A case currently pending before the U.S. Supreme Court could have a massive impact on the future of Chapter 11 bankruptcy law. In the case, the bankruptcy court approved a settlement that allowed some creditors with inferior claims to obtain a recovery, while other creditors with superior claims got nothing. According to a New York Times report, the high court’s ruling “could upend the common practice that ranks lenders, employees and other creditors in order of priority as they try to recover their money when a company files for bankruptcy.”
The case followed the demise of a New Jersey-based trucking company, Jevic Transportation Company. In 2006, a subsidiary of Sun Capital Group purchased Jevic in a leveraged buyout. The buyout was unsuccessful, and, two years later, Jevic filed for bankruptcy under Chapter 11. On the eve of its filing, it fired 90% of its employees, including 1,800 truck drivers.
The company had several legal problems to resolve. Its abrupt termination of the drivers without advance notice led them to file a court claim, asserting that the firings violated the Worker Adjustment and Retraining Notification (WARN) Act, and they were entitled to unpaid wages. Additionally, the drivers and several other unsecured creditors sued Jevic’s secured lender (which had financed the buyout) and Sun, arguing that the buyout fraudulently forced Jevic into bankruptcy.
Ultimately, Jevic dismissed its bankruptcy filing but did so in a way that incorporated a settlement among the debtor, its secured lender, Sun, and a committee of some of the unsecured creditors. Part of that settlement involved a release of claims the involved parties had in pending litigation matters.
The settlement, however, excluded the truck drivers, primarily because they refused to release their rights under their WARN Act claim. The drivers’ claims held priority over unsecured creditors, yet, through the settlement, it was the drivers who got nothing. The bankruptcy court approved the settlement, concluding that any other outcome would involve only the secured lender and Sun getting a recovery. The federal appeals court upheld this decision. That court concluded that, however flawed, the settlement that the bankruptcy court approved was the “least bad alternative.”
The case is now before the U.S. Supreme Court, where oral arguments were held in December. The U.S. Solicitor General filed a brief in the case on behalf of the truck drivers. The rule establishing priority in the payment of bankruptcy claims “is designed to protect intermediate creditors from being squeezed out by a deal between senior and junior creditors,” the Solicitor General argued. According to the Times report, a group of law professors also filed a brief supporting the truckers. One of the professors told the Times that one of the trade-offs involved in Chapter 11 protection is that the debtor must settle with all creditors, “not just the ones you want to deal with.”
The Supreme Court’s ruling in this case could have a profound impact on the landscape of creditor priority in Chapter 11 cases, as well as how much authority bankruptcy courts have in approving settlements that break with the order of priority. If your business is considering the possibility of Chapter 11 bankruptcy, you need knowledgeable counsel representing you. The experienced Florida bankruptcy attorneys at Stok Folk + Kon are on top of all of the evolving issues regarding creditor priority, settlements, and other aspects of Chapter 11 law.
Contact us online or by calling (954) 237-1777 to schedule your consultation.
More blog posts:
Exception to Automatic Stay Provision Allows Lawsuits to Proceed Despite Florida Medical Practice’s Chapter 11 Filing, Florida Business Lawyers Blog, Dec. 19, 2016
Creditors Hold Onto Priority Status in South Florida Homebuilder’s Chapter 11 Bankruptcy, Florida Business Lawyers Blog, July 20, 2016