April 3, 2017
Structured Lingchi: Czyzewski v. Jevic Holding Corp.
On March 23, 2017, the Supreme Court decided Czyzewski v. Jevic Holding Corp.1 (“Jevic“). Jevic presented an issue at the core of modern bankruptcy practice: How to deal with an open Chapter 11 bankruptcy case after the major participants are done with it. The parties sought to dismiss the case with conditions; the Court refused to approve it. This refusal subverts the so-called practice of “structured dismissals,” currently prevalent in Chapter 11 practice.
The origins of structured dismissals lie in the unique nature of a bankruptcy cases. When parties have no further use for a Chapter 11 case, one might think the answer would be a simple case dismissal. That’s the normal result in two-party litigation. The default treatment under Rule 41 of the Federal Rules of Civil Procedure is that dismissals are “without prejudice,” meaning that the litigation changed nothing, and the plaintiff is free to file again.
But bankruptcy is different. A bankruptcy case is a collective action, not unlike a class action by the debtor against all its creditors. One consequence of this characterization is that a bankruptcy debtor can’t just unilaterally dismiss its case, even if there is no objection. It must obtain court approval.
If the court grants that approval, then section 349 of the Bankruptcy Code provides that everyone goes back to square one; state court receiverships pending when the bankruptcy case was filed are reinstated; transfers or liens avoided during the case are reversed.2 More broadly, all bankruptcy court orders are vacated, and the bankruptcy estate, created by the filing of the case, is dissolved, with all property vested in the estate revesting in the debtor.
Or at least that is what supposed to happen. Sometime within the last decade, or even earlier, lawyers began to believe that a bankruptcy case could be dismissed with many of its benefits retained. After all, section 349 itself allows its consequences to be changed “for cause.” So if a Chapter 11 debtor sells its assets, and the secured creditor receives the proceeds, there is no need to continue the case, even if the secured creditor requires (usually at the bankruptcy court’s insistence) that a few crumbs be thrown to the unsecured creditors before the actual act of dismissal.
Thus was born the “structured dismissal.” The Court looked to the recent American Bankruptcy Institute study for examples of these types of dismissal. That study described a structured dismissal as a: “hybrid dismissal and confirmation order . . . that . . . typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case.”3
But back to the Supreme Court. Jevic reversed the Third Circuit’s approval of a structured dismissal. The gist of the reversal can be found in the facts of the case. Jevic was the subject of a leveraged-buyout gone bad. When Jevic filed for Chapter 11 bankruptcy, all its assets were in hock, and its secured creditors quickly arranged a sale of the assets to their benefit. The unsecured creditors committee was also busy. It sued the lenders to avoid the liens created as part of the leveraged buyout under fraudulent transfer theory.
Eventually, all Jevic’s assets were sold, and the estate was left with its fraudulent transfer lawsuit and $1.7 million—and the secured creditors claimed that cash as their collateral. Sensing a deal, the unsecured creditors committee agreed to take the money and dismiss the fraudulent transfer lawsuit.
There was, however, a problem. Jevic was in the trucking business, and the shutdown of its business had royally ticked off its drivers. They claimed the lenders violated the federal Worker Adjustment and Retraining Notification Act (“WARN”),4 and sued them outside of bankruptcy. As employees, however, they also had priority wage claims in the bankruptcy.5 Under bankruptcy law, these priority claims had to be paid in full before any other unsecured creditors could receive a penny.
The lenders, however, saw it differently. They did not want to settle their bankruptcy claims only to see their settlement payment used to fund a war chest to be used against them in the WARN act litigation. So the lenders, claiming the settlement funds were their collateral, stipulated that the proceeds could not go to the drivers. They justified cutting out the drivers in basest of terms: accept the settlement and the non-drivers would receive some cash; reject it, and receive nothing but unpleasant memories of contentious litigation. In short, the lenders pressured the other unsecured creditors to sell out the drivers in return for a positive bankruptcy dividend.
The bankruptcy court, district court, and appellate court bought this nonsense. Their reasoning was practical. From their perspective, if the settlement was not approved, no creditor (other than the secured lenders) would get anything. Adopting the philosophy that half a loaf is better than none (and feeding only some of the hungry is better than starving everyone), they approved the settlement which just incidentally dismissed the bankruptcy case. Put another way, they structured the dismissal so a priority class of creditors would not be paid.
Ultimately, the Court said that such a structure was untenable. Priorities are the bedrock of bankruptcy, and distributions that vary those priorities cannot be tolerated. As the Court stated, “[a] distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distribution of estate value in business bankruptcies.”6 As the Court saw it, “a bankruptcy court does not have such a power.”7
Or maybe it does. The Court was at pains to tells us—in an aside enclosed with parenthesis—that it was not saying that structured dismissals were per se bad.8 Just those that affect terminal dispositions.9
Or maybe not even that. Bankruptcy courts often tolerate transfers which violate statutory priority in early stages of a case. Workers without priority claims need to be paid so that they will stay and work. Lenders require higher priorities for their claims to be induced to lend to bankruptcy debtors. There may be other violations, but the Court singled out these typical variations as permissible, indicating that such orders are “generally” based on their ability to enhance “significant Code-related objectives.”10
There’s a fine line here between the ultimate variation of priority and expeditious interim variations believed to boost the possibility of reorganization. In Jevic, the Court condemned the former, and tolerated the latter.
If that characterization is correct, then Jevic isn’t too revolutionary. On the narrow issue of whether the parties can manipulate a dismissal to avoid statutory priorities, the Court clearly said no. But there can be death by a thousand cuts—the brutal torture known as lingchi. Court approval of payments to workers, priorities to lenders, and other purported reorganization-facilitating transfers can easily slice away at priorities, and produce a dismissal that, while not creating the variations, essentially preserves them.
Jevic tells us that frontal assaults on priorities won’t work. It left open, however, the efficacy of rearguard actions—those involving pre-dismissal “interim” variations. Given the resourcefulness of lawyers, get ready for new disputes.
Bruce A. Markell is the Professor of Bankruptcy Law and Practice at Northwestern University in Chicago, Illinois. From 2004 to 2013, he was as a United States bankruptcy judge for the District of Nevada. Before taking the bench, Professor Markell practiced bankruptcy and business law in Los Angeles for ten years, and was a law professor for fourteen.
He is the author of numerous articles on bankruptcy and commercial law, and a co-author of four law school casebooks. He contributes to Collier on Bankruptcy, and is a member of Collier‘s editorial advisory board. He is also a conferee of the National Bankruptcy Conference, a fellow of the American College of Bankruptcy, a member of the International Insolvency Institute, and a member of the American Law Institute.
He has served as an advisor on bankruptcy and secured transaction reform to the Republic of Indonesia, and is recently finished assisting Kosovo in redrafting its bankruptcy law.
- No. 15-649, slip op. (U.S. Mar. 22, 2017).
- 11 U.S.C. § 349(b) (2012).
- Jevic, No. 15-649, slip op. at 3 (quoting Am. Bankr. Inst., Commission to Study the Reform of Chapter 11, 2012-2014 Final Report and Recommendations 270 (2014)).
- 29 U.S.C. § 2102 (2014).
- 11 U.S.C. § 507(a)(4) (2012).
- Jevic, No. 15-649, slip op. at 2.
- Id. at 14 (“We express no view about the legality of structured dismissals in general.” ).
- See id. at 16.
- Id. at 15.
Recommended Citation Bruce Markell, Response, Structured Lingchi: Czyzewski v. Jevic Holding Corp., Geo. Wash. L. Rev. On the Docket (Apr. 3, 2017), http://www.gwlr.org/structured-lingchi-czyzewski-v-jevic-holding-corp/.