CHICAGO — The U.S. Supreme Court reversed a Third Circuit Court of Appeals "structured dismissal" ruling in a case in which former Jevic Holding Corp. truck drivers fought against being left out of a settlement in the company's Chapter 11 bankruptcy case, according to an article written by David Christian for The Circuit Rider.
Christian, who is the founder of David Christian Attorneys, said in the article that Jevic's secured creditors were accused of completing a fraudulent transfer by a committee of unsecured creditors in connection with a failed buyout attempt. A settlement was reached that allowed distribution to general unsecured creditors in Jevic's Chapter 11 case.
Christian said the settlement, however, skipped former Jevic truck drivers, who were holding wage claims and were allegedly entitled priority treatment under Bankruptcy Code.
The former truck drivers argued that the company could not get out of paying their wages by way of the "expediency of a structured dismissal."
Christian said the Third Circuit called approval of the structured dismissal a "rare case" that was based on "sufficient reasons" supporting the request.
However, the U.S. Supreme Court disagreed and voted 6-2 to reverse the ruling.
"Writing for the majority, Justice [Stephen] Breyer noted that Congress provided three possible outcomes for a Chapter 11 case under the Bankruptcy Code," Christian said in his article. "Hopefully, the debtor can confirm a Chapter 11 plan. If not, the bankruptcy court might be called upon to dismiss the case, returning the parties to the status quo ante (so much as possible). Or the bankruptcy court can convert the case to Chapter 7, resulting in the appointment of Chapter 7 trustee to liquidate and distribute the debtor’s assets."
Christian said that, as a result of the ruling in the Jevic case, parties now cannot escape Bankruptcy Code obligations via a structured dismissal.
The high court's ruling would provide "safer footing" for employees and creditors, but it is not "iron-clad," Christian said.
He said the Supreme Court's ruling in the Jevic case states that affected parties can consent to receiving different treatment in a bankruptcy case and that it isn't clear whether consent can be determined for an entire class of creditors.
Christian said some creditors will likely attempt to use the Jevic ruling as leverage to argue that their individual consent for treatment in a Chapter 11 case must be obtained. He said he believes that there will likely be litigation surrounding the Jevic decision and that the court's decision should "strengthen the hand of priority creditors in similar situations."
"Practitioners should always think creatively in attempting to fashion results that put an end to litigation, especially in the zero-sum context of an insolvency situation," Christian wrote.
Christian said practitioners should also take note of the Jevic ruling when fashioning settlements in bankruptcy proceedings.