Justices to Review Closely Watched Bankruptcy Case

(CN) - The U.S. Supreme Court on Tuesday said it will review a bankruptcy case in which a select creditors of a trucking company were allowed to jump the repayment line, leaving the firm's drivers empty-handed.

Jevic Holding Corp., a New Jersey-based trucking company, used the technique known as a "structured dismissal" to ensure that lawyers who worked on its Chapter 11 case and other creditors were paid even though drivers who had the same priority were not.

Under Chapter 11, a plan for bankruptcy is created; it assigns claims to a particular class and indicates how each class of claims will be treated.

But under a "structured dismissal" a company will agree to pay off one group of creditors but not others that have the same priority. The bankruptcy is then dismissed.

In this case, Jevic's drivers filed a claim for $8 million in damages, which the bankruptcy court approved.

A group of unsecured creditors also filed a suit, this one against two entities that held liens on Jevic's assets.

Eventually, the creditors and Jevic agreed to a settlement that resolve all of their claims against each other and pay various legal fees.

But the drivers opposed the deal because under the bankruptcy code, they should have been a higher priority for payment than some of the settlement parties.

Despite the drivers' qualms, the bankruptcy court approved the settlement. A federal court and the Third Circuit affirmed the ruling.

As is their custom, the justices did not explain why they decided to take up the case, but the solicitor general had urged them to do so because of a split about circuits on whether "a bankruptcy court can approve "a proposed 'settlement' that distributes estate assets in a manner inconsistent with the Bankruptcy Code's priority scheme" when there is an objection from a priority claimant.

Nineteen states have filed papers in the case, as have two consumer-rights organizations and more than a dozen bankruptcy scholars.

States are concerned that companies that use structured dismissals can use them to avoid tax claims.

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