JEVIC Opinion Illustrates The Importance Of Language Used In Orders

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The In re Jevic Holding Corp. chapter 11 case continues to make news.  The case is likely best remembered for the 2017 Supreme Court decision holding that the distribution scheme in a structured dismissal of a Chapter 11 case cannot violate the absolute priority rule.  The case has since been converted to Chapter 7, and in its most recent development, the Bankruptcy Court in Delaware barred the Chapter 7 trustee from stepping into the shoes of either the former unsecured creditors’ committee or the debtor due to the language in the Final Debtor In Possession Order.

Chapter 7 trustees have the power to pursue claims in the name of debtors, but such power does not apply if the debtor bars itself and its successors from asserting such claims.  However, a trustee does not have a right to take over an avoidance claim brought by a creditors’ committee unless the action being pursued is derivative of the debtor’s rights.

In Jevic, the Chapter 7 trustee filed a motion to be substituted as plaintiff for the Creditors’ Committee that had been appointed in the Chapter 11 case, and which filed an adversary action against certain creditors of the debtor known as the “Lender Group,” before the case converted to Chapter 7 and the Creditors’ Committee was dissolved.  As the Court noted, the “terms of the financing order are paramount in [the] analysis” as to the trustee’s rights.  08-11006-BLS, Doc. 1914, May 5, 2021, at 14.  In Jevic, the Court found that the language of the Final DIP Order prevented the trustee from being substituted as plaintiff in place of the Creditors’ Committee and from exercising its avoidance powers against the Lender Group based on the Debtor’s rights.

The language of the Final DIP Order was specific regarding who could assert a challenge and the timeframe in which a challenge could be asserted.  While any party could assert a challenge no later than 75 days of the Petition Date, only the Creditors’ Committee could assert an action no later than 75 days after the appointment of the Committee.  By the time the Chapter 7 trustee was appointed, it was well past 75 days from the Petition Date, and the Final DIP Order did not provide that a Chapter 7 Trustee could succeed to the rights of the Creditors’ Committee.  Most importantly, the Order stated that “[t]he stipulations and admissions contained in this Final Order shall be binding upon the Debtors and any successor thereto (including without limitation any Chapter 7 or Chapter 11 trustee appointed or elected for any of the Debtors) in all circumstances.”  08-11006-BLS, Doc. 1914, May 5, 2021, at 11.  Based on this language the Debtor waived not only its rights, but also waived the right to challenges by any successor, specifically including a Chapter 7 trustee.  The Bankruptcy Court therefore ruled that the Chapter 7 trustee was unable to step into the shoes of the Debtor to pursue an adversary action against the Lender Group referenced in the Final DIP Order.

It is noted that the language at issue in this Final DIP Order is fairly standard language in financing orders.  Therefore, parties wishing to avoid this result in future cases should consider using alternative language which will allow a Chapter 7 Trustee to succeed in the place of a Creditors’ Committee and/or the debtor.  Absent language preserving the rights of potential successors, such as a Chapter 7 Trustee, the estate may lose the ability to pursue certain claims.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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