United States: U.S. Supreme Court Rules WARN Claimants/Workers Must Get Priority Over Other Unsecured Creditors In Bankruptcy

Seyfarth Synopsis:  A bankruptcy court overseeing an employer's Chapter 11 bankruptcy proceeding allowed the employer to pay certain unsecured creditors before paying Worker Adjustment And Retraining Notification Act ("WARN") creditors – workers who had sued the company – monies owed pursuant to a judgment, even though the bulk of the WARN monies owed were for back wages that hold priority over other unsecured claims under the Bankruptcy Code.  The bankruptcy court allowed the employer to pay the other unsecured creditors pursuant to a settlement agreement between the other unsecured creditors, the secured creditors, and the employer because, according to the bankruptcy court, the other unsecured creditors would not receive any monies absent the settlement, while the WARN creditors would not recover any compensation under or absent the settlement.  Both the district court and U.S. Court Of Appeals For The Third Circuit agreed with the bankruptcy court. In Czyzewski v. Jevic Holding Corp., No. 15-649, 2017 U.S. LEXIS 2024 (U.S. Mar. 22, 2017), the U.S. Supreme Court reversed, finding that the bankruptcy court's conclusion that the WARN plaintiffs could not recover was questionable and, more significantly, that the bankruptcy court could not alter the Bankruptcy Code's distribution scheme at the expense of the WARN creditors absent their consent.

Employers undergoing Chapter 11 bankruptcy and WARN litigation should take note that unpaid wage claims will take priority over the claims of other unsecured creditors absent the consent of WARN creditors.

Case Background

Sun Capital Partners ("Sun"), a private equity firm, purchased Jevic Transportation Corp. ("Jevic"), an employer, in a leveraged buyout using monies borrowed from third-party CIT Group ("CIT").  In the buyout, both Sun and CIT used Jevic's stock as collateral to finance the purchase.

Two years after the buyout, Jevic declared bankruptcy under Chapter 11.  Immediately prior to filing for bankruptcy, Jevic, without the notice required under WARN, told its employees that it was terminating their employment.  During the bankruptcy, these employees sued, and the bankruptcy court entered a $12.4 million judgment in their favor, making them creditors of Jevic.  The bankruptcy court determined that $8.3 million of this $12.4 million was owed for priority wage claims.  While the WARN creditors argued that Sun was also liable for this judgment as a joint employer with Jevic, the bankruptcy court ultimately ruled against them, finding that Sun was not their employer.

Also during the bankruptcy, other unsecured creditors sued Sun and CIT, arguing that they were the beneficiaries of preferential transfers of Jevic's assets.  While this lawsuit was pending, Jevic's assets were depleted to $1.7 million in cash, subject to a lien by Sun, and the preferential transfer lawsuit.

Sun, CIT, Jevic, and the other unsecured creditors decided to settle the fraudulent transfer lawsuit.  At the time the case was settled, the WARN creditors' joint employer case was still pending, so Sun insisted that any settlement could not include a payment to the WARN creditors or their counsel, as Sun feared the WARN creditors' counsel would use such payments to fund litigation against Sun.  Under the settlement agreement, CIT agreed to pay $2 million to cover the legal fees and administrative expenses of the other unsecured creditors, while giving Jevic's remaining $1.7 million to pay taxes, administrative expenses, and pro rata distributions to the other unsecured creditors.  Also pursuant to the settlement, Jevic agreed to dismiss its Chapter 11 bankruptcy case.

Sun, CIT, Jevic, and the unsecured creditors petitioned the bankruptcy court to approve the settlement and dismiss the Chapter 11 case.  The WARN creditors opposed, arguing that the settlement violated the normal priority rules by giving other unsecured creditors priority over the WARN creditors.

While the bankruptcy court agreed that the settlement violated standard priority rules, it found that, because it was dismissing the Chapter 11 case rather than approving a Chapter 11 plan, it did not have to follow the priority rules contained in Chapter 11.  It found authority to do so in Chapter 11's dismissal provision, § 349(b)(1), which provides that, with dismissal, parties are restored to the status quo ante unless a bankruptcy judge, "for cause, orders otherwise."  Further, it found that, regardless of the settlement, the WARN creditors would not receive any distributions, while the settlement left the other unsecured creditors in a better position than they would be absent the settlement.  Both the district court and Third Circuit agreed.  The WARN creditors sought certiorari, which the Supreme Court granted.

The Court's Decision

In a March 22, 2017 opinion authored by Justice Breyer, the Supreme Court reversed.  The Supreme Court began its analysis by considering Jevic's argument that the WARN creditors lacked standing because they would not have recovered anything if the settlement was not approved.  The Supreme Court found this argument unpersuasive because it relied on two questionable propositions: first, that without violation of the ordinary priority rules, there would be no settlement and, second, that the fraudulent conveyance lawsuit had no value.  2017 U.S. LEXIS 2024, at *19.  With respect to the  first argument, the Supreme Court found it unpersuasive given that Sun ultimately won on the joint employer issue.  Id. at *19-20.  With respect to the second, the Supreme Court found the assumption that the fraudulent conveyance lawsuit had no value questionable in light of the fact it settled for $3.7 million.  Id. at *20.  The Supreme Court thus concluded that the WARN creditors had something to lose if the settlement was approved, and therefore had standing to challenge it.  Id. at *21.

The Supreme Court then turned to the question of whether a bankruptcy court can dismiss a Chapter 11 plan in a way that does not follow the ordinary priority rules without the affected creditors' consent.  Id.  It decided that it cannot for several reasons.

First, the Supreme Court observed that the distribution scheme contained in the Bankruptcy Code is "fundamental to the Bankruptcy Code's operation," and that one would expect more than "statutory silence" to authorize departures from the scheme.  Id. at *22-23.  Second, the Supreme Court concluded that Chapter 11 § 349(b)(1), in providing that the parties are restored to the status quo ante in a dismissal unless a bankruptcy judge, "for cause, orders otherwise," only allows a bankruptcy judge to "make appropriate orders to protect rights acquired in reliance on the bankruptcy case," which approval of the settlement did not do.  Id. at *24-25.  Finally, the court concluded that the consequences of allowing a departure from the normal distribution scheme were "potentially serious," including "changing the bargaining power of different classes of creditors" and "risks of collusion."  Id. at *30-31.

For these reasons, the Supreme Court reversed the bankruptcy court's approval of a settlement that, as part of the dismissal of a Chapter 11 case, allowed payment to general unsecured creditors while skipping the higher priority claims of the WARN creditors.

Implications For Employers

Financially distressed employers who are the subject of potential WARN litigation should be aware that, as a result of this decision, they will not be able to pay the claims of general unsecured creditors during bankruptcy absent the consent of WARN creditors.  The case has special implications for employers who own distressed employers, as was the case with Sun in Czyzewski, who want to avoid funding litigation against themselves under a joint employer theory.

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.

Authors
Gerald L. Maatman Jr.
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
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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