Usually workers in bankruptcy cases are debtors, but when employers are in bankruptcy, then their employees can find themselves wearing creditors’ shoes. Frequently, the employers owe money to banks as well, which leads to conflicts between the workers and the banks over the company’s assets and revenue. Typically, the Bankruptcy Code’s system for prioritizing creditors’ claims ensures that worker-creditors understand what kind of payment they will receive from the employer-debtor and prevents litigation over establishing the pecking order. But the U.S. Supreme Court just decided a case clarifying that the priority order must be respected even in a chapter 11 case a bankruptcy court has dismissed, subject to a settlement among the creditors (sometimes referred to as, “structured dismissals“).
In Czezewski v. Jevic Holding Corp., the bankruptcy court approved a structured settlement that permitted the company, Jevic, to partially satisfy its highest-priority creditors and its lowest-priority unsecured creditors while skipping over the worker-creditors who were in the middle. The workers sued, claiming that the bankruptcy court was obligated to honor their position above the unsecured creditors, but the remaining parties claimed that a successful chapter 11 bankruptcy would have left them with nothing anyway. The stakes were quite high because Jevic declared bankruptcy just as the economy was hurtling into the Great Recession, and one laid-off worker died because he lost his health care.
“Structured dismissals” do not appear in the Bankruptcy Code, and they’re somewhat controversial. (One New York bankruptcy judge won’t even use the term.) Nothing explicitly obligates bankruptcy courts to honor the priority system in such a dismissal, so the Court had to decide how best to fill a statutory hole. The Third Circuit Court of Appeals and lower courts upheld the bankruptcy court’s ruling.
The Court first wrestled with the issue of the workers’ standing to bring the case because the company and its other creditors argued that they would have received nothing from a successful chapter 11 bankruptcy anyway. The Court disagreed, and it distinguished between a lawsuit against the company that might be fruitless and one that was valueless. It may be that the workers would lose their case, but whether that case has any value is not for the bankruptcy court to determine. Thus, the workers had standing to dispute the structured settlement.
The Court then discussed whether a structured dismissal could skip over them. It held that the priority structure applied to chapter 11 structured dismissals because it could find no evidence of intent by Congress to permit violations of the priority structure. Moreover, it interpreted chapter 11 dismissals as restoring the parties to the pre-bankruptcy status quo and nothing more. By contrast, the structured dismissal in the case appeared to be more like an end-of-case distribution than a dismissal. This isn’t to say all structured dismissals are now barred, just that they have to stick to the Bankruptcy Code’s goals.
The Court then distinguished the situation in Jevic from other cases permitting structured dismissals, primarily that in Jevic there are no bankruptcy-related justifications to offset the plan. Instead, the distribution plan in the settlement resembled cases that federal courts rejected as end runs around the bankruptcy process.
The Supreme Court’s opinion is here (pdf).
The Jevic opinion is helpful to the worker-creditors in this case, but importantly, now that the Supreme Court recognizes the practice of “structured dismissals,” chapter 11 debtors in some circumstances will be able to take advantage of them.
My practice is capable of and experienced in advising chapter 11 bankruptcy cases. If your financial situation is sufficiently complex, then I can help you decide whether chapter 11 is the right chapter for your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.