The Supreme Court case that started Wednesday involving former bankrupt Jevic Transportation Co. and some of its former employees, whose claims were thrown out eight years ago by the trucking company, could eliminate the use of structured dismissals and send bankruptcy proceedings into turmoil, experts said.
If the court sides with the employees - likely affirming a ruling which allows structured dismissals to be done on the bankruptcy code but not if it threatens the absolute priority rule of a Chapter 11 plan - necessary first-day motions such as paying pre-petition wages and taxes could be upended, said attorney Jay R. Indyke, chair of Cooley's corporate restructuring and bankruptcy practice group.
In almost all Chapter 11 cases, companies file to pay pre-petition fees such as employee wages, taxes and vendor costs, as part of first-day motions. For these motions to gain approval, the debtor needs to prove it is dependent on paying the fees for its business to survive.
To save costs and maximize value to creditors, debtors will sometimes implement structured dismissals, or settlements to certain claim holders outside of a Chapter 11 plan. These structured dismissals do not follow the priority order of a plan which ensures secured creditors and administration fees get paid before unsecured creditors and equity holders.
"What's the difference?" Indyke said, comparing pre-petition fee payments to structured dismissals.
"Arguably all of those so-called first-day reliefs would be threatened by a ruling" that prevents bankruptcy judges from approving structured dismissals as a way to pay certain claim holders, Indyke said. Currently there is no rule allowing or disallowing debtors to settle with creditors outside of a plan.
"Those first-day applications are not so much for the ultimate end game as they are for stabilizing the debtor while it operates through (Chapter) 11," said Michael Sirota, co-chair of Cole Schotz PC's Bankruptcy & Corporate Restructuring Department, doubting that the Supreme Court would affirm a ruling that halts pre-petition fee payments.
Sirota said if a company seeking to reorganize cannot pay employee wages, for example, it will lose them and then the business would be shut down.
What will happen, if the court rules against structured dismissals, is that the lawyers who carve out the payments to creditors will lose the ability to find "creative" ways to maximize creditors' claims as best they can, which is not always an easy task, according to Sirota.
"The more tools that practitioners have, the more creative they can be," Sirota said.
Indyke said either way, if companies are stripped of their right to conduct structured dismissals, Chapter 11 cases surely will be dragged out as all claims will have to be paid through a plan, which already takes a long time to write up and will take even longer if no prior outside settlements are allowed.
Kenosha, Wis.-based Jevic filed for Chapter 11 protection in June of 2008 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington, citing a slump in demand for its services. The company exited its case in October of the same year after paying certain of its unsecured creditors but not the 1,785 former employees' $8 million in claims (of a higher priority than unsecured creditors) for being laid off during the bankruptcy without receiving 60 days' notice.
Certain creditors including the employees, mostly former truck drivers, sued private equity firm Sun Capital Partners, which bought Jevic in 2006 for $77.4 million, and the debtor's largest lender CIT Group, alleging that it was the buyout that sent Jevic into insurmountable debt. They expected Sun and CIT to settle with them for the $8 million owed for unpaid wages.
Instead, Sun and CIT issued out a $3.7 million settlement (a structured dismissal) to certain of Jevic's unsecured creditors. Bankruptcy Judge Brendan Linehan Shannon approved the settlement.
The employees were paid nothing so they took the settlement to the U.S. Court of Appeals for the Third Circuit, which approved the structured dismissal on May 21, 2015. On Wednesday, Czyzewski V. Jevic Holding Corp. was taken to the Supreme Court.
Indyke said he agrees with Jevic's original settlement, saying that it may not be "fair" to all creditors but it maximized value.
Founded in 1933 as Kenosha Auto Transport, Jevic transports large commercial trucks from manufacturers to retailers through 27 terminals adjacent to truck making plants.