After having avoided chapter 11 bankruptcy cases for years, on March 22, 2017, the Supreme Court issued its long-awaited ruling in Czyzewski v. Jevic Holding Corp. (“Jevic”).
In an opinion by Justice Stephen G. Breyer, the Court held that in chapter 11 cases, “structured dismissals” under which final distributions are made must comply with the Bankruptcy Code’s priority scheme, unless consent from all affected parties is obtained.
So, why is this important? Chapter 11 can be expensive and lengthy. The longer the case drags on, the more costly it can become. As a result, pre-packaged or pre-negotiated plans and expedited asset sales have been used over the years to short circuit the process, minimize expenses, and maximize creditor recoveries. Consistent with the shared interest in expeditious resolutions, “structured dismissals” of chapter 11 cases have become an increasingly popular exit strategy. A structured dismissal is essentially a negotiated end to a chapter 11 case, which typically dictates who will get paid and how much when the case is dismissed. Prior to Jevic, bankruptcy courts approved structured dismissals that provided for payments to creditors, even when those payments would otherwise violate the Bankruptcy Code’s priority rules.
Jevic involved the unsuccessful reorganization of Jevic Holding Corp., during which the Creditors’ Committee commenced litigation against a secured lender. The committee and the lender negotiated a deal that called for a structured dismissal of the Chapter 11 case and settlement that provided for a recovery by general unsecured creditors, but would give certain WARN Act creditors nothing on their $8.3 million in wage claims despite their position of priority over the general unsecured claims. Over the objections of the WARN Act claimants and the U.S. Trustee, the Delaware bankruptcy court approved the settlement and structured dismissal, reasoning that the Bankruptcy Code’s priority scheme did not apply because the payouts would occur pursuant to a structured dismissal, not a chapter 11 plan. On appeal, the structured dismissal was upheld by both the district court and the Third Circuit. The Supreme Court granted certiorari and reversed. In reaching this conclusion, Justice Breyer explained that 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 also careful to ensure that the opinion would be construed narrowly, and not to preclude common practices used in chapter 11 cases that depart from the rules and timing of distributions, such as first-day wage or critical vendor orders.
Though Jevic marks the end of structured dismissals with final distributions deviating from the Bankruptcy Code’s priority scheme without consent, it does not necessarily mark the end of structured dismissals in their entirety. Debtors and creditors will still be able to negotiate chapter 11 dismissals. And they will still be able to provide for certain payments, but many questions remain unanswered. Can senior creditors “gift” portions of their recovery to junior creditors while skipping classes of creditors in a chapter 11 plan? Can settlements during a chapter 11 case, which do not result in a dismissal, deviate from the Bankruptcy Code’s priority scheme? Although Jevic did not expressly address these issues, savvy bankruptcy practitioners working on complex cases with major obstacles can still get creative while looking to Jevic for guidance when formulating an exit to a difficult case. We expect chapter 11 lawyers across the country will be testing the limits of this opinion soon.