Jevic is still making law!
You remember Jevic, don’t you? That’s 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).
Jevic has now made law on a different but equally important subject: Bankruptcy Judge Brendan L. Shannon of Delaware followed the Tenth Circuit by holding that a so-called DIP financing order can preclude a subsequent chapter 7 trustee from taking over a lawsuit originally filed by the chapter 11 creditors’ committee challenging the liens of secured lenders.
Because a creditors’ committee evaporates on conversion to chapter 7, the new Jevic opinion means that no one is left to attack the lenders’ liens. The creditors have no one to blame but themselves, since they are the ones who agreed to the wording of the DIP financing order.
The new Jevic decision counsels committees to rethink language typically employed in DIP financing orders.
The Tortured History
Jevic Holding Corp. filed a chapter 11 petition in Delaware in 2008, almost exactly 13 years ago. One month after filing, the bankruptcy court entered an order, known as a DIP financing order, granting final approval for post-petition financing. In return for new financing, the debtor waived any claims it might have had against the lenders.
The financing order went on to say that the waivers “shall be binding upon the Debtors and any successor thereto (including without limitation any Chapter 7 or Chapter 11 trustee appointed or elected for any of the Debtors) in all circumstances.”
In typical fashion, the financing order gave interested parties 75 days to investigate and challenge pre-petition liens. Within the time limit, the official creditors’ committee sued the lenders, challenging their claims and liens.
After mediation, the debtor, the banks and the committee reached a settlement where the lenders 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.
Pointedly, the settlement gave nothing to workers for their $8.3 million in priority claims for unpaid wages. The workers objected to the settlement because some settlement proceeds were going to lower-ranked general unsecured creditors.
The bankruptcy court approved the settlement, and the Third Circuit upheld the structured dismissal in a 2-1 opinion, eliminating any chance of recovery by priority wage claimants.
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. 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). To read ABI’s report on Jevic, click here.
On remand, the case ended back in the lap of Judge Shannon, who once again nixed a revised settlement in May 2018 and converted the case to chapter 7. To read ABI’s report, click here.
After conversion, the chapter 7 trustee filed a motion in 2019 for his substitution as plaintiff in the still-pending suit by the creditors’ committee against the lenders. The lenders objected to substitution, contending that the trustee was a successor to the debtor and was thus barred from attacking the lenders’ liens and claims.
The Tenth Circuit Paves the Way
Judge Shannon denied the substitution motion in an opinion on May 5 and adopted the approach by the Tenth Circuit in Hill v. Akamai Tech. Inc. (In re MS55 Inc.), 477 F.3d 1131 (10th Cir. 2007).
Akamai taught that “a Chapter 7 trustee succeeds to the rights of the debtor-in-possession and is bound by prior actions of the debtor-in-possession to the extent approved by the court.” Id. at 1135. In that respect, Judge Shannon said it was “undisputed” that the DIP financing order waived the debtor’s claims against the lenders.
The debtor’s waiver invoked the additional provision in the financing order saying that the debtor’s waivers would be binding on a chapter 7 trustee “in all circumstances.”
The lenders contended that Akamai was on point. Indeed, it was, although not precisely. In Akamai, the DIP financing order waived the debtor’s claims against the lenders but gave the committee the right to investigate and challenge. Unlike the Jevic committee, however, the Akamai committee had not sued before conversion.
Judge Shannon characterized the Tenth Circuit as holding that “the Chapter 7 trustee’s rights to pursue avoidance actions are derivative of the debtor’s rights; so, the trustee was barred from bringing an avoidance action against the secured creditor because the court-approved financing order barred the debtor from doing so.”
The Jevic trustee pointed out factual distinctions to argue that he was the proper party in interest to pursue the committee’s lawsuit because the committee had dissolved on conversion.
Judge Shannon disagreed. The trustee was not appointed during the 75-day investigation period “and, therefore, cannot assert a challenge.” Once the 75-day investigation period ended, he said that “a party in interest’s right to challenge the Prepetition Indebtedness ended, including any right of a Chapter 7 Trustee appointed during that period.”
Judge Shannon also quoted Akamai regarding the committee’s challenge. The Denver-based appeals court said that the “creditors’ committee may have retained a right of action, but that does not remove the existing bar against the debtor-in-possession or, post-conversion, the trustee enforcing those rights.” Id. at 1135-1136.
In other words, the right of the committee to sue was “not transferrable to the Chapter 7 Trustee, who is bound by the provisions of the Final DIP Order,” Judge Shannon said.
The trustee argued that bootstrapping on the committee was not necessary because the claims belong to the estate and therefore vested in the trustee on conversion. Again, Judge Shannon disagreed. The trustee could pursue claims after conversion, “except when the debtor bars itself, and its successor, from asserting those rights.” [Emphasis in original.]
In short, Judge Shannon denied the substitution motion because the trustee “is bound by the stipulations, admissions and waivers made by the Debtors pre-conversion.”
Observations
The new Jevic decision should alter the negotiation over DIP lending orders. If everyone were to agree or the court were to order, a financing order presumably could permit a chapter 7 trustee to assume prosecution of a timely challenge.
Jevic is still making law!
You remember Jevic, don’t you? That’s 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).
Jevic has now made law on a different but equally important subject: Bankruptcy Judge Brendan L. Shannon of Delaware followed the Tenth Circuit by holding that a so-called DIP financing order can preclude a subsequent chapter 7 trustee from taking over a lawsuit originally filed by the chapter 11 creditors’ committee challenging the liens of secured lenders.
Because a creditors’ committee evaporates on conversion to chapter 7, the new Jevic opinion means that no one is left to attack the lenders’ liens. The creditors have no one to blame but themselves, since they are the ones who agreed to the wording of the DIP financing order.
The new Jevic decision counsels committees to rethink language typically employed in DIP financing orders.