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Jevic: Structured Dismissal SCOTUS Ruling

Jevic: Structured Dismissal SCOTUS Ruling Background Decorative Image

The Supreme Court limited the use of “structured dismissals” in chapter 11 cases on March 22, 2017, overturning a ruling of the Third Circuit. The Court stressed that any distribution scheme in connection with a proposed chapter 11 structured dismissal must follow the basic priority rules of the Bankruptcy Code absent consent of the affected parties. Importantly, however, the Supreme Court avoided determining that interim modifications of the priority scheme cannot be permitted at any time during a case.

The key question the Court considered was:

  • Whether a bankruptcy court, in considering a proposed structured dismissal of a chapter 11 case, can provide for distributions that deviate from the ordinary priority rules that would apply in a chapter 7 liquidation or a chapter 11 plan without the consent of the affected creditors?

Writing for a 6-2 majority, Justice Stephen Breyer held Wednesday that it was improper for a distribution scheme in a structured dismissal of a chapter 11 case to allow low-priority, general unsecured creditors of Jevic Holding Corp. to be paid ahead of certain dissenting, mid-priority creditors. The ruling overturned the decisions of the bankruptcy court, district court, and the Third Circuit Court of Appeals below, which had each given approval to the structured dismissal.

Section 349(b) of the Bankruptcy Code provides that upon dismissing a chapter 11 case, the property of the bankruptcy estate revests “in the entity in which such property was vested immediately before the commencement of the case.” This means the bankruptcy court is to restore the prepetition financial status quo of the parties when it dismisses a chapter 11 case. The Bankruptcy Code recognizes, however, that in some instances a perfect restoration of the status quo might be impossible, and in such cases, the bankruptcy court is authorized to alter the ordinary status quo restoration “for cause.” § 349(b). From this statutory authority, practitioners developed a structured dismissal, a term which is not found in the Bankruptcy Code, but which the Court noted has been defined by the American Bar Institute as a “hybrid dismissal and confirmation order . . . that . . . dismisses the case while, among other things, approving certain distributions to creditors, granting third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case.”

While the Bankruptcy Code defines the priority scheme that must be followed in chapter 7 and chapter 11, it “does not explicitly state what priority rules—if any—apply to a distribution in [a structured dismissal].” However, the Court noted that “[t]he importance of the priority system leads [it] to expect more than simple statutory silence if, and when, Congress were to intend a major departure.” The Bankruptcy Code does state that a bankruptcy court may “for cause, order[] otherwise” when the prepetition financial status quo cannot be replicated, but using principles of statutory interpretation, the Court explained that this provision does not provide sufficient “affirmative indication of [congressional] intent” to suggest that it allows bankruptcy courts wide discretion to ignore Bankruptcy Code priority rules in dismissals. “The Code gives a bankruptcy court the power to ‘dismiss’ a chapter 11 case . . . [b]ut the word ‘dismiss’ itself says nothing about the power to make nonconsensual priority-violating distributions of estate value.”

In addressing the Third Circuit’s reliance upon In re Iridium Operating LLC, 478 F.3d 452 (CA2 2007), which approved a deviation from the ordinary, distribution-priority scheme, the Court distinguished Iridium on the grounds that it dealt with “an interim distribution of settlement proceeds to fund a litigation trust,” while the question in the present case addresses priority with respect to a dismissal — a final disposition. The Court then noted several additional cases where interim distributions outside the normal priority rules had been approved, but it noted that such instances tend to involve “significant Code-related objectives that the priority-violating distributions serve.” Here, the Court found no such offsetting justification for going outside the ordinary priority rules.

Finally, the Court addressed the Third Circuit’s rationale that it would not approve a distribution outside the ordinary priority scheme in all structured dismissals but that it was proper to do so in certain “rare case[s]” where the bankruptcy court found “sufficient reasons” to do so. In rejecting this line of reasoning, the Court explained that to approve nonconsensual, priority-violating structured dismissals, even in only rare cases, would be to go down a potential slippery slope in which a “rare case exception [is turned] into a more general rule.” The uncertainty this would create, and the difficulty in giving precise definition to what would constitute “sufficient reasons” led the Court to conclude that “Congress did not authorize a ‘rare case’ exception.”

In dissent, Justice Thomas, joined by Justice Alito, wrote that the writ of certiorari should have been dismissed as improvidently granted because the petitioners argued a different, more narrow question on the merits than the question for which certiorari was granted. The dissent argued that deciding a question different than the one on which certiorari was granted could set an unwelcome precedent by which petitioners could seek review of a broad question subject to a circuit split “only then to change the question to one that seems more favorable.” Justice Thomas further pointed out that there is not a circuit split on the question decided in this case, as it is a “novel question of bankruptcy law,” and he thus lamented that the Court did not have the views of additional courts of appeals to take into consideration on this issue.

Summary of Key Takeaways:

  • Absent consent by affected parties, bankruptcy courts must follow the Bankruptcy Code priority rules in the structured dismissal of a chapter 11 case.
  • There is no “rare case” exception allowing courts to deviate from the ordinary priority rules in a structured dismissal.
  • The Court expressly stated that this opinion applies only to the specific question at issue —namely, the permissibility of structured dismissals that ignore Bankruptcy Code priority rules — and that it “express[es] no view about the legality of structured dismissals in general.”
  • The opinion did not eliminate the ability to do a structured dismissal per se.

This update presents a high-level summary of several key takeaways from the Supreme Court’s ruling in Czyzewski et al. v. Jevic Holding Corp. et al. (Case No. 15-649) issued on Wednesday, March 22, 2017.

For more information, please contact V&E Partner/Restructuring and Reorganization Practice Group Leader Bill Wallander or David Meyer (New York) and include your contact information. Visit our website to learn more about V&E’s Restructuring and Reorganization practice. 

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.