United States: Supreme Court Limits Use Of Structured Dismissals Of Chapter 11 Cases

Richard Lear is a Partner and Amy Fuentes is an Associate in the Washington D.C. office

John Monaghan is a Partner in the Chicago office


  • In a 6-2 decision, the U.S. Supreme Court ruled in favor of the petitioners in Czyzewski, et al. v. Jevic Holding Corp, et al., reversing the decision of the U.S. Court of Appeals for the Third Circuit.
  • The Supreme Court determined that bankruptcy courts may not approve structured dismissals of Chapter 11 cases that provide for distributions of estate funds that do not follow the ordinary priority rules established under the Bankruptcy Code without the consent of the affected creditors.
  • As grounds for its decision, the Supreme Court considered the priority of claims under Section 507 and the effects of the dismissal of a bankruptcy case under Section 349 of the Bankruptcy Code, but declined to express its view on the legality of structured dismissals in general.

In a 6-2 decision on March 22, 2017, the U.S. Supreme Court determined that bankruptcy courts may not approve a structured dismissal of a Chapter 11 case that provided for distributions of estate funds that do not follow ordinary priority rules established under the U.S. Bankruptcy Code without the affected creditors' consent.1 In a decision written by Justice Stephen Breyer, the Supreme Court ruled in favor of the petitioner in Czyzewski, et al. v. Jevic Holding Corp., et al.2, reversing the decision of the U.S. Court of Appeals for the Third Circuit and remanding the case for further proceedings.3

Case History

In Jevic, the question before the Court was whether a bankruptcy court has the legal power to order a distribution of assets that gave money to high-priority secured creditors and low-priority general unsecured creditors but bypassed dissenting mid-priority unsecured creditors in connection with the dismissal of a Chapter 11 case.

In 2006, Sun Capital Partners acquired Jevic Transportation Corp. in a leveraged buyout. Two years later, Jevic filed a Chapter 11 case in Delaware. At the time of its bankruptcy filing, Jevic owed $53 million to senior secured creditors, including Sun, and more than $20 million to tax and general unsecured creditors. The petitioners, a group of former Jevic truck drivers, filed suit in the bankruptcy case against Jevic and Sun for violations of state and federal Worker Adjustment and Retraining Notification (WARN) Acts – laws that require a company to give workers at least 60 days' notice before their termination of employment. Petitioners alleged that Jevic did not provide proper notice to petitioners of the termination of their employment. The bankruptcy court granted summary judgment for the petitioners against Jevic, leaving them with a judgment of $12.4 million. Approximately $8 million of the judgment counted as a priority unsecured wage claim under the Bankruptcy Code and, accordingly, was entitled to payment ahead of general unsecured claims. The petitioners' WARN suit against Sun continued throughout most of the litigation that came before the Supreme Court. Eventually, Sun prevailed.

Another lawsuit relevant to the litigation before the Supreme Court resulted from the bankruptcy court authorizing a committee representing Jevic's unsecured creditors to sue Sun and the other secured creditor to avoid transfers of Jevic's assets in connection with the leveraged buyout as preferences under Section 547 of the Bankruptcy Code and as fraudulent transfers under Section 548 of the Bankruptcy Code. Any recovery from this lawsuit would inure to the benefit of the bankruptcy estate, not to the unsecured creditors. In 2011, the bankruptcy court held that the committee had adequately pleaded claims of preferential transfer and fraudulent transfer under the Bankruptcy Code.4 Following this ruling, the committee, Sun and the other secured creditor defendant and Jevic tried to negotiate a settlement. At that time, the only assets remaining in the bankruptcy estate were the preference and fraudulent conveyance claims that were the subject of the lawsuit and $1.7 million in cash, which was subject to a lien held by Sun.

The parties were successful in reaching a settlement agreement providing that: 1) the bankruptcy court would dismiss the lawsuit with prejudice; 2) Sun would assign its lien on Jevic's remaining $1.7 million to a trust, which would pay taxes and administrative expenses and distribute the remainder on a pro rata basis to the holders of the low priority claims, but which would not pay anything to the petitioners on their higher priority $8.3 million wage claims5; 3) the other secured creditor defendant would deposit $2 million into an account earmarked to pay the committee's legal fees and administrative expenses; and 4) Jevic's Chapter 11 case would be dismissed. As summarized by the Supreme Court, "the proposed settlement called for a structured dismissal that provided for distributions that did not follow ordinary priority rules."

Although the bankruptcy court agreed with petitioners that the settlement's proposed distribution to creditors did not follow the payment priority rules contained in the Bankruptcy Code, the bankruptcy court concluded that the failure did not bar approval of the settlement for two reasons: 1) the proposed payouts would occur pursuant to a structured dismissal of the bankruptcy case and not under a confirmed plan; and 2) without the settlement and dismissal, there would be "no realistic prospect" of a meaningful payment for anyone other than the secured creditors, constituting "dire circumstances" for the estate and its creditors. The U.S. District Court for the District of Delaware affirmed the bankruptcy court, agreeing that the priority rules were not a bar to approval because the settlement was not a Chapter 11 plan.6 The Third Circuit affirmed the district court, holding that structured dismissals need not always respect the distribution priority scheme under the Bankruptcy Code in "rare instances," such as the case at hand.7

Supreme Court Reverses Third Circuit Ruling

The Supreme Court reversed the Third Circuit ruling, stating that the Bankruptcy Code's priority system "constitutes a basic underpinning of business bankruptcy law" and that there was no indication that "Congress actually meant to make structured dismissals a backdoor means to achieve the exact kind of nonconsensual priority-violating final distributions that the Code prohibits in Chapter 7 liquidations and Chapter 11 plans."

In its decision, the Supreme Court observed that Section 1112(b) of the Bankruptcy Code gave a bankruptcy court the power to dismiss a Chapter 11 case, but that neither "structured" nor "conditions" nor any other words about distributing estate assets or paying estate funds to creditors pursuant to a dismissal of the Chapter 11 case appeared in that section or in any relevant part of the Bankruptcy Code. Instead, the Supreme Court noted that Section 349(b) of the Bankruptcy Code provided that dismissal of a bankruptcy case restored the pre-petition financial status quo by, among other things, reinstating avoided transfers of estate property and revesting property of the bankruptcy estate in the entity in which such property was vested before the filing of the bankruptcy case. Acknowledging that Section 349(b) said that a bankruptcy court may, "for cause, orde[r] otherwise", the Supreme Court looked to the legislative history of that section and concluded that the provision appeared designed to give courts the flexibility to protect rights acquired by a party during the course of the bankruptcy case, a situation that did not exist in the Jevic case.

Finding no support in the Bankruptcy Code, other than possibly Section 349(b), for end-of-case distributions of estate assets to creditors of the kind that occur in Chapter 7 liquidations or under confirmed Chapter 11 plans as part of a dismissal of a bankruptcy case, the Supreme Court rejected the Third Circuit's approval of nonconsensual priority-violating structured dismissals even in "rare case[s]" in which courts could find "sufficient reasons" to disregard priority. Because of its view that it is difficult to adequately define "sufficient reasons," the Court concluded that a "rare case" exception could become a general rule resulting in potentially serious consequences in bankruptcy cases, including eliminating Congressional protections granted to particular classes of creditors, impacting the bargaining power of classes of creditors even in bankruptcy cases that do not result in structured dismissals, and promoting collusion between secured creditors and low-priority general unsecured creditors to freeze out priority unsecured creditors from receiving any distribution of estate assets.


The Supreme Court noted in its decision that there was no express support in the Bankruptcy Code for structured dismissals and that structured dismissals appear to be used with increasing frequency. Yet, despite the juxtaposition of these circumstances, the Court parenthetically stated that it was not considering the far more interesting issue: the legality of structured dismissals in general. Instead, the Court determined that structured dismissals cannot be used to make a final distribution of estate funds in a manner that deviates from the priorities set forth in Section 507 of the Bankruptcy Code without the consent of the affected creditors.8 Consequently, the Jevic decision raised more questions than it answered. For example, would a structured dismissal that followed the priorities of Section 507 be permissible? Second, would the "gifting" by a secured creditor of funds that are proceeds of its collateral to be used to pay a low-priority creditor class, skipping a high-priority creditor class, in a structured dismissal be allowed? The funds at issue in Jevic were the proceeds of the settlement of fraudulent conveyance and preference litigation against the secured creditors, and were not proceeds of the secured creditors' collateral. Some courts have held that a secured creditor is free to allocate the proceeds of its collateral as it wishes. Perhaps those decisions are left unscathed, but perhaps they are not.9

The Court also made clear that it was not prohibiting all of what it termed as "priority-violating distributions." Actually, the Court seemed to approve of priority-violating distributions if they are made early in the case such that they do not constitute a final distribution of estate assets if those distributions serve to "preserve the debtor as a going concern", "make disfavored creditors better off" or "promote the possibility of a confirmable plan." Examples of such priority-violating distributions mentioned (and implicitly approved) by the Court include the non-controversial payment of employee pre-petition wages under a "first-day" order, and the far more controversial (and implicitly approved) priority-skipping distributions to "critical vendors" and roll-ups of pre-petition secured debt into post-petition financing by the secured creditor.


1 Structured dismissals are defined by the American Bankruptcy Institute as a "hybrid dismissal and confirmation order...that...typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case." American Bankruptcy Institute Commission to Study the Reform of Chapter 11, 2012-2014 Final Report and Recommendations 270 (2014).    

2 Czyzewski, et al. v. Jevic Holding Corp, et al. (Slip Op., No. 15-649 March 22, 2017).

3 Justice Clarence Thomas filed a dissenting opinion.

4 In re Jevic Holding Corp., 2011 WL 4345204 (Bankr. D. Del. Sept. 15, 2011).

5 Apparently, Sun required that the distribution skip the petitioners' claims because the petitioners' WARN suit against Sun was still pending and Sun did not want to help finance the litigation against itself.

6 In re Jevic Holding Corp., 2014 WL 268613, *3 (D. Del. Jan. 24, 2014).

7 In re Jevic Holding Corp., 787 F.3d 173, 175, 180, 184 (3d Cir. 2017).

8 There is some question as to whether the Jevic decision addressed any existing split among the circuits as a result of petitioners recasting the question presented to the Court after the Court granted certiorari. Czyzewski, et al. v. Jevic Holding Corp, et al. (Slip Op., No. 15-649 March 22, 2017) (Thomas, J. dissenting opinion) ("[The recast question] is also not the subject of a circuit conflict").

9 The Court majority expressed concern with an approach to structured dismissals that promoted risks of collusion between senior secured creditors and representatives of general unsecured creditors "teaming up to squeeze out priority unsecured creditors." Jevic, Slip Op., at *17-18.

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.

In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.