Structured Dismissal or Not?
Views from the Bench was moderated once more by Mark Indelicato,
partner at Hahn & Hessen, the summit’s master sponsor. The bankruptcy court panelists were Judge Jean FitzSimon of the Eastern
District of Pennsylvania, Judge Rosemary Gambardella of the District
of New Jersey, Judge Kevin Gross of the District of Delaware and Judge
Kaplan of the District of New Jersey. The bankruptcy attorneys on
the panel included Sean Beach, partner at Young Conaway Stargatt &
Taylor; Mark Minuti, partner at Saul Ewing and Andrew Silfen, partner
at Arent Fox.
One of the topics focused on by the panelists included the March 23
Supreme Court decision regarding structured dismissals in Czyzewski
v. Jevic Holding.
Jevic was a New Jersey trucking company that filed Chapter 11
following a failed leveraged buyout. Its secured lender, CIT Group,
held a lien on virtually all of its assets, which were worth far less than
the amount owed on the loan. The unemployed drivers filed WARN
Act claims for unpaid wages against Jevic and Sun Capital, its private
equity sponsor. Sun also held a portion of the secured debt. An official
committee of unsecured creditors was appointed, which commenced
fraudulent conveyance and equitable subordination litigation against
CIT and Sun.
Three years later, all of the assets had been sold off and the
proceeds distributed to the secured lenders. In addition, the WARN
Act claimants had received a judgment in the bankruptcy court in
excess of $12 million, a substantial portion of which was entitled to
priority status under the Bankruptcy Code. Nothing remained of the
Jevic bankruptcy estate except $1.7 million in cash (which was subject
to the secured lenders’ lien) and the litigation claims against CIT and Sun. The case was effectively
at an impasse. A plan could not be confirmed, because there were insufficient funds to pay admin-
istrative and priority claims of the Chapter 11 case in full. The only other means available under
the Bankruptcy Code to resolve a Chapter 11 case are either a conversion to liquidation under
Chapter 7 or a dismissal of the case. Neither approach would provide for professional fees to be
paid quickly, and no recovery would have been received by any creditors other than CIT or Sun.
The parties (except WARN claimants) found a creative way to end the stalemate. The case
was dismissed, but a “structured dismissal” incorporated a settlement among Jevic, CIT, Sun and
the creditors’ committee. Under the Jevic structured dismissal, CIT and Sun agreed, in exchange
for a release of the litigation, to allow the $1.7 million in cash remaining in the estate and subject
to Sun’s lien plus another $2 million they contributed to the plan to be used to pay administrative
expenses and to provide a small distribution for general unsecured creditors.
The WARN Act claimants, however, were not part of the settlement. Since they refused to
release their WARN Act litigation against Sun, they received nothing, even though their claims
for unpaid wages against the Jevic bankruptcy estate were entitled to priority treatment ahead
of general unsecured claims. The bankruptcy court nevertheless approved the settlement and
the structured dismissal, finding there was “no realistic prospect” of a recovery to any parties
other than CIT and Sun in any event. The U.S. Court of Appeals for the 3rd Circuit affirmed. The
Supreme Court reversed the decision finding that a structured dismissal could not be used to alter
the priority scheme set forth in the Bankruptcy Code for distribution to creditors.
The group debated the merits of the decision. While Sifen contended that structured
dismissals are a valuable tool that can be used in Chapter 11, Judge Gambardella acknowledged
that it is a valid tool only if used early in the process, but it cannot be used to dismiss whole
classes of creditors without their consent. All parties acknowledged that the Supreme Court tried
to draft a very narrow holding, but the ultimate impact of Jevic on structured dismissals in general
and gifting plan remains in flux subject to further direction from the courts in light of Jevic. abfj
NADINE BONNER is editor of ABF Journal.
Top: Mark S. Indelicato, Esq., partner at Hahn & Hessen,
presided over a spirited debate about structured dismissal
during the Views from the Bench session.
Bottom:Judges Michael B. Kaplan (left) and Rosemary
Gambardella (right) share thoughts during a panel.