Client Alerts

Supreme Court Dismisses Structured Dismissals

Client Alerts | March 24, 2017

A recent decision by the United States Supreme Court, Czyzewski v. Jevic Holding Corp., curtails the controversial practice of concluding chapter 11 cases with “structured dismissals”. The decision narrows the range of options available to parties attempting to craft settlements resolving chapter 11 cases, and could increase the leverage available to holdouts.


In 2008 Jevic filed a chapter 11 petition. One of the major issues in the case was the contention by the unsecured creditors committee that the 2006 leveraged buyout in which Sun Capital Partners acquired Jevic was a fraudulent conveyance. A settlement was negotiated among Sun, CIT (Sun’s lender), Jevic and the creditors committee that provided cash to pay the expenses of the committee’s counsel, a fund to partially pay the claims of unsecured creditors, and releases for Sun and CIT. The settlement did not provide any cash to a group of former Jevic employees who asserted priority employment claims.

The settling parties recognized that if they had proposed a plan of reorganization to effectuate the settlement they would have had to deal with the former employees, because a plan of reorganization cannot be confirmed unless priority claimants are paid in full (or consent to lesser treatment). So instead they proposed that the bankruptcy court enter an order that simultaneously (1) dismissed the chapter 11 case and (2) approved and effectuated the elements of the settlement among the parties (a structured dismissal). The bankruptcy court entered a structured dismissal order, and was affirmed by the district court and the Third Circuit Court of Appeals.

Structured dismissals, while rare, have become increasingly popular in recent years. The statutory predicates are Bankruptcy Code sections 1112(b) (which provides for dismissal of a chapter 11 case, for cause) and 349(b) (which lists several consequences of a dismissal “unless the court, for cause, orders otherwise”). The argument accepted by the bankruptcy court and the district court was that the statutory grant of a power to order “otherwise” for cause gave discretion to the bankruptcy court to approve the structured settlement. The court of appeals affirmed on the basis that this was a “rare case” where a departure from the normal rules of priority was justified.

The Decision

The Supreme Court reversed by a vote of 6-2. It held that section 349(b) must be interpreted in the context of the entire Bankruptcy Code, including the priorities it accords to different kinds of claims. It determined that no provisions in the Bankruptcy Code provide specific support for the proposition that a structured dismissal could be a “backdoor means to achieve the exact kind of nonconsensual priority-violating final distributions that the Code prohibits in Chapter 7 liquidations and Chapter 11 plans.”

The Court rejected the circuit court’s theory that this was a “rare case” that justified an exception. It noted that the statutory language contained no “rare case” exception, and reasoned that such an exception created a slippery slope toward the creation of a general rule.

The Court specifically noted (and implicitly approved of) instances where bankruptcy courts approve of distributions that do not follow the priority rules, such as “first day” orders that permit payment of prepetition wages or “critical vendors”, or that permit “roll-ups” of pre-petition debt in connection with DIP financing. It distinguished such distributions as interim in nature, and predicated on court findings that creditors would ultimately achieve greater recoveries through temporary violations of payment priorities. In the context of a structured dismissal, by contrast, the approved violation of priorities was permanent, and there was no chance that the former employees would subsequently benefit from the settlement.

Looking forward

Looking to other cases, the Czyzewski decision will likely benefit those who hold priority claims, such as taxing authorities and employees. Parties such as these often do not have a seat at negotiations, and hence were vulnerable to the type of structured dismissal that was struck down by the decision.
Other potential beneficiaries are minority creditors whose claims are sufficiently large to constitute a blocking position with respect to confirmation of a plan of reorganization, and who therefore might have been vulnerable to a structured dismissal.

The decision does not discuss the controversial concept of “gifting,” where a senior creditor allows some property due it to be paid to a junior creditor or creditors in a plan of reorganization or in connection with a sale of property under section 363 of the Bankruptcy Code. The Czyzewski decision has elements that support each side of the gifting debate. Like structured dismissals, gifting has been criticized as being a vehicle for evading the priority rules. On the other hand, gifting that occurs in connection with a 363 sale may be supportable under the Czyzewski distinction protecting interim distributions.

The effect of the Supreme Court decision on the Czyzewski litigants is unclear. The settling parties insisted throughout the litigation that the only way their settlement could work was if no piece of the pie was reserved for the former employees, and that the alternative was litigation that would sap the debtor’s estate. The Court was skeptical of this self-serving conclusion, and now we will see what happens following remand.