On March 22, 2017, in a 6-2 decision, the United States Supreme Court reversed the Third Circuit and held that distributions made pursuant to a structured dismissal must follow the Bankruptcy Code’s priority rules unless the affected creditors consent. Czyzewski, et al. v. Jevic Holding Corp. et al., No. 15-649 (2017). Senior secured creditors of the Debtor, the Debtor and the creditors committee entered into a settlement agreement whereby, among other things, i) the chapter 11 case would be dismissed; ii) certain funds would be earmarked for payment of the committee’s legal fees and administrative expenses; and iii) one of the senior secured creditors would assign its lien on the Debtor’s remaining $1.7 million to a trust, which would pay taxes and administrative expenses and then distribute the remainder pro rata to low-priority general unsecured creditors. Id. at 7. A class of creditors who had a large mid-level priority wage claim would not receive anything under this structured dismissal of the Debtor’s case. Id. The Bankruptcy Court approved the settlement and structured dismissal in light of the “dire circumstances” facing the estate while acknowledging that the distribution did not follow ordinary priority rules. Id. at 8. The District Court and Third Circuit affirmed. Id. at 9.

The Supreme Court concluded that a bankruptcy court cannot approve a structured dismissal that provides for distributions that do not follow ordinary priority rules without the affected creditors’ consent. Id. at 11. It reasoned that the priority system of the Bankruptcy Code is a basic underpinning of business bankruptcy law and has long been considered fundamental to the Code’s operation. Id. at 11-12. The Court did not express any view regarding the legality of structured dismissals in general.

To read the Supreme Court’s opinion in its entirety, please click here.

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