Czyzewski v. Jevic Holding Corp. ,
580 U.S. ___ (2017)

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Justia Opinion Summary

Jevic filed for Chapter 11 bankruptcy after its purchase in a leveraged buyout. Former Jevic drivers were awarded a judgment for violations of state and federal Worker Adjustment and Retraining Notification (WARN) Acts, part of which was a priority wage claim under 11 U.S.C. 507(a)(4), entitling them to payment ahead of general unsecured claims. In another suit, a court-authorized committee representing unsecured creditors sued Sun Capital and CIT for fraudulent conveyance in the buyout; the parties negotiated a structured dismissal of Jevic’s bankruptcy, under which the drivers would receive nothing on their WARN claims, but lower-priority general unsecured creditors would be paid. The Bankruptcy Court reasoned that the proposed payouts would occur under a structured dismissal rather than an approved plan, so failure to follow ordinary priority rules did not bar approval. The district court and Third Circuit affirmed. The Supreme Court reversed. The drivers have standing, having “suffered an injury in fact,” or “likely to be redressed by a favorable judicial decision.” A settlement that respects ordinary priorities remains a reasonable possibility and the fraudulent-conveyance claim could have litigation value. Bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors. Section 349(b), which permits a bankruptcy judge, “for cause, [to] orde[r] otherwise,” gives courts flexibility to protect reliance interests, not to make general end-of-case distributions that would be impermissible in a Chapter 11 plan or Chapter 7 liquidation. Here, the priority-violating distribution is attached to a final disposition and does not preserve the debtor as a going concern, nor make the disfavored creditors better off, promote the possibility of a confirmable plan, help to restore the status quo ante, or protect reliance interests. There is no “rare case” exception, permitting courts to disregard priority in structured dismissals for “sufficient reasons.”

  • Syllabus  | 
  • Opinion (Stephen G. Breyer)  | 
  • Dissent (Clarence Thomas)

NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued.The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience of the reader.See United States v. Detroit Timber & Lumber Co., 200 U. S. 321 .

SUPREME COURT OF THE UNITED STATES

Syllabus

CZYZEWSKI et al. v. JEVIC HOLDING CORP. et al.

certiorari to the united states court of appeals for the third circuit

No. 15–649. Argued December 7, 2016—Decided March 22, 2017

There are three possible conclusions to a Chapter 11 bankruptcy. First, debtor and creditors may negotiate a plan to govern the distribution of the estate’s value. See, e.g., 11 U. S. C. §§1121, 1123, 1129, 1141. Second, the bankruptcy court may convert the case to Chapter 7 for liquidation of the business and distribution of its assets to creditors. §§1112(a), (b), 726. Finally, the bankruptcy court may dismiss the case. §1112(b). A court ordering a dismissal ordinarily attempts to restore the prepetition financial status quo. §349(b)(3). Yet if perfect restoration proves difficult or impossible, the court may, “for cause,” alter the dismissal’s normal restorative consequences, §349(b)—i.e., it may order a “structured dismissal.” The Bankruptcy Code also establishes basic priority rules for determining the order in which the court will distribute an estate’s assets. The Code makes clear that distributions in a Chapter 7 liquidation must follow this prescribed order. §§725, 726. Chapter 11 permits some flexibility, but a court still cannot confirm a plan that contains priority-violating distributions over the objection of an impaired creditor class. §§1129(a)(7), (b)(2). The Code does not explicitly state what priority rules—if any—apply to the distribution of assets in a structured dismissal.

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, was 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 and dismissed the case, reasoning 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.

Held:

1. Petitioners have Article III standing. Respondents argue that petitioners have not “suffered an injury in fact,” or at least one “likely to be redressed by a favorable judicial decision,” Spokeo, Inc. v. Robins, 578 U. S. ___, ___, because petitioners would have gotten nothing even if the Bankruptcy Court had never approved the structured dismissal and will still get nothing if the structured dismissal is undone now. That argument rests upon the assumptions that (1) without a violation of ordinary priority rules, there will be no settlement, and (2) without a settlement, the fraudulent-conveyance lawsuit has no value. The record, however, indicates both that a settlement that respects ordinary priorities remains a reasonable possibility and that the fraudulent-conveyance claim could have litigation value. Therefore, as a consequence of the Bankruptcy Court’s approval of the structured dismissal, petitioners lost a chance to obtain a settlement that respected their priorities or, if not that, the power to assert the fraudulent-conveyance claim themselves. A decision in their favor is likely to redress that loss. Pp. 9–11.

2. Bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors. Pp. 11–18.

(a) Given the importance of the priority system, this Court looks for an affirmative indication of intent before concluding that Congress means to make a major departure. See Whitman v. American Trucking Assns., Inc., 531 U. S. 457 . Nothing in the statute evinces such intent. Insofar as the dismissal sections of Chapter 11 foresee any transfer of assets, they seek a restoration of the prepetition financial status quo. Read in context, §349(b), which permits a bankruptcy judge, “for cause, [to] orde[r] otherwise,” seems designed to give courts the flexibility to protect reliance interests acquired in the bankruptcy, not to make general end-of-case distributions that would be flatly impermissible in a Chapter 11 plan or Chapter 7 liquidation. Precedent does not support a contrary position. E.g., In re Iridium Operating LLC, 478 F. 3d 452 (CA2), distinguished. Cases in which courts have approved deviations from ordinary priority rules generally involve interim distributions serving significant Code-related objectives. That is not the case here, where, e.g., the priority-violating distribution is attached to a final disposition, does not preserve the debtor as a going concern, does not make the disfavored creditors better off, does not promote the possibility of a confirmable plan, does not help to restore the status quo ante, and does not protect reliance interests. Pp. 11–16.

(b) Congress did not authorize a “rare case” exception that permits courts to disregard priority in structured dismissals for “sufficient reasons.” The fact that it is difficult to give precise content to the concept of “sufficient reasons” threatens to turn the court below’s exception into a more general rule, resulting in uncertainty that has potentially serious consequences—e.g., departure from the protections granted particular classes of creditors, changes in the bargaining power of different classes of creditors even in bankruptcies that do not end in structured dismissals, risks of collusion, and increased difficulty in achieving settlements. Courts cannot deviate from the strictures of the Code, even in “rare cases.” Pp. 16–18.

787 F. 3d 173, reversed and remanded.

Breyer, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Ginsburg, Sotomayor, and Kagan, JJ., joined. Thomas, J., filed a dissenting opinion, in which Alito, J., joined.

Primary Holding

Bankruptcy courts may not approve structured dismissals of bankruptcy cases that deviate from ordinary priority rules unless the creditors affected by the deviation consent.

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