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Czyzewski v. Jevic Holding Corp. - 137 S. Ct. 973 (2017)

Rule:

Chapter 11 foresees three possible outcomes. The first is a bankruptcy-court-confirmed plan. Such a plan may keep the business operating. The second possible outcome is conversion of the case to a Chapter 7 proceeding for liquidation and a distribution of remaining assets. 11 U.S.C.S. §§ 1112(a) and (b), 726. That conversion in effect confesses an inability to find a plan. The third possible outcome is dismissal of the Chapter 11 case. 11 U.S.C.S. § 1112(b). 

Facts:

Respondent Jevic Transportation filed for Chapter 11 bankruptcy after being purchased in a leveraged buyout. The bankruptcy prompted two lawsuits. In the first, a group of former Jevic truckdrivers, petitioners here, were awarded a judgment against Jevic for Jevic's failure to provide proper notice of termination in violation of state and federal Worker Adjustment and Retraining Notification (WARN) Acts. Part of that judgment counted as a priority wage claim under §507(a)(4), entitling the workers to payment ahead of general unsecured claims against the Jevic estate. In the second suit, a court-authorized committee representing Jevic's unsecured creditors sued Sun Capital and CIT Group, respondents here, for fraudulent conveyance in connection with the leveraged buyout of Jevic. These parties negotiated a settlement agreement that called for a structured dismissal of Jevic's Chapter 11 bankruptcy. Under the proposed structured dismissal, petitioners would receive nothing on their WARN claims, but lower-priority general unsecured creditors would be paid. Petitioners argued that the distribution scheme accordingly violated the Code's priority rules by paying general unsecured claims ahead of their own. The Bankruptcy Court nevertheless approved the settlement agreement  despite the agreement not following ordinary priority rules and dismissed the case. It reasoned that because the proposed payouts would occur pursuant to a structured dismissal rather than an approved plan, the failure to follow ordinary priority rules did not bar approval. The District Court and the Third Circuit affirmed.

Issue:

Was the approval of the settlement agreeement proper, considering it did not follow ordinary priority rules and failed to obtain the affected creditors' consent?

Answer:

No.

Conclusion:

Judgment was reversed. A distribution scheme ordered in connection with the dismissal of a Chapter 11 case could not, without the consent of the affected parties, deviate from the basic priority rules that applied under the primary mechanisms the Bankruptcy Code established for final distributions of estate value in business bankruptcies; The workers with a WARN Act judgment had standing to challenge a structured dismissal where a settlement without a violation of ordinary priority rules remained a reasonable possibility, and the workers' fraudulent-conveyance claim could have had litigation value; Congress had not authorized a rare case exception in 11 U.S.C.S. § 349(b) given that a court could not alter the balance struck by the statute, not even in rare cases.

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