The Jevic Holding Corp. bankruptcy case is proving to be precedent setting.  The court had previously greatly increased the evidentiary burden on a party seeking to hold one company liable for the debts of another company under a “single employer” theory.  That ruling was seen as a boon for private equity firms who were oftentimes the target of Chapter 11 creditor committee claims seeking to make them liable for the debts of their portfolio companies.

Now, the U.S. Supreme Court is poised to rule on yet another issue arising from the Jevic case. On June 28, 2016, the Supreme Court granted a petition for certiorari to decide whether a bankruptcy court may “dismiss a case through an agreement that gives payment to lower-ranking creditors ahead of more senior-ranked creditors.” This technique is sometimes referred to as a “structured dismissal.”

In Jevic, the bankruptcy court approved a settlement among the debtor, the creditors’ committee, the private equity firm and the lead pre-petition lender.  The settlement provided for cash payments and other concessions from secured creditors in return for dismissal of various avoidance actions brought by the unsecured creditors committee.

The settlement was opposed by a group of drivers who had successfully sued the debtor for violation of the WARN Act and an analogous New Jersey statute by failing to provide them with the required 60-day notice before a plant closing or mass layoff.  Under the proposed settlement, the drivers would receive no distribution, although the settlement would provide payments to tax and general unsecured creditors.  The drivers contended that this settlement, which was to be followed by a dismissal of the bankruptcy case, was contrary to the priority rules in section 507 of the Bankruptcy Code since most of the drivers’ $12.4 million claim was entitled to priority status given to employee wage claims.  The U.S. Trustee also objected to the settlement.

The bankruptcy court approved the settlement, in essence finding that the settlement was a better result than any likely alternative where unsecured creditors, including the drivers, would receive nothing. The district court affirmed on appeal, and the drivers and the U.S. Trustee appealed to the Third Circuit Court of Appeals, arguing that structured dismissals were either banned by the Bankruptcy Code or at least had to comply with the Bankruptcy Code’s priority distribution scheme.

The Third Circuit affirmed the lower courts’ rulings, holding that a bankruptcy court has discretion to approve structured dismissals unless there is a showing “that the structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion process.”   Further, the Court, following the Second Circuit’s decision in In re Iridium Operating LLC, held that settlements that deviated from the Bankruptcy Code’s priority scheme could be approved if they have “specific and credible grounds to justify the deviation.”  This was contrary to the Fifth Circuit’s decision in Matter of AWECO, Inc.

In granting certiorari, the Supreme Court will attempt to resolve this circuit split and decide how much flexibility is given to debtors and other parties to craft structured dismissals that deviate from the Bankruptcy Code’s priority scheme.  The Court’s decision will likely have a tremendous impact upon bankruptcy cases, since parties will now know the outside limits of their ability to resolve their competing claims through negotiation.