Bankruptcy Judge Peter D. Russin of Ft. Lauderdale, Fla., explained the Supreme Court’s Jevic decision as meaning that “a bankruptcy court may not authorize distributions that bypass the Code’s priority scheme absent the consent of those affected.”

In his April 19 opinion, Judge Russin was facing a familiar problem. The debtor had assets that could be sold, but the sale price likely would not pay administrative expenses incurred before the sale. Even the secured lenders’ agreement to a carve-out for some administrative expenses wouldn’t solve the problem.

Naturally, Judge Russin could dismiss the case and let the lender foreclose, but dismissal would mean the loss of 700 jobs. He read Jevic to mean that he couldn’t take cash away from creditors with a higher priority to pay administrative expenses. What to do?

The answer was consent by administrative creditors who were willing, as Judge Russin said, to take “a negotiated risk over a guaranteed loss.”

Big Debt, No Free Assets

A small airline retaining only eight aircraft, the debtor had $400 million in debt secured by all the assets. The prospective buyer offered $5.5 million in new-money debtor-in-possession financing to have priority over existing debt and super-priority administrative status under Section 364(c)(1). The DIP financing was designed to sustain operations until a sale could close.

Also the stalking horse bidder, the DIP lender was offering to buy the assets with a credit bid for the $5.5 million in DIP financing. Judge Russin let it be known that he would not approve the DIP financing “if the ultimate agreement did not provide a carve out for the payment of administrative expense claims.”

The first sign of hope came from the prepetition secured lenders, who agreed to a carveout for administrative expenses. But that wasn’t enough. As a credit bid, a sale would have no cash to cover several million dollars in administrative expenses for trade payables, taxes and payroll. Furthermore, an overbid at auction might not cover all administrative expenses.

Broad notice having been given, Judge Russin said that “administrative creditors appeared at the final hearing and expressed their support for the proposed process” despite the possibility of not being paid their administrative claims.

Judge Russin conceded that “not all administrative claimants appeared or voiced a position.” Although “silence does not constitute consent,” he said that it “does not alter the reality that no party has filed an objection or proposed an alternative to the process now before the Court.” He made the following findings:

[T]he estate’s primary administrative expense claimants reviewed the structure, understood the risks, and consented to proceed in the hope of recovery. That consent forms the legal basis for approval under Czyzewski v. Jevic Holding Corp., 580 U.S. 697 (2017), and aligns with the principles set forth in § 1129(a)(9)(A) of the Bankruptcy Code.

To read ABI’s report on Jevic, click here.

Judge Russin found “[n]othing in Jevic or the Code [that] prevents administrative creditors from agreeing to a process that may leave them underpaid, so long as they do so voluntarily, with eyes open and in the absence of better alternatives.”

To account for administrative creditors who did not affirmatively consent, Judge Russin said,

Nearly every administrative creditor of significance . . . appeared and affirmed that, though the risk is real, the alternative is worse. They chose the possibility of at least partial recovery through continued operations over the certainty of loss through collapse.

Judge Russin went on to say that the “Bankruptcy Code permits that choice” because Section 1129(a)(9)(A) provides that administrative claims must be paid unless “the holder of a particular claim has agreed to a different treatment.”

Where “those at risk entitled to administrative priority have assessed the circumstances, considered the alternatives, and opted to support a process that may maximize going concern value, that decision deserves respect,” Judge Russin said. He approved the DIP financing despite the possibility that administrative creditors would not be paid, because the “law allows creditors to weigh the risks and bet on recovery through continued operations — particularly when the alternatives are neither a confirmable plan nor a competitive reorganization, but certain collapse.”