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Supreme Court Rejects Structured Dismissals That Violate Bankruptcy Priority Distribution Scheme

The United States Supreme Court recently held that "[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 [Bankruptcy] Code establishes for final distributions of estate value in business bankruptcies." In Czyzewski v. Jevic Holding Corp., 580 U.S. ___ (2017), a group of truck drivers held a $12.4 million judgment against their former bankrupt employer, Jevic Transportation Company. In accordance with the Bankruptcy Code's distribution scheme, approximately $8.3 million of the judgment was entitled to priority payment after Jevic's secured creditors, but before Jevic's unsecured creditors. Jevic's unsecured creditors' committee, however, agreed to a settlement under which the bankruptcy court would, among other things, dismiss Jevic's bankruptcy case and make distributions to Jevic's general unsecured creditors without any payment to the truck drivers. The truck drivers objected, arguing that the proposed settlement violated the Bankruptcy Code's priority distribution scheme by failing to pay priority creditors before general unsecured creditors. In analyzing the permissibility of the settlement, the Court held that the chapter 11 process foresees three outcomes: (1) the confirmation of a plan; (2) the conversion of the case to a chapter 7; or (3) a dismissal that returns the former debtor to the prepetition financial status quo. Instead of dismissing a case outright, bankruptcy courts---as the court did here---have increasingly utilized "structured dismissals." In a structured dismissal, a bankruptcy court dismisses a case, but may also approve distributions to creditors, grant third-party releases, enjoin certain conduct by creditors, and not necessarily vacate orders or unwind transactions undertaken during the case. In this instance, the proposed settlement called for a structured dismissal that made distributions in violation of the Bankruptcy Code's priority distribution scheme. The Court, however, flatly held that a bankruptcy court cannot order such a structured dismissal. Simply put, no provision in the Bankruptcy Code permits priority-violating distributions via a dismissal, and the Court would expect such a provision if Congress truly intended to permit them.

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