Supreme Court’s Jevic Opinion Affirms Central Role of Priority Structure in Chapter 11 Reorganizations

The U.S. Supreme Court decided late last month the closely-watched case, Czyzewski v. Jevic Holding Corp., in which I (along with Professor Melissa Jacoby, currently of the University of North Carolina Law School, formerly of Temple Law) coauthored a brief for amici curiae law professors in support of Petitioners, truck drivers whom Jevic terminated shortly before it filed for bankruptcy.

Holding about $8.3 million in priority wage claims, these workers objected to a settlement that Jevic’s shareholders and senior lenders reached with the creditors’ committee. The settlement denied the workers their priority payment, dismissed the bankruptcy, and foreclosed the workers’ rights to challenge under state law the leveraged buyout (LBO) that led to the bankruptcy. The Third Circuit concluded that such a settlement was permissible in “rare” circumstances. The Supreme Court disagreed, holding that such so-called “structured dismissals”—an order dismissing the bankruptcy with strings attached—must comply with priority rules absent consent of the affected parties.

Justice Breyer’s majority opinion is notable for at least two reasons. First, it recognized what was ultimately at stake: the integrity and efficiency of the chapter 11 process. The consequences of failing to reverse, the Court explained, “are potentially serious,” and include “risks of collusion,” “making settlement more difficult to achieve,” and eroding procedural protections that “Congress granted particular classes of creditors,” such as unpaid workers. The Court found no basis in bankruptcy law to allow for exceptions to priority rules in “rare” cases, and seemed to doubt that Jevic was such a case in any event.

Second, consider what Justice Breyer’s opinion did not do. It did not, contrary to some reports, prohibit all structured dismissals, which are seen as a new and potentially valuable mechanism for resolving certain bankruptcies: “We express no view about the legality of structured dismissals in general,” Justice Breyer noted. The decision also distinguished the impermissible final distribution in Jevic from interim distributions, such as “critical vendor orders,” that permit special priority treatment for claims of those who supply vital goods or services to a corporate debtor. These payments might deviate from bankruptcy’s priority rules temporarily, Justice Breyer noted, but serve other fundamental objectives. By contrast, the Court in Jevic could not find “any significant offsetting bankruptcy-related justification.” The opinion also avoided related, controversial issues, such as the propriety of so-called “gift plans” or third-party releases. It shows, however, that Justice Breyer may be the best Justice for the job, if or when the Court chooses to tackle those questions.

Structured dismissals have become an important technique for resolving chapter 11 bankruptcies because they are viewed as less expensive than the traditional exit mechanism—a “plan of reorganization”—and yet can provide many of the benefits of a plan. They are especially attractive in cases where a debtor’s assets have been sold, and all that remains in the bankruptcy is distribution of the sale proceeds. Justice Breyer’s opinion is important because it reminds practitioners and courts that, while there is nothing inherently wrong with that approach, the distributions must respect foundational principles of payment priority.

Although not central to the holding, Justice Breyer cited a paper I authored on the structure of LBOs that are challenged as fraudulent transfers, as happened here. Professor Jacoby and I recently published a short post about the case on Harvard’s Bankruptcy Roundtable. If you still haven’t had your fill of Jevic, you can listen to a webinar on the case produced by the American Bankruptcy Institute in which I participated along with others involved in the case.


Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University Beasley School of Law

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