by the same parties who had sponsored the settlement rejected by the Supreme Court last year. In addition, Judge Shannon converted the case to liquidation in chapter 7, effectively taking the future of the case out of the hands of those who have been trying to avoid paying workers’ claims since the chapter 11 case was filed in 2008.
The Prelude to the Supreme Court’s Reversal
In Jevic’s unsuccessful reorganization, the official unsecured creditors’ committee had sued the secured lender for receipt of a fraudulent transfer. The result was a settlement where the lender would set aside some money for distribution to general unsecured creditors after dismissal. The distribution scheme in the settlement did not follow the priority rules contained in Section 507.
Giving them nothing for their $8.3 million in priority claims for unpaid wages, workers objected to the settlement because some settlement proceeds were to be held in a trust exclusively for lower-ranked general unsecured creditors.
Upheld in district court, the bankruptcy court approved the settlement and so-called structured dismissal. The Third Circuit upheld the structured dismissal in a 2-1 opinion, eliminating any chance of recovery by priority wage claimants through the bankruptcy.
The Supreme Court reversed and remanded in a 6/2 opinion, with the two dissenters arguing that the petition for certiorari should have been dismissed as having been improvidently granted. To read ABI’s report on the Jevic decision, click here.
The New (and Equally Defective) Settlement
After the case ended up back in Judge Shannon’s lap, an unsuccessful mediation ensued. There being no truly consensual settlement, the company, the creditors’ committee and the lender proposed a new and otherwise unremarkable settlement except for one fact: The workers whose claims were being “settled” were not parties to the settlement and indeed opposed. The new settlement purported to amend the prior settlement.
The newly proposed settlement called for paying the workers about $1 million on their priority claims. The proponents theorized that $1 million is all the workers would have been paid under the original settlement in 2012, were the distributions made according to Section 507. The case would be dismissed once again if Judge Shannon were to approve the new deal.
The workers nonetheless opposed the settlement and in response filed their own motion for conversion to chapter 7.
Judge Shannon held a hearing regarding the dueling motions on May 14 and read his opinion into the record on May 21. He recited how the $1 million earmarked for workers would be coming from Jevic’s corporate owner and the lender.
Judge Shannon said he was “not satisfied” that the new proposal was merely an amendment to the prior settlement. Instead, it was a new settlement, he said, as to which the workers would be entitled to discovery.
Judge Shannon said that the parties did agree on one fact, namely that confirming a chapter 11 plan remains impossible. The inability to confirm a plan, he said, constitutes “cause” for conversion to chapter 7.
Judge Shannon declined to speculate on what a chapter 7 trustee could “do or accomplish.” He was sure, however, that “no meaningful purpose would be served by keeping these cases in chapter 11.”
Although it is not clear from his bench opinion, Judge Shannon may be giving the workers an opening to challenge the original 2012 settlement on the merits in addition to the lack of adherence to Section 507 priorities.
Judge Shannon said he would make conversion effective on June 5.