Preview of Upcoming Supreme Court Term

This is a preview of the upcoming term from the Georgetown Supreme Court Institute.  There is only one bankruptcy case on the docket so far, Czyzewski v. Jevic Holding Corporation (15-649)

According to the preview:

Question Presented: Whether a bankruptcy court may authorize the distribution of settlement proceeds in a manner that violates the statutory priority scheme.

Summary: The Bankruptcy Code prioritizes the order in which a debtor in bankruptcy under Chapter (Ch.) 11 or Ch. 7 must pay the claims of its creditors. Section 507 identifies unsecured claims entitled to priority, and specifies the order of payment.  Higher-priority claims must be paid in full before lower-priority claims are paid anything.  The question in this case is whether a bankruptcy court may order a structured dismissal of a Ch. 11 case that settles claims against the estate and pays settlement proceeds to creditors in violation of the Code’s priority scheme.

Respondent Jevic, a trucking company, fired Casimir Czyzewski and nearly 1800 other truck drivers (petitioners) without notice the day before filing for Ch. 11 bankruptcy.  Petitioners won summary judgment against Jevic on claims for lost wages and benefits.  Petitioners’ claim for roughly $8.3 million in lost wages is entitled to priority under Section 507.  A Committee of unsecured creditors with non-priority claims filed suit against two secured creditors, respondents Sun and CIT, claiming fraudulent conveyance on behalf of the estate.  Jevic, Sun, CIT, and the Committee sought approval of a structured dismissal that would settle the estate’s claims against Sun and CIT, distribute the settlement proceeds among the unsecured non-priority creditors, and dismiss the bankruptcy case.  Under the proposed settlement, petitioners’ priority claim for lost wages would go unpaid. The bankruptcy court approved the structured dismissal over the objections of petitioners and the U.S. Trustee, and the district court affirmed.

The Third Circuit affirmed.  The court held that bankruptcy courts have discretion under Bankr. R. 9019 (authorizing “fair and equitable” settlements), to approve a structured dismissal that favors lower-priority creditors to the detriment of creditors with higher-priority claims, if specific and credible grounds justify the deviation from the Code’s priority scheme.  The court found sufficient grounds to justify the structured dismissal of Jevic’s case because there was no prospect of a confirmable plan of reorganization under Ch. 11, and liquidating the estate under Ch. 7 would leave nothing for unsecured creditors, including petitioners, after secured creditors had depleted the remaining assets.  The critical question, in the court’s view, was whether the settlement served the interests of the estate and creditors as a whole, not one particular group.

Petitioners contend that bankruptcy courts lack authority to order structured dismissals that deviate from the Code’s priority scheme in distributing estate assets. Petitioners assert that the phrase “fair and equitable” is a bankruptcy term of art meaning a rule of full or absolute priority. Petitioners maintain that the Code authorizes three dispositions of Ch. 11 bankruptcy cases: (1) approval of a reorganization plan that respects priority of payment; (2) conversion to Ch. 7, liquidation of the estate, and distribution of assets in priority order; or (3) dismissal, which vacates all orders entered by the bankruptcy court, returns estate property to its pre-petition owner, and enables creditors to pursue claims against the debtor outside of bankruptcy.

Decision Below: 787 F.3d 173 (3d Cir. 2015)

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