Deciphering Dicta: “Critical Vendors” in a Post-Jevic World

[1]“Critical vendor” status is a blessing. Without such status, an unsecured creditor may receive little to no recovery in a traditional chapter 11. Thus, critical vendor status instills hope in unsecured creditors, and when courts — particularly the Supreme Court — reference the revered status, members of the legal community listen and take note.[2]

A recent case briefly mentioning critical vendors was Czyzewski v. Jevic Holding Corp., which examined the use of chapter 11 structured dismissals and the Bankruptcy Code’s priority scheme.[3] Justice Breyer, writing for the Court, juxtaposed critical-vendor motions and structured dismissals, highlighting that the former, while still a priority-skipping structure, possessed a “significant offsetting bankruptcy-related justification” (e.g., preserving the debtor as a going concern and promoting the possibility of a confirmable plan).[4] As to critical-vendor issues, Justice Breyer’s sentiments were nothing more than obiter dictum, often termed “dicta,” the Latin phrase for “something said in passing.”[5] Dicta, despite being nonbinding, occupies a central and seemingly persuasive role in judicial opinions and the common law system.[6] With the ink now dry in Jevic, it is important to pause and briefly examine to what extent the lower courts are or are not embracing the Supreme Court’s dicta.

The first post-Jevic case to consider critical vendors was In re Pioneer Health Services.[7] In Pioneer, the debtor-hospital moved to elevate the status of several physicians, stressing the employees’ criticalness for a successful reorganization.[8] The creditors’ committee opposed the motion, arguing that it was untimely (i.e., filed 10 months after the petition date), there was a potential floodgate effect with regard to other creditors, and there were general concerns regarding unequal treatment among similarly situated creditors.[9] After carefully considering the statutory grounds and case law for anointing critical-vendor status, Chief Judge Neil P. Olack invoked a restrictive view on the court’s power and denied the motion.[10] Curiously, the court noted that “Jevic[, decided 13 days prior,] suggests that CoServ’s[11] and Kmart’s restrictive view of critical vendor payments is the correct approach.”[12] Judge Olack’s restrictive stance is consistent with Fifth Circuit case law,[13] but it is curious as to what, if anything, can be gleaned from Jevic that would bear weight in Pioneer.

At best, Justice Breyer hinted at the existence of critical-vendor motions and the fact that they are certainly dissimilar to structured dismissals, but Jevic does not elucidate or endorse any position on the stringency courts should or should not invoke. In closing, Judge Olack again appeals to Jevic, writing “The Supreme Court recently rejected non-consensual structured dismissals as violating priority rules. Here, the Court finds no ‘significant offsetting bankruptcy-related justification’ for classifying the Affected Physicians as critical vendors.”[14] It is again curious as to why the court would place any emphasis on Jevic’s holding when dealing with a true critical-vendor issue. Jevic references aside, the Pioneer holding was well grounded due to the debtors’ “ou[t] of the norm”[15] factual situation and, more importantly, the availability of a nonpriority altering remedy of filing a stay violation motion.[16]

There have been few noteworthy critical-vendor cases since Pioneer. Most recently, Jevic reared its head in In re BX Acquisitions, a case tangentially tying in critical-vendor motions but ultimately involving cross-motions for summary judgment over a trustee’s avoidance action.[17] However, unlike Pioneer, the court’s Jevic discussion was due to the arguments of counsel — not a product of judicial sentiment.[18] The court noted:

Plaintiff-Trustee quotes a passage in Jevic where the Supreme Court cited a Seventh Circuit decision on the justification for critical-vendor orders, which indicated such decisions usually find that allowing such payments would ‘enable a successful reorganization and make even the disfavored creditors better off.’ To the extent that Plaintiff-Trustee is arguing that this high standard applies to a debtor-in-possession’s decision to assume an executory contract — and pay any pre-petition default in full — the established case law suggests otherwise. A debtor-in-possession’s decision to assume an executory contract has been subject to a ‘business judgment’ standard, and it does not appear that the Jevic decision changes that criteria.[19]

The court rightfully dispensed with the trustee’s attempt to argue that Jevic advocated for a “doctrine of necessity”-like standard[20] when considering a debtor’s choice to assume an executory contract.

While it is undoubtedly too early to know the full effects of Jevic, it is not too early to know that attorneys and judges alike may (improperly) place emphasis on Judge Breyer’s dicta. Given the importance of critical-vendor status as a tool for enabling successful reorganizations, it is essential for Jevic’s dicta to be treated as dicta to prevent the erosion of practitioners’ abilities to implement solutions to common business problems faced by debtors.