U.S. Supreme Court Approves Structured Dismissals in Certain Circumstances

            On March 22, 2017, the United States Supreme Court issued its ruling in Czyzewski v. Jevic Holding Corp.,[1] holding 6-2 that bankruptcy courts cannot approve structured dismissals that provide for distributions in violation of the Bankruptcy Code’s priority scheme without the consent of the affected parties.            The Court’s holding is an appeal from a decision by the Third Circuit Court of Appeals which held that bankruptcy courts could, in “rare cases,” approve structured dismissals that provide distributions in violation of the Bankruptcy Code’s priority scheme. For a discussion of the underlying facts of the case and of the Third Circuit’s holding, please read our previous post by clicking here.             In reaching its decision, the Court noted that while the Bankruptcy Code “makes clear” that distributions made in a chapter 7 liquidation must adhere to the Bankruptcy Code’s priority scheme and that distributions in a confirmed chapter 11 plan of reorganization “may impose a different ordering with the consent of the affected parties,”[2] a bankruptcy court cannot grant a dismissal of a chapter 11 bankruptcy that provides for distributions in violation of the priority scheme, absent the consent of the affected parties.            While the Court conceded that a bankruptcy court can dismiss a case “for cause”[3]—which typically returns the parties to the status quo ante, and the orders in the bankruptcy case do not survive—and that section 349(b) of the Bankruptcy Code permits a court “for cause, [to] order[] otherwise,” the Court found that the word “cause” “[was] too weak a reed upon which to rest so weighty a power” of a bankruptcy court to make final distributions that contravene the priority system in connection with the dismissal of a chapter 11 case (absent the affected parties’ consent).[4]            The Court also distinguished In re Iridium Operating, LLC,[5] a Second Circuit decision relied upon by the Third Circuit in Jevic.  The Supreme Court noted that Iridium did not involve a structured dismissal, but rather “addressed an interim distribution of settlement proceeds to fund a litigation trust that would press claims on the estate’s behalf.”[6]  Therefore, Iridium did not support the Third Circuit’s decision that the Bankruptcy Code permits structured dismissals that deviate from the Bankruptcy Code’s priority scheme in “rare cases.”  The Supreme Court emphasized that the consequences of permitting structured dismissals that deviate from the Bankruptcy Code’s priority scheme “are potentially serious” and include (i) departing from the statutory priorities enacted by Congress, (ii) changes in the bargaining power between different creditor-classes, and (iii) the risk of collusion whereby “senior secured creditors and general unsecured creditors team[] up to squeeze out priority unsecured creditors.”[7]            The Court further recognized that other bankruptcy decisions have approved interim distributions that violated the Bankruptcy Code’s priority scheme. However, the Court distinguished those cases from Iridium and Jevic because “in such instances one can generally find significant Code-related objectives that the priority-violating distributions serve,” and “make even the disfavored creditors better off.”  Examples of such interim distributions are courts approving “first-day” wage orders permitting payment of employees’ pre-petition wages, “critical vendor” orders permitting payment to vital suppliers, and “roll-ups” permitting lenders that continue to provide post-petition financing to be paid first on their pre-petition claims.[8]              Importantly, the Supreme Court’s decision did not disapprove of the use of structured dismissals that do not violate the Bankruptcy Code’s priority scheme.  In particular, the Court noted that “[w]e express no view about the legality of structured dismissals in general.”[9]  Thus, it appears that while a bankruptcy court cannot grant a structured dismissal that violates the Bankruptcy Code’s priority scheme absent consent of affected parties, the Court did not foreclose the permissibility of a structured dismissal that does not deviate from the priority scheme or a structured dismissal that deviates from the priority scheme but where all affected parties consent.               A copy of the Supreme Court’s opinion can be found by clicking here.            For further information, please contact a Thompson & Knight Bankruptcy and Restructuring Attorney.            For more information on Thompson & Knight’s Bankruptcy and Restructuring Practice, please visit http://www.tklaw.com/bankruptcy-and-restructuring/.            [1] 137 S. Ct. 973 (2017).[2]See 11 U.S.C. §§ 1129(a)(7), 1129(b)(2).[3]See 11 U.S.C. § 1112(b).[4] 137 S. Ct. at 985.[5] 478 F.3d 452 (2d Cir. 2007).[6] 137 S. Ct. at 985 (emphasis in original).[7]Id. at 986.[8]Id. at 985.[9]Id. at 986.