United States: Supreme Court To Resolve Circuit Split Over Structured Dismissals

The Supreme Court again will be addressing the powers of bankruptcy courts. At the end of the term, the Court granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that violates the statutory priority scheme in the Bankruptcy Code. No. 15-649, 2016 WL 3496769 (S. Ct. June 28, 2016). The Supreme Court is expected to address this fundamental bankruptcy issue sometime early next year.


Jevic Transportation was a New Jersey-based trucking company. In 2006, Sun Capital Partners, a private equity firm, acquired the company in a leveraged buyout. Sun Capital financed the transaction by borrowing against Jevic's assets. Shortly thereafter, Jevic refinanced the debt it had incurred pursuant to the buyout with a consortium of lenders led by CIT Group. By late 2007, Jevic had defaulted on this loan. Jevic then filed for chapter 11 bankruptcy protection on May 20, 2008.

A class of nearly 1800 truck drivers, whom Jevic laid off without warning near the time of the bankruptcy, brought suit against both Jevic and Sun Capital. The official committee of Jevic's general unsecured creditors also brought suit on behalf of Jevic's estate against Sun Capital and CIT Group, arguing that the leveraged buyout was a preference and fraudulent transfer. As Jevic was administratively insolvent—i.e., the administrative and priority claims against the estate exceeded the value of the estate's unencumbered assets—it pursued a settlement of the estate's claims and a structured dismissal that would distribute the proceeds among creditors.

In June 2012, Jevic, Sun Capital, CIT and the unsecured creditors committee filed a joint motion seeking court approval of a proposed settlement and structured dismissal. Under the settlement: (i) CIT agreed to pay $2 million on account of various administrative priority claims; (ii) Sun Capital agreed to assign its lien on Jevic's remaining $1.7 million in cash to a trust to pay other administrative and tax claims, and then to pay the general unsecured claims on a pro rata basis; (iii) the parties agreed to dismiss the fraudulent transfer action and the bankruptcy case; and (iv) the settling parties agreed to release all claims against each other.

The class of laid off drivers and the U.S. Trustee (an officer of the Department of Justice) each objected to the settlement and structured dismissal. The drivers had priority claims against the estate under sections 507(a)(4) and (5) as a result of Jevic's violations of the New Jersey equivalent of the Worker Adjustment and Retraining Notification Act (better known as the WARN Act). The drivers argued that the settlement violated the priority scheme under 11 U.S.C. § 507 and improperly channeled a recovery to general unsecured creditors before paying their priority claims in full. The drivers further contended that the unsecured creditors committee had breached its fiduciary duty to the estate by "agreeing to a settlement that, effectively, freezes out the [drivers]." Additionally, the U.S. Trustee objected on the ground that the Bankruptcy Code does not permit structured dismissals.

Jevic, Sun Capital and CIT responded by arguing that section 507 does not apply to settlements, including structured dismissals like the one at issue here. "Section 507 of the Code simply describes the priority of particular 'expenses and claims.' ... It does not specify the circumstances under which bankruptcy courts are required to apply those priorities." Section 1129 in turn applies this scheme but only in the context of a plan. Accordingly, the parties argued that section 507 has no bearing on a settlement.


Section 507 of the Bankruptcy Code details the priority order of the payment of certain claims when assets of the bankruptcy estate are distributed. In particular, section 507(a)(4) requires payment of $12,475 per employee in wages and compensation. Under section 507(a)(5), the debtor must pay claims contributions to an employee benefit plan arising from services rendered within 180 days of the petition date (in amount totaling $12,475 per employee covered under the benefit plan).

Prior to Jevic, two Courts of Appeals grappled with whether or not distributions of settlement proceeds must comply with section 507. In In re AWECO, Inc., the Fifth Circuit rejected a settlement of a lawsuit against a chapter 11 debtor that would have transferred $5.3 million worth of estate assets to an unsecured creditor before satisfying outstanding senior claims. 725 F.2d 293 (5th Cir. 1984). The Fifth Circuit held that settlements must be "fair and equitable," and that "fair and equitable" means compliant with the priority scheme.

The Second Circuit adopted a more flexible approach when confronted with the same question several years later. In In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007), the unsecured creditors committee proposed a settlement that would split the estate's cash between the lenders and a litigation trust set up to fund a different debtor action against one of the priority administrative creditors. The priority administrative creditor objected to the settlement because the proposed distribution allocated funds to lower-priority creditors and skipped over the administrative claim. Finding the Fifth Circuit's approach in AWECO, Inc. "too rigid," the Second Circuit concluded that the absolute priority rule is not necessarily implicated when a court is asked to approve a settlement outside the context of a reorganization plan. Although complying with the Code's priority scheme must be "the most important factor for the bankruptcy court to consider when determining whether a settlement is 'fair and equitable' under Rule 9019," the Second Circuit held that courts may nonetheless approve settlements with distributions deviating from the priority structure when "the remaining factors weigh heavily in favor of approving a settlement[.]"

Delaware Bankruptcy Court and District Court Opinions in Jevic

In an oral opinion, the Bankruptcy Court for the District of Delaware approved the proposed Jevic settlement and entered the structured dismissal. The court held that the Bankruptcy Code does not expressly authorize structured dismissals, but it found them permissible because they are "simply dismissals that are preceded by other orders of the bankruptcy court ... that remain in effect after dismissal." It also found section 507 inapplicable because the case did not involve a chapter 11 plan. The bankruptcy court stated that it had the power approve the structured dismissal under section 105(a) of the Bankruptcy Code—which gives it the power "to issue any order ... that is necessary or appropriate to carry out the provisions" of the Bankruptcy Code—because it was more appropriate than the alternative of converting the case to chapter 7.

The bankruptcy court applied the multifactor test of In re Martin, 91 F.3d 389 (3d Cir. 1996) used for evaluating settlements under Federal Rule of Bankruptcy Procedure 9019. Under this test, a bankruptcy judge must consider the following in deciding whether to approve a proposed compromise: (1) probability of success in litigation; (2) likely difficulties in collection; (3) complexity of litigation involved, and expense, inconvenience and delay necessarily attending it; and (4) paramount interest of creditors. The Jevic court balanced these factors and found that the balance tipped in favor of approving the settlement, and nothing in the Bankruptcy Code dictated otherwise.

The district court affirmed. The court found that the bankruptcy court had not abused its discretion in concluding that structured dismissals are permissible, and that the settlement did not need to follow the absolute priority rule because it was not a reorganization plan. In re Jevic Holding Corp., No. 08-11006, 2014 WL 268613 (D. Del. Jan. 24, 2014).

Third Circuit Opinion in Jevic

A divided panel of the Third Circuit affirmed. In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015). Like the lower courts, the Third Circuit's decision ultimately turned on the fact that the absolute priority rule as codified under section 1129(b)(2) applies by its terms only to plans, and that there is no specific Code provision prohibiting distributions that bypass the priority scheme outside the plan context. In so holding, the Third Circuit expressly rejected the Fifth's Circuit holding in AWECO, Inc. and, instead, adopted the Second Circuit's holding in Iridium Operating.

The Third Circuit began its analysis by noting that settlements are favored in bankruptcy. It also expressly agreed with the Second Circuit's statement that "compliance with the Code priorities will usually be dispositive of whether a proposed settlement is fair and equitable." The Third Circuit therefore held that "bankruptcy courts may approve settlements that deviate from the priority scheme of § 507 of the Bankruptcy Code only if they have 'specific and credible grounds to justify deviation." Noting that Jevic presented a "close call," the Court ultimately found "specific and credible grounds" for approving the settlement because it presented "the least bad alternative" where there was "no prospect" of a plan being confirmed and conversion to chapter 7 would have resulted in the secured creditors taking all that remained of the estate in "short order."

Judge Scirica dissented. He stated that approving the settlement "undermined the Code's essential priority scheme... by skip[ping] over an entire class of creditors" in making distributions. While he did not advocate for a per se rule similar to the one made in AWECO, Inc., he did not find the circumstances in Jevic extraordinary enough to warrant an exception. Instead, he deemed the settlement "an impermissible end-run around the carefully designed routes by which a debtor may emerge from Chapter 11 proceedings."

Supreme Court Considerations

There is a strong textual argument for affirming the Third Circuit's opinion given the lack of provisions in the Bankruptcy Code dictating that priorities apply to settlements, as opposed to plans. While the absolute priority rule is critical to the bankruptcy scheme, under the plain text of the Bankruptcy Code, only plans need comply with it.

The Solicitor General, together with the Executive Office for the U.S. Trustee, weighed in on this matter with an amicus brief. The Solicitor General recommended granting review and argued that the Third Circuit should be reversed. The Solicitor General's brief rejected reading the statutory priorities as limited to plans, contending that "bankruptcy is not a free-for-all in which parties or bankruptcy courts may dispose of claims and distribute assets as they see fit." Much like Judge Scirica, the Solicitor General saw a settlement as essentially a substitute for a plan, which needs to comply with the priority scheme under section 507.


The Supreme Court's decision will, hopefully, resolve one of the most important circuit splits in business bankruptcy law. Currently, the Third Circuit's decision enables parties to reach settlements that do not comply with the priority scheme under section 507. Given the strong policy favoring consensual agreements and the balance of factors weighing in favor of settlement approval under Martin, affirming the Third Circuit's decision may be consistent with Congress' intent. A ruling in favor of structured dismissals would serve to channel cases away from chapter 11 plans and toward consensual settlements. This could reduce administrative costs and facilitate quicker bankruptcy resolutions. However, this could also lead to settlements that run counter to the expected results under the absolute priority rule. This represents a close and complex question for the Court.

Additionally, the Supreme Court's decision may affect the permissibility of "gift plans," i.e. payments from secured creditors or buyers—supposedly from their own property—that enable distribution in a chapter 11 plan not in accordance with priorities. If the Supreme Court signs off on orders where creditors agree to recoveries outside the scope of the absolute priority rule, it might tacitly endorse gift plans whereby secured creditors agree that their recoveries may be distributed in part to junior creditor classes to ensure completion of the bankruptcy. Historically, gifting has occurred in the plan context, but structured dismissals could also provide a platform for this activity.

The oral argument date for Jevic has not been set yet. We expect that it will be held in early December of this year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

10 Oct 2018, Conference, Florida, United States
Julie Totten is Program Chair of this year’s conference, Lynne Hermle is speaking on women in the courtroom, boardroom, and c-suite, and Erin Connell is speaking on pay equity and pay transparency.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions