We previously wrote about the U.S. Supreme Court’s decision to hear a group of truck drivers’ challenge to the dismissal of a chapter 11 bankruptcy case that was designed to avoid paying the drivers’ claims. Today, the U.S. Supreme Court issued its decision in Czyzewski v. Jevic Holding Corp., which held that the “structured dismissal” of the bankruptcy case was improper because it violated the priority scheme established under bankruptcy law by seeking to exclude the truck drivers from the distribution of assets.
The debtor in Jevic, along with other key constituents, sought the Bankruptcy Court’s approval of a settlement that allowed for the dismissal of the bankruptcy case and payments to certain unsecured creditors, but excluded the payment of the truck drivers’ claims under the WARN Act. The truck drivers took issue with this proposal because their claims were of a higher priority than some of the unsecured claims that were to be paid under the settlement. All of the lower courts overruled the truck drivers’ objections and approved the structured dismissal.
The Supreme Court reversed the prior rulings and stated that “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.” Accordingly, the truck drivers’ challenge to the structured dismissal was successful, and the Supreme Court’s decision will have a significant impact on the use of structured dismissals in future bankruptcy cases.