U.S. Supreme Court Upholds the Priority Scheme in Structured Dismissals

In a rare instance where certiorari is granted in a bankruptcy case, on March 22, 2017, the United States Supreme Court rendered a crucial and fundamental decision that significantly affects the ability of parties to a Chapter 11 bankruptcy case to deviate from the priority distribution scheme set forth in the Bankruptcy Code under 11 U.S.C §507 and as incorporated by 11 U.S.C. §1129 by a structured dismissal of the bankruptcy case.  In Czyzewski v. Jevic Holding Corp., 580 U.S. ____, 197 L. Ed. 2d 398, 85 U.S.L.W. 4115 (2017), the Supreme Court held that Bankruptcy Courts may not approve structured dismissals that provide distributions to creditors that circumvent the priority distribution scheme of the Bankruptcy Code without the consent of affected creditors.

Structured dismissals have been utilized to resolve Chapter 11 cases that cannot be resolved pursuant to a confirmed Plan and would otherwise be dismissed or converted.  They do not require disclosure, voting or consent by affected creditors and substantive and procedural findings by the Bankruptcy Court that are otherwise required to confirm a Chapter 11 Plan.

The Third Circuit in In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015), upheld a structured dismissal previously approved by the Bankruptcy Court despite the fact that it violated the priority rules by allowing distributions to junior creditors without paying all creditors otherwise entitled to distributions before them under the Bankruptcy Code’s priority scheme.  The aggrieved party was a group of truck drivers who were entitled to a priority wage claim based upon violations of the Worker Adjustment and Retraining Notification Act.  The structured dismissal at issue did not provide for any payment to the truck drivers, although junior creditors received a distribution pursuant to the structured dismissal.

The Supreme Court granted certiorari because there was a difference among the Federal Circuit Courts as to whether structured dismissals may circumvent the priority scheme in the Bankruptcy Code.  In Czyzewski, the Supreme Court reversed the Third Circuit in a 6 to 2 decision and held that structured dismissals must adhere to the priority standards in the Bankruptcy Code or be on consent of all affected parties relying upon the fact that there was no indication that Congress in enacting the Bankruptcy Code intended such a departure.  Furthermore, the Supreme Court held that Congress did not authorize a “rare case” exception to allow Bankruptcy Courts to disregard the priority scheme for any reason regardless of the circumstances.