In In re Short Bark Industries Inc., 17-11502 (Bankr. D. Del. Sept. 11, 2017), Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware read the Supreme Court’s holding in Jevic narrowly in connection with a settlement of a dispute on DIP financing.
Short Bark Industries Inc. filed a chapter 11 petition in July, aiming for a quick sale of the assets. The company had about $17 million in secured debt, with almost $10 million owing to the senior secured lender. After filing, the debtor landed a stalking horse bid to sell the business for $3.2 million. The official creditors’ committee objected to the proposed DIP financing provided by the senior secured lender.
Subject to the court’s approval, the lender and the committee settled their disputes over financing. The agreement called for the lender to hold a minimum of $110,000 in sale proceeds in escrow for payment to holders of general unsecured claims but not for holders of unpaid priority or administrative claims.
The U.S. Trustee and a creditor with a disputed priority claim objected to the settlement, based on Jevic.
Ruling on the objection in an opinion delivered from the bench on Sept. 11, Judge Gross said he was initially inclined to disapprove the settlement, saying that the U.S. Trustee lodged a “very strong objection.” The judge said he then reread Jevic, noting how “it was all about a structured settlement.” He quoted Justice Stephen G. Breyer’s opinion proscribing “end-of-case distributions” that “would be flatly impermissible in a chapter 7 liquidation.”
Judge Gross characterized Justice Breyer as disapproving Jevic’s priority-skipping distribution because there was no “significant, offsetting, bankruptcy-related justification.”
In contrast, Judge Gross said the settlement in Short Bark “enables the debtors to continue with their businesses . . . and the employment of 500 plus people, while preserving the committee’s right to bring actions against insiders.”
Judge Gross had been told that administrative claims would be paid by using the chapter 11 financing. He said there was “little, if any, assurance” that the creditor with the disputed priority claim “would receive any distribution, were the settlement to be denied.”
The decision by Judge Gross appears to limit Jevic to a prohibition against priority-skipping distributions occurring at the end of the case, when it is clear that priority and administrative claims will not be paid. If his rationale holds up, settlements could avoid Jevic’s fate by being accelerated to an earlier time in the chapter 11 case.