In our last column we reported on the U.S. Supreme Court's decision in Czyzewski v. Jevic Holding, 137 S. Ct. 973 (2017). In that decision, the court ruled a bankruptcy court may not order a structured dismissal of a Chapter 11 case that provides for estate assets to be distributed in violation of the Bankruptcy Code's distribution scheme. The decision was widely discussed by bankruptcy practitioners, in part because there are a number of common practices in Chapter 11 that also distribute estate assets in violation of the bankruptcy code's distribution scheme. The Supreme Court's opinion, in dicta, distinguished those practices because they often serve an appropriate bankruptcy purpose. Today we review two recent opinions that consider the Jevic decision's impact on two of these common practices.

The 'Jevic' Ruling

In Jevic, the debtor, its secured creditor, equity holder, and the creditors' committee entered into a settlement agreement that provided, among other things, that estate funds would be distributed to general unsecured creditors while certain priority claimants would receive nothing, and the chapter 11 case would be dismissed. The priority claimants and U.S. Trustee objected, arguing that the distribution scheme of the bankruptcy code prohibited distribution of estate assets to general unsecured creditors unless priority creditors were paid in full. The Bankruptcy Court overruled their objection, observing that in the absence of the settlement and dismissal, no creditor would receive anything. After the Bankruptcy Court's decision was affirmed by the District Court, the U.S. Court of Appeals for the Third Circuit again affirmed, noting that while Congress codified the distribution scheme in plan or liquidation contexts, courts could ” … in rare instances like this one, approve structured dismissals that do not strictly adhere to the Bankruptcy Code's priority scheme.”

The Supreme Court's Jevic decision reversed the Third Circuit's decision, rejected the “rare case” exception, and ruled that structured dismissals cannot distribute assets in violation of the Bankruptcy Code's distribution scheme. This ruling was most recently applied by Bankruptcy Judge Christopher Sontchi of the U.S. Bankruptcy Court for the District of Delaware in In re Constellation Enterprises, Case No. 16-11213 (CSS). In a bench ruling on May 16, 2017, Judge Sontchi denied the debtors and committee's joint motion for approval of a settlement agreement and structured dismissal, reasoning that it was prohibited in light of the Supreme Court's decision in Jevic.

The question remains, however, how will Jevic impact areas other than structured dismissals?

Distribution Issues Outside of Structured Dismissals

In Jevic, the Supreme Court acknowledged certain Chapter 11 practices that provide for interim distribution of estate funds in violation of the bankruptcy code's waterfall provisions. The court distinguished such practices by writing: But in such instances one can generally find significant code-related objectives that the priority-violating distributions serve. Courts, for example, have approved “first-day” wage orders that allow payment of employees' prepetition wages, “critical vendor” orders that allow payment of essential suppliers' prepetition invoices, and “roll-ups” that allow lenders who continue financing the debtor to be paid first on their prepetition claims. In doing so, these courts have usually found that the distributions at issue would “enable a successful reorganization and make even the disfavored creditors better off.” By way of contrast, in a structured dismissal like the one ordered below, the priority-violating distribution is attached to a final disposition; it does not preserve the debtor as a going concern; it does not make the disfavored creditors better off; it does not promote the possibility of a confirmable plan; it does not help to restore the status quo ante; and it does not protect reliance interests. In short, we cannot find in the violation of ordinary priority rules that occurred here any significant offsetting bankruptcy-related justification.