Chapter 11 bankruptcy cases generally conclude in one of three ways: a plan, conversion
to a liquidation under Chapter 7, or
dismissal. Classically, dismissal restores
the debtor to its financial condition as
of the date it filed bankruptcy, but “for
cause” Bankruptcy Courts can order
a “structured dismissal” effecting the
distribution of some or all of the debtor’s
assets and affording other related relief.
Structured dismissal orders are often
comprehensive, complex documents
with provisions mirroring those
typically found in Chapter 11 plans.
Because structured dismissals offer an
efficient alternative to Chapter 11 plans,
their use as an end-of-case option has
grown substantially in recent years.
A problem with structured dismissals,
however, is that the proposed
distribution does not always track
the Bankruptcy Code’s priority
scheme. In Czyzewski v. Jevic Holding
Corp., 580 U.S. ___, 5 (2017), the U.S.
Supreme Court considered the issue
and held that Bankruptcy Courts are
not authorized to enter structured
dismissal orders that deviate from
the distribution scheme required
by the Bankruptcy Code, absent
consent of the affected parties.
The Jevic Case
In 2006, Sun Capital Partners
executed a leveraged buyout of Jevic
Transportation Corporation, a shipping
company. CI T Group provided the
financing, and Jevic’s assets were
pledged for the loan. Id. Jevic filed
Chapter 11 bankruptcy less than two
years later. Id. Just prior to the petition
date, Jevic halted nearly all operations
and notified its truck drivers and other
employees that they would be fired.
Id. at 6. Two adversary proceedings
were filed in the bankruptcy, which
were at issue on appeal. Id.
In the first proceeding, the truck drivers
brought a class action suit against Sun
Capital and Jevic for violations of state
and federal Worker Adjustment and
Retraining Notification (WARN) Acts.
Id. The Bankruptcy Court granted
summary judgment in favor of the
drivers, leaving them with an estimated
$12.4 million claim—$8.3 million of
which held priority wage claim status
under 11 U.S.C. Section 507(a)( 4). Id.
In the second proceeding, the official
committee of unsecured creditors
brought a derivative suit on behalf
of the bankruptcy estate against Sun
Capital and CIT for preferential and/
or fraudulent transfers in violation
of 11 U.S.C. Sections 547–48. Id. at
6–7. The derivative suit ended in a
settlement agreement between Sun
Capital, CIT, Jevic, and the committee
for $3.7 million, and required entry
of a structured dismissal that would
provide no distributions from the
settlement to the drivers— ignoring
the petitioners’ priority status in
favor of certain payments to general
unsecured creditors. Id. at 7.
Over the objections of the U.S. Trustee
and the petitioners, the Bankruptcy
Court approved the settlement
agreement and dismissed the case,
holding that, in “dire circumstances,”
a structured dismissal providing
distribution outside of the ordinary
priority scheme did not bar approval.
Id. at 8. On appeal, the District Court
affirmed. Id. at 8–9. The 3rd U.S.
Circuit Court of Appeals also affirmed,
holding that structured dismissals
need not always respect the absolute
priority rules because Congress
legislated these rules in the context of
confirmation of a bankruptcy plan—
not structured dismissals. Id. at 9.
The Supreme Court granted the
petitioners’ writ of certiorari from
the 3rd Circuit. Jevic, U.S. 580 at 9.
Originally, the question posed to the
court was “[w]hether the bankruptcy
court may authorize the distribution of
settlement proceeds in a manner that
violates the statutory priority scheme.”
Id. at 1 (Thomas, J., dissenting) (citing
Pet. for Cert. i). However, the ultimate
question addressed was “[w]hether a
Chapter 11 case may be terminated by
a ‘structured dismissal’ that distributes
estate property in violation of the
Bankruptcy Code’s priority scheme.”
Id. (citing Brief for Petitioners i).
The Supreme Court held that a
structured dismissal could not, without
the consent of the affected creditors,
continued on page 14