Supreme Court Watch 2016-2017 - Part I: Structured Dismissals and Insider Claims

by Blank Rome LLP

The Supreme Court’s 2016–2017 term began last week with attention to two bankruptcy issues: Structured dismissals and insider claims.

Structured Dismissals:

Structured dismissals occur when a company’s assets in chapter 11 will not generate enough cash to pay priority claims in full and permit confirmation of a plan. In Czyzewski v. Jevic Holding Corp., the official unsecured creditors’ committee sued the secured lender and negotiated a settlement whereby the lender agreed to set aside money for distribution to unsecured creditors following and agreed (i.e., “structured”) dismissal of the chapter 11 case. The distribution scheme did not follow priorities in the Bankruptcy Code because priority wage claimants received nothing from the lender while lower-ranked general unsecured creditors did. The bankruptcy court approved the settlement and dismissed the chapter 11 case over the wage claimant’s objection and that ruling was upheld in the district court and the Third Circuit.

The Supreme Court granted certiorari to review the Third Circuit’s ruling in Jevic on whether bankruptcy courts can dismiss chapter 11 cases when property is distributed in a settlement that does not comply with priorities contained in Section 507 of the Bankruptcy Code. The Court’s granting of certiorari in this case was not surprising because there has been a long-standing split in the circuits on the issue of structured dismissals. In Jevic, the Third Circuit approved a structured dismissal, following the Second Circuit on this issue. In contrast, the Fifth Circuit barred structured dismissals in a 1984 decision.

The Solicitor General recommended that the Supreme Court review and reverse the Third Circuit, arguing 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” and that “nothing in the Code authorizes a court to approve a disposition that is essentially a substitute for a plan but does not comply with the priority scheme set forth in Section 507.”

Insider Claims:

On October 3, the first day of the new term, the Supreme Court invited the Acting Solicitor General to file a brief expressing the views of the United States on U.S. Bank NA v. The Village at Lakeridge LLC, which usually indicates a higher probability that the Court will grant certiorari. In Lakeridge, the Ninth Circuit held that a person does not become a statutory insider solely by acquiring a claim from a statutory insider. This issue is important when insiders hold the only unsecured claims because insider claims are not counted for purposes of confirming a cram-down plan over the objection of secured creditors.

In Lakeridge, the corporate debtor had only two creditors: a bank with a $10 million secured claim and the debtor’s general partner, which had a $2.8 million unsecured claim. In order to confirm a plan over the bank’s objection the holder of the unsecured claim would have to vote to accept the plan. But because the general partner was an insider, its vote would not be counted. To solve the cram-down problem, the general partner sold its claim for $5,000 to a close friend of one of the owners of the general partner and the plan called for $30,000 distribution on the unsecured claim. The bankruptcy judge ruled that although the buyer was not itself a statutory insider, it became an insider upon purchasing the claim. On appeal, the Bankruptcy Appellate Panel (“BAP”) agreed that the purchaser was not a statutory insider but reversed the bankruptcy court’s ruling that the purchaser became an insider by purchasing the insider claim. On further appeal, the Ninth Circuit upheld the BAP’s decision, although one judge filed a dissenting opinion on whether the purchaser was, in fact, a non-statutory insider based on the circumstances surrounding its claim purchase.

In the principal holding of the Ninth Circuit’s opinion, the majority in the Ninth Circuit agreed that a person does not become a statutory insider solely by acquiring a claim in good faith from a statutory insider. The opinion noted that the Code distinguishes between the status of a claim and the status of a creditor and that insider status pertains only to the claimant and not the claim. Therefore, the Ninth Circuit stated that status as an insider entails a factual inquiry to be conducted on a case-by-case basis and that to become an insider, a claim buyer must have a close relationship with the debtor and negotiate the relevant transaction at less than arm’s length. The bankruptcy judge had previously determined that the buyer was not an insider based on his conduct and relationship with the debtor and a majority of the Ninth Circuit panel did not find that conclusion to be clearly erroneous. It therefore affirmed the appellate panel.

The dissenting judge agreed that insider status depends on the circumstances of the case but believed that there were enough facts in this case about the relationship between the insider and the purchaser and the purchaser’s rationale for buying the claim to conclude that the purchaser should be treated as a non-statutory insider. 

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.

© Blank Rome LLP | Attorney Advertising

Written by:

Blank Rome LLP

Blank Rome LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.