In Brief: U.S. Supreme Court Invalidates Nonconsensual "Structured Dismissal" of Chapter 11 Case Incorporating Settlement Deviating From Bankruptcy Code’s Priority Scheme

In Brief: U.S. Supreme Court Invalidates Nonconsensual "Structured Dismissal" of Chapter 11 Case Incorporating Settlement Deviating From Bankruptcy Code’s Priority Scheme

In a highly anticipated decision, the U.S. Supreme Court ruled on March 22, 2017, in Czyzewski v. Jevic Holding Corp., No. 15-649, 2017 BL 89680 (U.S. Mar. 22, 2017), that, without the consent of affected creditors, bankruptcy courts may not approve "structured dismissals" providing for distributions which "deviate from the basic priority rules that apply under the primary mechanisms the [Bankruptcy] Code establishes for final distributions of estate value in business bankruptcies."

Due to the significant time and administrative costs associated with confirming a liquidating chapter 11 plan or converting the case to chapter 7 following the sale of substantially all of a debtor’s assets under section 363(b) of the Bankruptcy Code, structured dismissals of chapter 11 cases have become a popular exit strategy. A "structured dismissal" is a dismissal conditioned upon certain elements to which the stakeholders have agreed in advance and which is subsequently approved by the bankruptcy court, as distinguished from an unconditional dismissal of the chapter 11 case ordered by the court under section 1112(b).

In Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), the U.S. Court of Appeals for the Third Circuit ruled that, "absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition." The court also held that "bankruptcy courts may approve settlements that deviate from the priority scheme of [the Bankruptcy Code]," but only if the court has "specific and credible grounds" to justify the deviation. On the basis of this reasoning, the Third Circuit approved a structured dismissal of the chapter 11 case of Jevic Transportation, Inc., a New Jersey-based trucking company, that incorporated a settlement under which unsecured creditors would receive a distribution from secured creditors’ collateral, but holders of priority wage claims (i.e., truck drivers) would receive nothing. The Third Circuit agreed with the lower courts that approval of the structured dismissal and settlement was warranted due to "dire circumstances"—the debtor had no prospect of confirming a chapter 11 plan, and conversion of the case to chapter 7 would mean that only secured creditors would recover anything.

The Supreme Court reversed. Writing for the 6-2 majority, Justice Breyer stated that "we 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 Code prohibits in Chapter 7 liquidations and Chapter 11 plans." The majority found no expression of any such intent in the Bankruptcy Code, nor did it find any "significant offsetting bankruptcy-related justification" that would warrant a violation of the ordinary priority rules in the case before it. Thus, it concluded that Congress did not authorize a "rare case" exception to the ordinary priority rules.

However, Justice Breyer wrote that "[w]e express no view about the legality of structured dismissals in general."

Justices Thomas and Alito filed a dissenting opinion, in which they stated that the Court should not have agreed to hear the case. According to the dissent, two different issues were implicated in the appeal—structured dismissals and settlements that deviate from the statutory priority scheme—yet the Court granted certiorari to resolve a circuit split only with regard to the latter and was not provided with "full adversarial briefing" on the former, which is a "novel question of bankruptcy law."

An article discussing Jevic in more detail will be included in the next edition of the Business Restructuring Review.

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