The United States Supreme Court heard oral arguments on December 7, 2016 in Czyzewski v. Jevic Holding Corp. The case poses a question that has divided the Second, Third, and Fifth Circuits: Whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that departs from the statutory priority scheme in the Bankruptcy Code, including through a so-called “structured settlement.”
Key Takeaways
- The Supreme Court heard arguments in Jevic to consider whether structured settlements can depart from the absolute priority rule.
- Several Justices suggested that, even if pre-plan settlements can depart from the priority hierarchy in exceptional cases, this may not be such a case.
- We expect the Court to rule on this matter in early 2017.
Background
As previously reported, Jevic Transportation, a New Jersey-based trucking company, filed for chapter 11 bankruptcy protection in 2008. A class of the company’s former truck drivers then filed priority unsecured claims against the estate under federal and state Worker Adjustment and Retraining Notification (WARN) Acts. Separately, the committee of unsecured creditors filed a fraudulent conveyance action, on behalf of the estate, against Sun Capital Partners, Inc. and CIT Group/Business Credit, Inc., creditors involved in Jevic’s prior leveraged buyout. While those claims were pending, the estate became administratively insolvent, foreclosing the prospect of a confirmable chapter 11 plan.
Ultimately, all parties except for the drivers reached a “structured settlement” with the bankruptcy estate. The settlement resolved the bankruptcy in its entirety by distributing all remaining estate assets to certain administrative and tax claimants and general unsecured creditors, with no payment to the drivers. That distribution was at odds with the priority scheme set out in 11 U.S.C. § 507, under which the drivers would have collected on their priority claims in full before other unsecured creditors received any payment. Nonetheless, the bankruptcy court approved the settlement under section 363(b), reasoning that it was “the least bad alternative” for creditors of the administratively insolvent estate. The court permitted the departure from the normal priority scheme because section 507 applies only to “plans” in chapter 11 proceedings, not pre-plan settlements. A divided panel of the Third Circuit affirmed, and the drivers petitioned for review in the Supreme Court.
Oral Argument
During oral argument at the Supreme Court, counsel for the petitioners (arguing against the settlement) acknowledged that section 507’s priority scheme, as incorporated by section 1129, applies only to “plans” in chapter 11 proceedings – not “settlements.” But she argued that the broader text and structure of the Code “foreclose any inference that Congress intended to allow courts to disregard” the priority scheme “and create a different method for distributing assets that’s not mentioned anywhere in the Code.” She thus contended that bankruptcy judges lack discretion under section 363(b) to resolve a case entirely by approving a settlement that distributes the estate’s assets in violation of the priority scheme – the interpretation previously adopted by the Fifth Circuit. The petitioners’ counsel was careful to cabin the requested relief to avoid invalidating pre-plan settlements that defy statutory priority but do not resolve the case entirely, including critical vendor orders.
Justice Alito initially suggested that the petitioners had changed their arguments at the briefing stage, including by challenging only structured settlements specifically, and not pre-plan distributions of estate assets in general. Petitioners’ counsel disputed that point, and no other Justice expressed additional concerns. Questioning then turned to the absence of statutory language requiring settlements to conform with section 507. Justice Kagan wondered why the issue “isn’t mentioned someplace in the Code,” and whether “Congress just [did] not think that this might happen.” In response, petitioners’ counsel argued that there is no specific mention of settlements because settlements generally are not intended to be a method of distributing estate assets; only plans are. Justices Ginsburg and Kennedy pushed back by citing section 349(b), which appears to authorize a pre-plan dismissal that, “for cause,” distributes estate assets in a way that differs from the pre-bankruptcy status quo. But petitioners’ counsel sought to minimize that section’s role, framing it as “a relatively limited provision” used as a mechanism for protecting third-party detrimental reliance on intervening bankruptcy court orders, but not altering the distributional hierarchy.
The Office of the Solicitor General, appearing as amicus curiae in support of the petitioners, echoed many of those arguments, characterizing the type of structured settlement at issue as an impermissible end-run used “to override the consent of the priority claimholders.”
On the other side, counsel for the respondents argued that section 1129 mandates fidelity to the priority waterfall hierarchy only in “plans.” Settlements, he contended, are subject to a bankruptcy court’s “discretionary analysis” under section 363(b), which permits departures from the priority hierarchy in certain circumstances. Several Justices questioned that interpretation of the statute. Justice Breyer expressed doubt that section 363(b), which “says nothing” about the permissible “terms” of a settlement, empowers “the bankruptcy trustee or any court” to “reverse the order in which [the estate’s] assets will be distributed.” Justice Kagan also appeared skeptical that “authorization” to depart from the priority scheme could be found in the text of the Bankruptcy Code. “That’s … a big principle,” she noted, “and I think we would have known about it if that’s the way bankruptcy proceedings were supposed to go.”
Respondents’ counsel then emphasized that, under the approach taken by the Second and Third Circuits, section 363(b) would ordinarily require settlements to follow the waterfall hierarchy, with departures permitted only in “rare” cases that do not entail “evasion” of a confirmable plan. Several Justices questioned whether that framework would adequately prevent improper settlements: Justice Breyer “worried” that settlements might still be used to strategically disadvantage creditors, and Justice Kagan remained concerned that “plans that the Bankruptcy Code declare[s] not confirmable are, in fact, going to be confirmed through this alternative procedure.” Justices Sotomayor and Kennedy, meanwhile, suggested that the settlement at issue would not qualify as a “rare” case in any event. In Justice Sotomayor’s view, the settlement amounted to an “alternative plan” produced by “collusion among the senior and junior creditors to the exclusion of the disfavored creditor.”
Though making predictions based on oral argument is risky business, it seemed that the Court was leaning against the respondents and more likely to reverse the approval of the settlement and remand for it to be considered under a more rigorous standard.
A decision is expected in early 2017. Orrick will continue to monitor the case and will provide an update once a decision has been reached.