Bankruptcy Deals Decried by Workers Get High Court Review

  • ‘Structured dismissals’ single out some creditors for recovery
  • Some U.S. states say loophole lets debtors avoid tax payments

The U.S. Supreme Court is seen on June 27, 2016, in Washington.

Photographer: MANDEL NGAN/AFP/Getty Images

The U.S. Supreme Court will review a bankruptcy strategy that lets select creditors jump the repayment line, sometimes at the expense of parties otherwise entitled to some recovery.

The dispute taken up by the court involves “structured dismissals,” in which a company agrees to pay off one group of creditors but not others that have the same priority. The bankruptcy is then dismissed.

The practice has drawn fire from scholars, consumer advocates and more than a dozen states, which claim it can allow companies to skirt tax claims.

Jevic Holding Corp., a trucking company, used the technique to ensure that some lawyers who worked on its Chapter 11 case got paid even though drivers who had the same priority were not. The drivers had claimed damages over their mass firing when the company filed for bankruptcy.

A Delaware bankruptcy judge let Jevic drop its Chapter 11 petition instead of converting the case to a liquidation overseen by a trustee -- who would have paid creditors according to the Bankruptcy Code’s “absolute priority” rule. That rule sets out the order in which creditors are paid. Senior creditors must be paid in full before lower ranks get anything. Any money paid to the lower-ranking creditors must be shared. 

Equal Priority

In this instance, the truckers would have shared equal priority with the lawyers and other creditors who settled. Without the settlement, Jevic argued, senior creditors would have claimed all the assets, and no lower-ranking creditors would have collected anything.

The drivers challenged the move before the Philadelphia-based federal appeals court, which governs Delaware’s busy bankruptcy court. A similar case yielded the same result in New York, while another court rejected the strategy.

Nineteen states filed papers in the case, along with more than a dozen bankruptcy scholars and two consumer-rights organizations. States are concerned about companies that use structured dismissals to downgrade, or entirely avoid, tax claims.

‘For Sale’

A victory for Jevic will bring more structured dismissals, according to Martin Bienenstock, who leads the bankruptcy group at Proskauer Rose LLP. That would threaten the main intent of the Bankruptcy Code, to ensure the fair distribution of assets to creditors, the lawyer, who worked on the General Motors and Enron bankruptcies, wrote in an e-mail before the high court agreed to take up the case.

“Corporate governance would be for sale,” Bienenstock wrote. “The Chapter 11 process may be turned into a quest and competition for payoffs circumventing the absolute priority rule and the principle that all claims in a class must be treated equally.”

The case is Czyzewski v. Jevic Holding Corp., 15-649.

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