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U.S. Supreme Court to Decide Future of ‘Structured Dismissals’ in Chapter 11

Most New York bankruptcy debtors do not choose chapter 11, but their lives can be affected by chapter 11 bankruptcies filed by others, such as their employers. This is precisely what is happening in a case the U.S. Supreme Court is deciding, Czyzewski v. Jevic Holding Corp., which asks whether bankruptcy courts should allow “structured dismissals.” The petitioners, a group of truck drivers, assert that their former employer entered into an agreement with other creditors that would bypass their claims to dismiss its case. Although the claim centers on technical issues, the stakes are quite high for the workers.

So, what’s a “structured dismissal” and why does it matter?

The goal of a chapter 11 case is for the parties to agree on, and the bankruptcy court to confirm, a reorganization plan of the debtor’s business. This plan must satisfy priority claims in the order set forth the in the Bankruptcy Code. If the debtor instead converts the case to chapter 7, then the rules governing priority claims will operate there too. Otherwise, if the debtor dismisses the case, then the parties retain their rights to sue the debtor on the unpaid debts.

What’s not clear in the Bankruptcy Code is what happens if the debtor enters into a court-approved settlement with the other creditors that compensates them outside the order for prioritizing claims. These agreements happen in chapter 11 New York bankruptcy, but judges go very carefully and sometimes don’t call them “structured dismissals.”

According to a New York Times Dealbook post, in Czyzewski the respondent-debtor, Jevic, was bought out by a private equity firm, Sun Capital Partners, for $77 million in 2006. Jevic then borrowed a lot of money, and two years later filed bankruptcy. Jevic laid off nearly 2,000 workers, who then sued it for $8 million for not giving them sufficient notice of a mass layoff. Joining some other junior unsecured creditors, they also sued Sun Capital and Jevic’s main lender for fraud.

Sun Capital and the lender then settled their case with the junior unsecured creditors for $3.7 million subject to a dismissal of Jevic’s bankruptcy case. The deal left the employees, whose claims superseded the unsecured creditors, totally in the cold. The employees found much difficulty finding work in 2008, and one died because he lost his health care coverage for his cancer treatment. (The Affordable Care Act would probably have prevented this.)

The question, though, is: Why did the courts approve this deal? Apparently, Jevic could not satisfy administrative and priority claims, so a chapter 11 plan could never have been confirmed. Lower federal courts also reasoned that a chapter 7 bankruptcy would have yielded similar results for the workers. The parties to the settlement argued that no other alternative exists for the employees.

The Court will hand down its decision in Czyzewski in 2017. The result might create situations in which high-priority creditors join with low-priority creditors in structured dismissals to squeeze out creditors in the middle. This can easily lead to more workers such as those for Jevic who lost everything.

The Dealbook post is here.

If you have lost your job and you are finding trouble making ends meet, then talking to an experienced New York bankruptcy lawyer can help you assess your options.

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.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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