(CN) – Handing a New Jersey company’s truck drivers a victory, the Supreme Court ruled 6-2 Wednesday that bankruptcy courts can’t allow select creditors to jump the repayment line and leave others 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. The U.S. Supreme Court agreed to take up the case last summer.
On Wednesday, the nation’s highest court reversed and ruled 6-2 that bankruptcy courts cannot approve structured dismissals that don’t follow normal priority rules without the consent of affected creditors, in this case Jevic’s truck drivers.
“A distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the [Bankruptcy] Code establishes for final distributions of estate value in business bankruptcies,” Justice Stephen Breyer wrote for the majority.
The Supreme Court held that Congress did not authorize a “rare case” exception to disregard creditors’ priority in structured dismissals for “sufficient reasons.”
“Courts cannot deviate from the strictures of the Code, even in ‘rare cases,’” Breyer wrote.
Chief Justice John Roberts and Justices Anthony Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined Breyer in the majority.
Justice Clarence Thomas filed a dissenting opinion, in which Justice Samuel Alito joined.
Thomas said the Supreme Court’s review of the case was improperly granted, claiming the truck drivers argued one question on the merits of the case after certiorari was granted on a different question.
He said the high court decided to answer whether “a bankruptcy court may authorize the distribution of settlement proceeds in a manner that violates the statutory priority scheme,” but the drivers recast the question to ask whether “a Chapter 11 case may be terminated by a ‘structured dismissal’ that distributes estate property in violation of the Bankruptcy Code’s priority scheme.”
“Although both questions involve priority-skipping distributions of estate assets, the recast question is narrower—and different—than the one on which we granted certiorari,” Thomas wrote in the two-page dissent. “Deciding this question may invite future petitioners to seek review of a circuit conflict only then to change the question to one that seems more favorable.”
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