Source: https://www.drinkerbiddle.com/insights/publications/2017/03/jevic-holding-corp
Timestamp: 2019-04-19 00:25:21+00:00

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The Supreme Court issued its much-anticipated ruling in Czyzewski v. Jevic Holding Corp., 580 U.S. ___ (2017)1 on March 21, reversing the Third Circuit Court of Appeals’ affirmance of an order approving the distribution of the proceeds of settlement of bankruptcy estate causes of action to general unsecured creditors via structured dismissal, with no distribution to holders of priority wage claims.
The question before us is whether a bankruptcy court has the legal power to order this priority-skipping kind of distribution scheme in connection with a Chapter 11 dismissal.
Structured dismissals in general are alive and well in the Third Circuit. The specific type of structured dismissal affirmed by the Third Circuit is now verboten. But the Third Circuit’s conclusion that the Code permits structured dismissals as a general matter was undisturbed on appeal and thus remains precedential.
Priority-skipping settlements in general are alive and well in the Second and Third Circuits. Again, implementing such a settlement in a structured dismissal is verboten. But the Third Circuit’s conclusion that the Code permits priority-skipping settlements that follow the Second Circuit’s flexible test in Iridium was undisturbed on appeal and thus remains precedential.
Support for employee wage orders, critical vendor orders, and roll-ups. These three species of priority-skipping “interim” distributions were expressly recognized—for the first time in a Supreme Court opinion—and distinguished from the impermissible “final” distributions in the structured dismissal context. That will be at least worthy of a “cf.” cite in the applicable first-day motions going forward.
Record, record, record. The Court based its Article III standing ruling on arguably dubious inferences drawn from a murky record, and it placed a lot of weight on a statement made to the bankruptcy court by counsel for one of the settling parties. It seems possible that a more complete record could have led to a different result on the threshold issue of standing.
Code provisions permitting the bankruptcy court to “order otherwise, for cause.” The Court’s statutory analysis focused on § 349(b)’s “for cause, orders otherwise” language. This construct is used several other places in the Code, e.g., § 363(k) (authorizing limitation of credit-bidding rights), 1108 (authorizing limitation of debtor’s/trustee’s ability to operate the debtor’s business in chapter 11), and 363(c) (authorizing limitation of debtor’s/trustee’s ability to use/sell/lease property in the ordinary course of business). Thus, interpretation of these provisions going forward should at least be informed by the Court’s methodology and conclusions in Jevic.
A shot in the arm for the sub rosa plan doctrine. The Court’s salutary citation to Braniff Airways, coupled with its citation and distinguishment of Chrysler, will result in a resurgence of “sub rosa plan” objections to § 363 sales.
Fodder for objections to class-skipping gift plans. The Court’s broad statement that a bankruptcy court “cannot confirm a plan that contains priority-violating distributions over the objection of an impaired creditor class”9 will become standard fare in every objection to a class-skipping gift plan, but probably will not carry the day since it was dictum.
Jevic Transportation, Inc. was a trucking company acquired by Sun Capital in 2006 in a leveraged buyout (LBO) financed by a group of secured lenders led by CIT Group. In May 2008, Jevic ceased substantially all of its operations, terminated the vast majority of its workforce, and filed for chapter 11 relief in Delaware. A group of terminated truck drivers commenced a class action adversary proceeding against Jevic and Sun for federal and state WARN Act violations, seeking an estimated $12.4 million in damages, of which they estimated $8.3 million would be entitled to § 507(a)(4) wage priority. The official committee of unsecured creditors in the case commenced an adversary proceeding against Sun and CIT, derivatively on behalf of Jevic’s bankruptcy estate, asserting fraudulent transfer theories on account of the 2006 LBO.
The WARN plaintiffs objected to the settlement on the grounds that it distributed estate assets to junior creditors in violation of the Code’s priority scheme. The bankruptcy court overruled this objection, finding that the “dire circumstances” of the case warranted approval of the settlement notwithstanding its deviation from the priority scheme, to wit: (i) there was “no realistic prospect” of a meaningful distribution to anyone but Sun and CIT absent approval of the settlement, (ii) there was “no prospect” of confirmation of a chapter 11 plan, (iii) conversion to chapter 7 would be pointless because there were no unencumbered funds for a trustee to use to investigate or prosecute causes of action, and Sun and CIT had “stated unequivocally and credibly” that they would not do this deal in a chapter 7, and (iv) the WARN plaintiffs were not prejudiced by their omission from the settlement because their WARN claims were “effectively worthless” since the estate had no unencumbered funds.11 The bankruptcy court entered an order approving the settlement on December 4, 2012. The WARN plaintiffs sought a stay pending appeal of that order, but the request was denied by the bankruptcy court and the WARN plaintiffs did not seek a further stay.
While the appeal was pending, the settlement was consummated. The trust was funded and issued more than 1,000 disbursement checks. And on October 11, 2013, Jevic’s chapter 11 case was dismissed.
Sun and CIT cried foul, noting in their answering brief that the Court’s rules prohibit changing the substance of the questions presented on appeal, and that the Court likely would not have granted certiorari on that question because it had only been addressed by a single federal court of appeals—i.e., the Third Circuit below.30 Standing on procedure, Sun and CIT briefed the question presented in the petition for certiorari, arguing (i) the WARN plaintiffs lacked Article III standing because approval of the settlement had not caused them a legally redressable injury, and (ii) the Bankruptcy Code neither authorizes nor requires bankruptcy courts to reject chapter 11 settlements that do not follow the Code’s priority scheme.31 Their brief did not address the issue of structured dismissal other than to argue it was not properly before the Court.
Today, the Court answers a novel and important question of bankruptcy law. Unfortunately, it does so without the benefit of any reasoned opinions on the dispositive issue from the courts of appeals (apart from the Court of Appeals’ opinion in this case) and with briefing on that issue from only one of the parties. That is because, having persuaded us to grant certiorari on one question, petitioners chose to argue a different issue on the merits. In light of that switch, I would dismiss the writ of certiorari as improvidently granted.
(with a “cf.” signal) In re Chrysler LLC, 576 F.3d 108, 118 (2d Cir. 2009) (approving a § 363 asset sale because the bankruptcy court demonstrated “proper solicitude for the priority between creditors and deemed it essential that the [s]ale in no way upset that priority”).
Needless to say, each of these cases merits a fresh look by practitioners in light of the salutary citation from the Supreme Court. And the Court’s apparent harmonization of Braniff (the seminal “sub rosa plan” case) with Chrysler (which had famously rejected a “sub rosa plan” objection), will likely reinvigorate objections based on the “sub rosa plan” doctrine.
1 Pinpoint citations herein are to the slip opinion available at https://www.supremecourt.gov/opinions/16pdf/15-649_k53m.pdf (last visited 6/5/17).
2 Op. at 1–2 (emphasis in original).
5 Id. at 15. An early front-runner for 2017’s “Most Ironic Legal Citation of the Year – Bankruptcy”.
7 Compare In re AWECO, Inc., 725 F.2d 293 (5th Cir. 1984) (yes) with Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015) and Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007) (not necessarily).
8 See Op. at 14–15 (distinguishing Iridium on the grounds that it involved an “interim” distribution of estate assets during the chapter 11 case, as opposed to a “final” distribution; also noting the Iridium court’s observation that application of the absolute priority rule to a preplan settlement would be difficult given that the nature and extent of the bankruptcy estate and creditor claims are not yet fully resolved).
10 As the Third Circuit noted in its decision, Jevic’s CRO had testified “opaquely” in the bankruptcy court that “‘there was no decision not to pay the WARN claimants’” through the settlement. Jevic, 787 F.3d at 177 n.3. But Sun’s counsel had invited the bankruptcy court to take “judicial notice that there’s a pending WARN action against Sun” and, essentially, to connect the dots as to why the WARN plaintiffs were left out of the distribution waterfall. Id. n.4.
11 Jevic, 787 F.3d at 178 (internal quotation marks, citations omitted).
12 Czyzewski v. Jevic Holding Corp. (In re Jevic Holding Corp.), Civ. No. 13-104-SLR, 2014 U.S. Dist. LEXIS 8813, *14 (D. Del. Jan. 24, 2014).
13 Jevic, 787 F.3d 173.
18 Id. at 181–82 (emphasis added). We believe this remains a valid statement of the law in the Third Circuit regarding structured dismissals in general (i.e., that do not involve priority-skipping distributions).
21 Id. at 186 (Scirica, J., concurring in part and dissenting in part). Judge Scirica concurred with the majority with respect to (i) its implicit holding that equitable mootness did not bar the WARN plaintiffs’ appeal, and (ii) its adoption of the Iridium standard for approval of priority-skipping settlements. Id.
23 Id. at 185 (Hardiman, J., writing for the court).
24 Id. at 186–87 (Scirica, J., concurring in part and dissenting in part).
25 Id. at 190 (footnotes omitted). Implementation of such a directive would be interesting, to say the least, given that more than a thousand checks were issued to general unsecured claimants, and the payout was apparently only 4 percent. Id. at 177 n.1 (Hardiman, J., writing for the court). A thousand tiny disgorgement lawsuits? An ADR procedures order hauling everyone back to Delaware for mandatory mediation/arbitration? Who pays for that?
26 Petition for a Writ of Certiorari, 2015 WL 7252903, *i (Nov. 16, 2015).
28 Op. (Thomas, J., dissenting) at 1.
29 Brief for Petitioners, 2016 WL 4524347, *i (Aug. 26, 2016).
30 Brief for Respondents, 2016 WL 5957079, *52–56 (Oct. 12, 2016).
32 Op. (Thomas, J., dissenting) at 1–2 (internal quotation marks, citation omitted).
38 Id. Curious that something the Third Circuit found “not explicit” from the record, but that “seemed” to be the case despite “opaque” testimony, Jevic, 787 F.3d at 177 and n.3, appeared “clear” to the Supreme Court.
42 Id. at 12. As noted above, this latter quotation will no doubt be featured prominently in future objections to class-skipping “gift” plans.
43 Id. As support for this line of reasoning, the Court cited the late Justice Scalia’s oft-quoted aphorism that Congress “does not . . . hide elephants in mouse holes,” Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001).
44 Op. at 13 (internal quotation marks, citation omitted).
46 Id. at 14–15 (citations omitted, emphasis in original).
48 Id. (internal quotation marks, citation omitted). While it does not necessarily endorse these other types of priority-skipping distributions, this passage at least provides collateral support for them.
51 The structured dismissal in Biolitec had proposed “binding assignments of rights and releases of liability, to modify the claims distribution process, to replace the chapter 7 trustee with a Liquidating Trustee that is not subject to the duties and requirements of the Code, and to subordinate the claims of the Non-Debtor Affiliates in the absence of this Court’s determination that subordination is warranted,” and there was also a concern that the proposed liquidating trustee’s actions would be subject to the direction and consent of an unsecured creditor whose interests were in direct conflict with other beneficiaries of the trust. 528 B.R. at 270‑71. We believe it is possible to harmonize the Biolitec result with the Third Circuit’s statement of the law on structured dismissals in its Jevic opinion, see supra note 18, as a simple exercise of discretion not to approve the structured dismissal based on the procedural concerns identified by the bankruptcy court.
54 Id. (internal quotation marks, citation omitted).

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