Joseph Briggett, BridgeTower Media Newswires
A recent U.S. Supreme Court ruling will have major implications for bankruptcy filings.
In a case watched closely by business, legal and restructuring professionals everywhere, the decision last month says bankruptcy courts cannot approve settlements that stray from the conventional rules for determining creditors’ order of priority, unless all the affected creditors agree.
Essentially, the Supreme Court has narrowed the common practice in which bankruptcy courts permitted structured dismissals. Many observers predict this will make it harder to navigate the Chapter 11 reorganization process.
The ruling came in the case of Czyzewski v. Jevic Holding Corp., the latter being the owner of former New Jersey trucking company Jevic Operations.
After a leveraged buyout in 2006, Jevic fell on hard times. It managed to stay afloat at first through an out-of-court restructuring.
But under pressure from its secured creditors, Jevic filed for Chapter 11 reorganization in 2008. Shortly after, the company closed its operations and terminated all of its nearly 1,800 employees.
Lawsuits were filed by unsecured creditors, as well as the employees, against Jevic and other third parties.
Generally, the bankruptcy code provides three ways to end a Chapter 11 case – confirmation of the Chapter 11 plan, conversion to a Chapter 7 liquidation or a dismissal. The issue in the Jevic case was dismissal.
In a key part of the bankruptcy code, Section 349 allows courts, for good cause, to “order otherwise.”
In addition, a structured dismissal does not entail a statutorily regulated liquidation as in a Chapter 7 conversion. The key element of a structured dismissal, as opposed to a straight dismissal, is that it doesn’t return the parties to their pre-bankruptcy positions. Instead, a structured dismissal adjudicates and affects their rights.
In the Jevic case, the high court examined the language that allows bankruptcy courts to order otherwise.
The majority opinion, written by Justice Stephen Breyer, says the structured dismissal in the Jevic case exceeded the bankruptcy court’s authority under Section 349. He wrote that, among the key protections of Chapter 11 is disclosure, voting by constituents and that the plan meets legal standards, including compliance with the bankruptcy code’s priority rules.
The statutory scheme contemplates that if these requirements are not met, the alternative is conversion to Chapter 7 liquidation.
With that in mind,Justice Breyer asked whether the power to order otherwise could be used as a backdoor to elude both the plan process and a Chapter 7 conversion. If so, he regarded it as a significant departure from the statutory scheme.
For that to be the case, he would expect to find some indication from Congress that this third option was intended, which he didn’t find.
Therefore, Justice Breyer interpreted the “order otherwise” language narrowly. Section 349 is intended only to give courts flexibility to protect rights in a bankruptcy case. It does not allow structured dismissals that allocate value in a manner that strays from the statutory priority scheme.
So what’s the bottom line for businesses and restructuring professionals?
Their ability to navigate through the Chapter 11 plan process going forward will be hindered. The backdoor of a structured dismissal has at least narrowed, and non-consensual structured dismissals may have seen their last days.
Restructuring attorneys should be prepared with exit strategies through a confirmed Chapter 11 plan, a dismissal that satisfies Jevic, or a conversion to Chapter 7.
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Joseph Briggett is an attorney with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard and specializes in commercial litigation and bankruptcy.
