Amicus Curiae Brief — Czyzewski v. Jevic Holding Corp., 136 S. Ct. 2541 (2016) (No. 15-649)

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No. 15-649 | OFIGE OF THE CLEP |

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In the Supreme Court of the nited States

CASIMIR CZYZEWSKI, ET AL., PETITIONERS

v.

JEVIC HOLDING CORP., ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

IAN HEATH GERSHENGORN

Acting Solicitor General

Couneel af Record

BENJAMIN C. MIZER

Principal Assistant

RAMONA I), ELLIOTT

Deputy Director/ SARAH E. HARRINGTON

( neral Counsel Assistant to tke Solicitor

General

MATTHEW SUTKO

Associate General Counsel MICHAEL 8S. RAAB

WENDY Cox = KAERSVANG

Trial Attorney tlorneys

Department of Justice Department of Justice

Evecutive Office Washi .C. 80680-0001

for United Statex Trustees rie, .gov

Washington, D.C. 20530 (202) 514-2217

QUESTION PRESENTED

Whether a bankruptcy court may authorize a dis-

tribution of settlement proceeds that violates the

priority scheme established by the Bankruptcy Code,

over the objection of priority creditors whose rights

are impaired by the proposed distribution.

(T)

TABLE OF CONTENTS

Page

| eee 1

IIT aaadaceeslmsetnuneanpennensinibiaiiiaieasennteaneisanisentiia 2

Summary Of arQUMe;t .........0:....0rccrcrccscsreessrsssenencorencsencnessrecsosees 12

APQUMENL.........00..crscrsccrsersssenssnsserersnsenensrerensssceseosasensssssessesssssenss 15

A. The courts below erred by approving a distri-

bution of estate assets in a manner not provided

for in the Bankruptcy Code ..............csccssesseneeeseeneees 16

B. The Code does not permit a bankruptcy court to

abrogate the rights of nonconsenting priority

claimholders based on the agreement of other

PI aces execxsseeszsocenseansnsonsensnesnocosenscasscssensnssesseceseneseeee 25

COI ccccnnsnensnseetenstanatestnensastninninnnenanenmnnmamnnsmenmeanten 33

TABLE OF AUTHORITIES

Cases:

AWECO, Inc., In re, 725 F.2d 293 (5th Cir.),

cert. denied, 469 U.S. 880 (1984) ..........cccceerseneereeneeenees 11

Andrus v. Glover Constr. Co., 446 U.S. 608 (1980) ............ 24

Bull v. United States, 295 U.S. 247 (1935) ..........ccccceeceecenees 20

Burlingham v. Crouse, 228 U.S. 459 (1913)........ccccceeeeees 16

Cybergenics Corp., In re, 226 F.3d 237 (3d Cir. 2000)....... 32

Hillman v. Maretta, 133 S. Ct. 1943 (2013) ...........cccceceees 24

Iridium Operating LLC, In re, 478 F.3d 452 (2d Cir.

St cnssiicniniecsrsieieceniinenasisintntsenianinbenidininmeensisasivehendhidansionieine 10, 11

Kuehner v. Irving Trust Co., 299 U.S. 446 (1987).........000 19

Law v. Siegel, 134 S. Ct. 1188 (2014) .........cccccccccseeeeneeneenens 25

Martin v. Wilks, 490 U.S. 755 (1989).........ccccccsereeerseneeneenes 28

Northwest Bank Worthington v. Ahlers, 485 U.S. 197

GI icnneinsnnicsnntinsensntnemnesvmnigmammnetasiansgenmemenniamndinanenann 21

PWS Holding Corp., In re, 303 F.3d 308 (3d Cir.

2002), cert. denied, 538 U.S. 924 (2008) ...........c.ccceceeceeeees 32

(IIT)

Cases—Continued: Page

Pepper v. Litton, 308 U.S. 295 (1989) ..........ccccceeeseeeeeeseeeeeee 15

Protective Comm. for Indep. Stockholders of TMT

Trailer Ferry, Inc. v. Anderson, 390 U.S. 414

Fie nasiinaindesicterenemenciatsitagaiiedetannanteaiabininnmuanniapinamnnecets 4, 28

RadLAX Gateway Hotel, LLC v. Amalgamated

I, a icecciinsintstenieneniecremnnsstes 24

l/nited States v. Bryan & Woodcock, 13 U.S.

a iiahaiahinsaicenicieretenneneniotiinntbiesictmriniinceicesines 18

l/nited States v. Embassy Rest., Inc., 359 U.S. 29

ee irnitsenrcsnininienetinbianinssaniiganinecniniiidiasinitpmbnicnesiness 19, 20

United States v. Noland, 517 U.S. 535 (1996) ..............0.0+. 21

Young v. United States, 535 U.S. 43 (2002) ..........c.cccccceeees 15

Statutes and rule:

Act of Aug. 19, 1841, ch. 9, § 5, 5 Stat. 445 00. 19

Bankruptcy Act, ch. 541, 30 Stat. 5440000. cceeeeesees 25

Bankruptcy Code, 11 U.S.C. 101 ef seq. ............ccccccsecseeeeeeeees l

Ch. 1,11 U.S.C. 101 et seq.:

Oe a I Ncchicasihiicicigennnnsinnicecenesians 3, 13, 18, 24, 26

Ch. 3, 11 U.S.C. 301 et seq.:

Be NE aieiecssisdiinidonernrsiinisilatontibinniatsamainiaiaimnesaniastebioian 1

IN i ssa siarciesiaertpeadiistvesinnenecuiieanatnedinadiied 5, 23

ia secicnecccanicettintcisesantsenibitinestitaiiinela 5, 23

Fe TT iciintntirscensseninsabebaneinetninenpiniintiossisin 5

Be EE ideiitciseneniaicessennninvienintnenseneconsesinnaiiait 5

OO Fae eeliteiinnitaitncintnvesntnieniennaesctenpiedmuiciati 16

CO. ye i ee ND crrccensctansenssnsssrsnceemenzenenens 13, 26

Be PD iteidiastetcrenesainsieniscessinnmvesiintnstant 2

a ee diailiaiinibataiateatlinnnectanetninainenntectieniiis passim

a I ii iatiiesitdinciastecttarnanincsinemntiannisainiagias 18

Be PR as IE Prcctenictricnitenerncensisntntemnctnencinneieiasinuipe 21

Vv

Statutes and rule—Continued: Page

a ecscinininininteaeeiainieiatins 2, 21

Oe aia ccrticirncuinnictteliinadinianenncsntiniaiial 3, 6

Be I aiinsacitiiniscicninsnttniinmenpcenintnepinensii 3, 21

Oe a errsiniapiennchisinenatetaiitennsanadenieaiaiia 2

ini ccsinccitid cts dialaeaitineniiiiaiil 2

Be I ili oes sa daentianiibienictaeintandamdeenatatie’ 24

EE SN Seer ee ae Se 21

ESSE ee ere emer 5. 5

Bee I iciceiinceincnnctinscininipeitiaichsannisedianas 5, 28

Be I insist sicsidiciatsiiasennieniectibdatalniianencidanll 4, 32

ee ITT cetinriesiensessecsininisinsinnsnsiindenndivisdeniaitenstatenticnitvaaiee 7

ee itiatnidnninieihettninienicteainienmindiiaiaial 7

Be a caida biereciiveniteseninicmnintcsnsinnentasectinsemneniinii 4, 32

Cy Ho ee re le Oe IO sciccnceticnsessensevescermecnsions passim

ee I ceili ietccceninnsisecirsaniclintcincsnceciicttinedl 22, 24

ee irises rntcettiaiatitetines hiatal 4

ee ee I ino hirientnapanienmpenannoieanniuels 4

is ee ee es I Oe ID prcescrccrtnctnsinescicinesicn passim

Sa emuiemadeivanemaneadined 4

Se DT i cater cnicnicensnseniibeiebesninliniasiienenialensiaa 4, 32

Be ns TE tctethihiciiinsnatessihesninsecotnaneiencaineninibainietaiiiniainns 5

es eines seceriiencinesnineenipiiniasinionnveinieniteniie 17

Sp II PIII. ori ectpiesleenirccinliteiesnndenipeiioniianieniainniiil 3

ee I SI ersiscnlaciciinirinstanthatentnaanaieniaieabesaiiaiaiinien 21

i Se tia ctintaknneneciccmicinicaiaiiiantiniasiiieeneitalidion 3

Oe I iiiininimniscgnisieniannniiimnisiameiiiiion 23

Ry Sinha sichicrsesininceenaiciepinilehenntinestinnaiaslainenibicitis 30

ee iitiniicirecinrtinininittingsiiccitalsnnnetasiaiaa 16, 22

EE a eee ee passim

11 U.S.C. 11ZBfaKBMA)AD) ..........0cecsoerserecesererseseseeees 5

VI

Statutes and rule—Continued: Page

BERET ee a 21, 22

SE eee awn 16, 21

oy Ee nan a a: 22

accession 3

ERS TARE per es mee MOSEL or 16

Ch. 12, 11 U.S.C. 1201 et seq.:

Be es I Ie retin iciciinensccenednepienenmncenicnni 24

Ch. 13, 11 U.S.C. 1301 et seq.:

fA EME SRE se meena rence 24

SE REE ES alese op eane ee oer cs EO Meee Ear 1

gy EER ESA AS OD 6

N.J. Stat. Ann. § 34:21-2 (West 2011) ...........:cccccccceecssseeseeeees 6

Fed. R. Bankr. P. 9019, 11 U.S.C. App. at 757... 4, 11, 27, 28

Miscellaneous:

James M. Henderson, 6 A Treatise on the

Bankruptcy Law of the United States

na TTETrhasiciacnsieibibovhabsniidachisediabelntaiusicenntencstmeneniiintiesticiais 24

H.R. Rep. No. 595, 95th Cong., Ist Sess.

EE a oe 1, 20, 21, 30

H.R. Rep. No. 996, 102d Cong., 2d Sess. (1992) ..... 15, 17, 18

H.R. Rep. No. 835, 103d Cong., 2d Sess. (1994) ........... 17, 18

Patrick A. Murphy et al., Creditors’ Rights in

sR crrrniscrecesenstnscnenasinincsénsssescenssmessaces 32

Alan N. Resnik & Henry J. Sommer, Collier on

Bankruptcy (16th ed. 2016):

STi acootsadidsitipiaondinchadlanidevsicbendinesmatninsiiuneisiaeaiensimeeitine 5

RE SEAS a WL PN Ie, one ee Sen oe ele SPOR eee ne 19, 20

TaUUIE FF Sesisiiiiesidesiilaicleinitincbicetiinnianidicneiiaananneisicinianinicsdianttinianinibins 3

Vil

Miscellaneous—Continued: Page

George M. Treister et al., Fundamentals of

Bankruptcy Law (5th ed. 2004) .........cccccecseeenceees 21, 27, 30

U.S. Dep’t of Justice, [/nited States Trustee

Program Strategic Plan FY 2012-2016,

https://www.justice.gov/ust/strategic-

plan-mission (last visited Sept. 1, 2016)................-cc0.00000 2

In the Supreme Court of the Anited States

No. 15-649

CASIMIR CZYZEWSKI, ET AL., PETITIONERS

v.

JEVIC HOLDING CORP., ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

INTEREST OF THE UNITED STATES

This case presents the question whether a bank-

ruptey court may authorize a distribution of settle-

ment proceeds in a manner that violates the priority

scheme established in the Bankruptcy Code, 11 U.S.C.

101 et seq., over the objection of priority creditors whose

rights are impaired by the proposed distribution.

That is an issue of substantial importance to the Unit-

ed States. The Attorney General appoints United

States Trustees to supervise the administration of

bankruptcy cases and trustees throughout the coun-

try. 28 U.S.C. 581-589a. United States Trustees “serve

as bankruptcy watch-dogs to prevent fraud, dishones-

ty, and overreaching in the bankruptcy arena,” H.R.

Rep. No. 595, 95th Cong., Ist Sess. 88 (1977) (1977

Report), and they “may raise and may appear and be

heard on any issue in any case or proceeding under”

Title 11, 11 U.S.C. 307. The United States Trustee Pro-

(1)

2

gram thus acts in the public interest “to promote the

integrity and efficiency of the bankruptcy system for

the benefit of all stakeholders—debtors, creditors,

and the public.” U.S. Dep’t of Justice, United States

Trustee Program Strategic Plan FY 2012-2016, at 1,

https://www.justice.gov/ust/strategic-plan-mission (last

visited Sept. 1, 2016).

The United States is also the largest creditor in the

Nation, frequently appearing as creditor in Chapter

ll eases. Certain tax claims, which by their nature

involve debts owed to governmental units, have priori-

ty status in bankruptcy. 11 U.S.C. 503(b)(1)(B), 507(a)(2)

and (8). In addition, several government agencies, in-

cluding the Federal Deposit Insurance Corporation

and the National Credit Union Administration, are

entitled to assert priority claims in certain circum-

stances. See 11 U.S.C. 507(a)(2) and (9). Because a

bankruptcy estate’s assets are typically searce, the

United States has an interest in preventing bankrupt-

ey courts from authorizing the distribution of estate

assets in a manner that violates the rights of non-

consenting priority creditors.

At the Court’s invitation, the U nited States filed a

brief as amicus curiae at the petition stage of this

case.

STATEMENT

1. A company may file a bankruptcy petition

pursuant to Chapter 7 or Chapter 11 of the Bankrupt-

cy Code. In a Chapter 7 bankruptcy, the company’s

pre-petition assets are liquidated and distributed to

creditors. 11 U.S.C. 701 et seq. A Chapter 11 bank-

ruptey, in contrast, is implemented through a “plan”

that assigns to “classes” the various allowed claims

and specifies the treatment each class of claims shall

3

receive, in exchange for a discharge of debts to the

extent provided by the Code. 11 U.S.C. 1122, 1123,

1141.

In a Chapter 11 plan, each secured creditor typical-

ly is designated as a class unto itself. See Alan N.

Resnik & Henry J. Sommer, 7 Collier on Bankruptcy

1 1122.03(3][c], at 1122-15 to 1122-16 (16th ed. 2016)

(Collier). Among unsecured claims, the Code assigns

“priority” to certain claims because of their “special

social importance.” S. Rep. No. 1106, 95th Cong., 2d

Sess. 4 (1978) (1978 Report). Section 507-—which ap-

plies to bankruptcies filed under Chapters 7 and 11, see

11 U.S.C. 103(a)—identifies claims entitled to priority

and specifies the order in which they must be paid. 11

U.S.C. 507. Unsecured claims with priority include

certain administrative expenses incurred during the

bankruptcy proceeding; employee wages and benefits

that were earned but not paid in the six months before

the bankruptcy petition was filed; consumer deposits;

and taxes. /bid.

Under Section 507, wage claims have fourth priori-

ty, and contributions to employee benefit plans have

fifth priority. 11 U.S.C. 507(a)(4) and (5). A bank-

ruptcy court generally may confirm a proposed Chap-

ter 11 plan only if each holder of a priority claim un-

der Section 507 receives cash or deferred cash pay-

ments (depending on the circumstances) equal to the

value of the claim as of the effective date of the plan,

unless a particular claimholder “agree(s] to a different

treatment of [its] claim.” 11 U.S.C. 1129(a)(9). In

addition to requiring that priority claimants be paid in

full (unless they consent to different treatment), the

Code establishes further prerequisites to plan confir-

mation with respect to non-priority unsecured credi-

4

tors. But full payment of Section 507 priority claims

is a mandatory precondition of plan confirmation re-

gardiess of how other unsecured creditors may be

treated under a plan. In a Chapter 7 liquidation, un-

secured creditors with Section 507 priority claims are

paid “in the order specified” in Section 507, 11 U.S.C.

726(a)(1), and other unsecured claimants may not

receive any payments unless the priority claims are

paid in full, 11 U.S.C. 726(a)(2).

While a bankruptcy case is pending, any legal

claims the estate has against its creditors and others

may be litigated or settled, usually by the debtor in

possession or a trustee. During the pendency of a

bankruptcy, a claim by a creditor that a debtor’s as-

sets were depleted by a fraudulent conveyance be-

comes a claim of the estate and is assigned to the

trustee to pursue on behalf of the estate. 11 U.S.C.

544(b); see 11 U.S.C. 548(a) (trustee has exclusive

right to pursue fraudulent-conveyance action in bank-

ruptey). In a Chapter 11 bankruptcy, such a claim

(and others) may be pursued by a debtor in posses-

sion, who generally has the rights of a trustee.

11 U.S.C. 1107. In some circumstances, a bankruptcy

court may authorize a committee of creditors to pur-

sue claims on behalf of the estate. 11 U.S.C. 1103. A

bankruptcy court may approve settlement of an estate

claim if, after notice and a hearing, the court deter-

mines that the settlement is fair and equitable. Fed.

R. Bankr. P. 9019, 11 U.S.C. App. at 757; see Protec-

tive Comm. for Indep. Stockholders of TMT Trailer

Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968). Any

proceeds from the litigation or settlement of the es-

tate’s claims hecome estate property subject to distri-

5

bution under the normal rules of priority. 11 U.S.C.

541(a)(3) and (6).

If the estate of a Chapter 11 debtor lacks sufficient

funds to pay the priority claimholders in full in ac-

cordance with Section 1129(a)(9)(A)-(D) (typically in

cash or deferred payments), and the priority claim-

ants do not agree to different treatment under a plan,

the case can either be converted to a Chapter 7 liqui-

dation or dismissed. 11 U.S.C. 1112. An order of

dismissal in a bankruptcy case ordinarily has the

effect of vacating most orders entered during the

proceedings and “revest{ing] the property of the es-

tate in the entity in which such property was vested

immediately before the commencement of the case”

(usually the debtor). 11 U.S.C. 349(b)(3); see 11

U.S.C. 349(b)(2). The “objective” of a dismissal “is to

undo the title 11 case, insofar as is practicable, and to

restore all property rights to the position they occu-

pied at the beginning of such case.” 3 Collier 9 349.01[2],

at 349-3. The bankruptcy court has discretion to alter

the effects of its dismissal “for cause,” 11 U.S.C. 349,

such as by leaving its orders in force to protect the

reliance interest of a good-faith purchaser, 3 Collier

1 349.01[2], at 349-3. Otherwise, if a Chapter 11 case

is dismissed, creditors retain their pre-petition claims

against the debtor (and any related fraudulent-

conveyance claims they previously had against third

parties) and can pursue them outside bankruptcy. 11

U.S.C. 349(b).

2. This case arises out of the bankruptcy of re-

spondent Jevic Transportation, Inc. (Jevic), a trucking

company, following its acquisition by respondent Sun

Capital Partners (Sun) in a leveraged buyout. Pet.

App. 2a. Sun financed the transaction by borrowing

6

against Jevic’s assets. C.A. App. 733-734 (September

15, 2011, bankruptcy court opinion). When Jevic sub-

sequently refinanced the loan, respondent CIT

Group/Business Credit, Inc. (CIT) became the prima-

ry lender and obtained a lien on all of Jevic’s assets.

Pet. App. 36a; C.A. App. 734. In response to Jevic’s

deteriorating financial condition, Sun agreed to guar-

antee $2 million of Jevic’s debt in exchange for CIT’s

agreement not to foreclose on Jevic’s assets for a

period of time. Pet. App. 2a; C.A. App. 735, 1162.

Shortly before that agreement expired, Jevic’s board

of directors authorized a bankruptcy filing. Pet. App.

2a. Jevic then ceased substantially all of its opera-

tions, notified its employees that they would be fired,

and filed a Chapter 11 bankruptcy petition. /d. at 2a-

3a. When that petition was filed, Jevic owed approxi-

mately $53 million to CIT and Sun, who were first-

priority secured creditors. /d. at 3a, 36a n.2.

As relevant here, two suits were filed in the bank-

ruptey court, one seeking to establish the estate's

liabilities and the other asserting claims of the estate.

First, petitioners—a group of Jevic’s employee truck

drivers—alleged violations of state and federal laws

known as Worker Adjustment and Retraining Notifi-

cation (WARN) Acts, which require in some circum-

stances that an employer give written notice to em-

ployees at least 60 days before laying them off. Pet.

App. 3a (citing 29 U.S.C. 2102; and N.J. Stat. Ann.

§ 34:21-2 (West 2011)). The bankruptcy court grant-

ed summary judgment to petitioners on their claims

against Jevic. /d. at 5a & n.2. An estimated $8.3 mil-

lion dollars of petitioners’ WARN Act claim is a priori-

ty wage claim under 11 U.S.C. 507(a)(4). Pet. App. 6a.

7

Second, after an Official Committee of Unsecured

Creditors (Committee) was appointed to represent the

interests of Jevic’s unsecured creditors, the bank-

ruptcy court authorized the Committee to pursue a

fraudulent-conveyance action against Sun and CIT on

behalf of the estate. Pet. App. 3a. The Committee

alleged that Sun, with CIT’s assistance, had “acquired

Jevie with virtually none of its own money” and had

“hastened Jevic’s bankruptcy by saddling it with debts

that it couldn’t service.” /bid. (citation omitted). The

Committee’s complaint alleged, inter alia, that Sun’s

and CIT’s liens were avoidable and that certain assets

with significant value must be disgorged to the estate.

See C.A. App. 764-854.

The bankruptcy court ultimately denied in part and

granted in part Sun’s and CIT’s motion to dismiss the

fraudulent-conveyance action, concluding that the

Committee had adequately pleaded claims of fraudu-

lent transfer and preferential transfer under 11

U.S.C. 547 and 548. Pet. App. 3a-4a. The court ex-

plained that “[a]n overly leveraged buyout that leaves

the target company with unreasonably small capital—

where it is reasonably foreseeable that the target will

soon thereafter become insolvent—may provide the

requisite factual predicate for an avoidance action

grounded in fraudulent transfer law.” C.A. App. 751.

The court concluded that the Committee’s complaint

sufficiently alleged that CIT had played a critical role

in facilitating a series of transactions that recklessly

reduced Jevic’s equity, increased its debt, and shifted

the risk of loss to its other creditors. Pet. App. 4a.

The Committee, Jevic, CIT, and Sun then sought to

negotiate a settlement of the Committee’s fraudulent-

conveyance action. Pet. App. 4a. By that point, Jev-

8

ic’s only assets were the fraudulent-conveyance claim

against CIT and Sun, and $1.7 million in cash, which

was subject to Sun’s lien. /bid. The parties to the

negotiations ultimately reached an agreement that

would accomplish four things: (1) those parties would

exchange releases of their claims against each other,

and the bankruptcy court would dismiss the estate’s

fraudulent-conveyance action with prejudice; (2) CIT

would pay $2 million into an account earmarked to pay

Jevic’s and the Committee’s legal fees and other ad-

ministrative expenses, but not otherwise available for

distribution to creditors; (3) Sun would assign its lien

on Jevic’s remaining $1.7 million to a trust that would

pay tax and administrative creditors, with the remain-

der to be distributed on a pro rata basis to the general

unsecured creditors (but not to petitioners, who are

higher-priority creditors); and (4) Jevic’s Chapter 11

bankruptcy would be dismissed. /d. at 5a-6a. The

proposed settlement did not provide for any payment

to petitioners on their higher-priority WARN Act

claims, and it left Jevic with no assets to satisfy those

claims outside bankruptcy. /d. at 5a-7a.

3. The Committee, Jevic, CIT, and Sun moved in

the bankruptcy court for approval of the settlement.

See Pet. App. 53a. Petitioners and the United States

Trustee opposed that motion, on the grounds that the

proposed settlement would distribute estate assets to

creditors of lower priority than petitioners, in contra-

vention of the Bankruptcy Code’s priority scheme, and

that the Code does not contemplate or permit relief

other than a confirmed plan, a Chapter 7 liquidation,

or an outright dismissal. /d. at 7a, 53a, 57a.

In an oral ruling, the bankruptcy court granted the

motion to approve the settlement, which it described

9

as a “global resolution” reached by “certain of the

parties.” Pet. App. 55a; see id. at 53a-66a. The court

acknowledged that this type of resolution “is certainly

neither favored nor commonplace”; that “no express |

provision in the code” authorizes the “distribution and

dismissal contemplated by the settlement motion”;

and that “the proposed distributions are not in ac-

cordance with the” Code’s priority scheme. /d. at 57a,

58a. The court nevertheless approved the proposed

disposition, explaining that, “because this is not a

plan, and there is no prospect of a confirmable plan

being filed, the absolute priority rule is not a bar to

approval of this settlement.” /d. at 58a. Because CIT

and Jevic had liens on all of the estate’s assets, the

bankruptcy court determined that a disposition that

would make money available to the unsecured credi-

tors and some priority creditors was in the interest of

the creditors as a group. /d. at 58a, 61a.

The bankruptcy court stated that the fairness of

the proposed settlement depended in part on the like-

lihood that the Committee would ultimately prevail in

its fraudulent-transfer action if that suit were litigat-

ed to its conclusion. Pet. App. 59a-60a. The court

noted several “independent hurdles that the Commit-

tee would have to clear before it would actually see a

material recovery out of the litigation.” /d. at 60a.

The court also noted that the estate (unlike CIT and

Sun) had no available funds and would have a difficult

time retaining counsel to pursue the case, notwith-

standing the possibility of retaining contingency coun-

sel or a Chapter 7 Trustee to continue the litigation.

Id. at 61a. The bankruptcy court also concluded that

petitioners were not prejudiced by dismissal of the

case on those terms because petitioners’ collective

10

WARN Act “claim against the estate [was] presently,

effectively worthless given that the estate lack/ed]

available unencumbered funds to satisfy it if it were

allowed.” /bid.

4. The district court affirmed. Pet. App. 33a-43a.

While stating that “the settlement does not follow the

absolute priority rule,” the court held that this devia-

tion was “not a bar to the approval of the settlement

as [the settlement] is not a reorganization plan.” /d.

at 42a. The court also concluded that “the settlement

was in the best interest of the estate.” /d. at 4la.

5. The court of appeals affirmed. Pet. App. la-23a.

The court first held that a bankruptcy court has dis-

cretion to order a “structured dismissal” of a Chapter

11 bankruptcy, at least when there is “no prospect of a

confirmable plan” and conversion to Chapter 7 would

not be “worthwhile.” /d. at 15a; see id. at 12a-l5a.

The court further held that a bankruptcy court may

order such a “structured dismissal” even when the

“settlement|| * * * skip[s] a class of objecting credi-

tors in favor of more junior creditors.” /d. at 15a; see

id. at 15a-21a.

The court of appeals observed that the Second and

Fifth Circuits had rendered conflicting decisions re-

garding the propriety of such settlements. Pet. App.

17a-18a. It sided with the Second Circuit, which had

held that “the absolute priority rule ‘is not necessarily

implicated’ when ‘a settlement is presented for court

approval apart from a reorganization plan.’” /d. at

18a (quoting /n re /ridium Operating LLC, 478 F.3d

452, 463 (2d Cir. 2007) (Jridium)). The court of ap-

peals rejected the approach adopted by the Fifth

Circuit, which had held “that the ‘fair and equitable’

standard applies to settlements, and ‘fair and equita-

1]

ble’ means compliant with the priority system.” /d. at

17a (quoting Jn re AWECO, Inc., 725 F.2d 293, 298

(5th Cir.) (AWECO), cert. denied, 469 U.S. 880 (1984)).

Instead, the court followed the Second Circuit in hold-

ing that, although “‘complif[ance] with the Code’s

priority scheme must be the most important factor for

the bankruptcy court to consider when determining

whether a settlement is “fair and equitable” under

Rule 9019,’ * * * a noncompliant settlement could be

approved when ‘the remaining factors weigh heavily in

favor of approving a settlement.’” /d. at 18a (quoting

lridium, 478 F.3d at 464).

The court of appeals held that the settlement and

structured dismissal of Jevic’s bankruptcy case was

“the least bad alternative since there was ‘no prospect’

of a plan being confirmed and conversion to Chapter 7

would have resulted in the secured creditors taking all

that remained of the estate in ‘short order.’” Pet. App.

21a (quoting C.A. App. 32). While acknowledging that

“the exclusion of [petitioners] certainly lends an ele-

ment of unfairness,” the court considered the critical

question to be whether the settlement serves the

interests of the “estate and the creditors as a whole,”

not “one particular group of creditors.” /d. at 22a.

Judge Scirica dissented. Pet. App. 23a-32a. He

stated that “the bankruptcy court’s order undermined

the Code’s essential priority scheme.” /d. at 23a.

Although Judge Scirica would have followed the Sec-

ond Circuit in permitting settlements contrary to the

priority scheme in “extraordinary circumstances,” he

disagreed with the majority’s conclusion that “this

appeal presents an extraordinary case.” /d. at 24a.

He explained that it is “not unusual” for a debtor to

enter Chapter 11 bankruptcy proceedings with liens

12

on all of its assets and with the goal of liquidating. /d.

at 3la; see id. at 3la n.5 (citing study showing that

22% of surveyed companies entered Chapter 11 with

secured claims exceeding the value of the estate). He

further explained that, “to the extent that the only

alternative to the settlement was a Chapter 7 liquida-

tion, that reality was, at least in part, a product of [the

settling parties’] own making.” /d. at 25a.

SUMMARY OF ARGUMENT

A. The Bankruptcy Code establishes a detailed and

interconnected set of protections for debtors, credi-

tors, and the public. One integral feature of that

scheme, which reflects bankruptcy practice that long

predated the Code, is its identification of specific

types of claims that are entitled to priority of pay-

ment. See 11 U.S.C. 507. A Chapter 11 plan of reor-

ganization cannot be confirmed unless either claims

that have priority status under Section 507 are paid in

full or the holders of such claims consent to a different

treatment. Congress has long identified employee

wage claims as priority claims, and that treatment

reflects Congress’s judgment that payment of such

claims serves especially important public interests. A

bankruptcy court may not override that judgment

based on its perception that a different allocation of

estate assets would be fairer or more efficient.

If a bankruptcy estate lacks sufficient funds to pay

all Section 507 priority creditors in full, and the priori-

ty creditors do not consent to less favorable treat-

ment, the Code provides for conversion to Chapter 7

or dismissal of the bankruptcy case. If a case is con-

verted to Chapter 7, priority creditors must be paid

first, and in the order specified in Section 507, before

any other unsecured creditors can receive estate as-

13

sets. If a case is dismissed, creditors can pursue their

claims outside bankruptcy, pursuant to applicable

non-bankruptcy state and federal law. Dismissal of

the present case would have left petitioners free to

pursue their WARN Act claims against Jevic, and to

attempt to make assets available to pay any favorable

judgment by pursuing a fraudulent-transfer claim

against Sun and CIT.

The court of appeals appeared to recognize that the

distribution of estate assets that occurred here, in

which petitioners received nothing even though non-

priority unsecured creditors received a portion of the

estate’s funds, would not have been permissible in a

Chapter 11 reorganization plan or in a Chapter 7 liq-

uidation. The court believed, however, that the con-

straints imposed by Section 507’s priority rules do not

apply to a distribution of estate assets that is under-

taken pursuant to a structured dismissal of a case

rather than pursuant to confirmation of a bankruptcy

plan. That was error. Chapter 5 of the Code (which

includes Section 507) applies to all “case[s] under,”

inter alia, Chapters 7 and 11, 11 U.S.C. 103(a), and

Jevic’s bankruptcy was a “case under” Chapter 11

even though it did not culminate in confirmation of a

plan. Nothing in the Code authorized the bankruptcy

court to use the expedient of case dismissal as a sub-

stitute for plan confirmation in order to distribute

estate assets in a manner inconsistent with Section

507’s priority scheme.

B. The court of appeals was also wrong in uphold-

ing the bankruptcy court’s distribution of estate as-

sets on the ground that the Code’s priority rules do

not apply to “settlements.” To be sure, by providing

that Section 507’s priority rules apply to Chapter 11

14

plans “[e]xcept to the extent that the holder of a par-

ticular claim has agreed to a different treatment of

such claim,” 11 U.S.C. 1129(a)(9), the Code does con-

template that a particular priority creditor can validly

consent to an impairment of the rights it would other-

wise possess. The court below, however, invoked the

purported “settlement” exception to the Code’s priori-

ty rules to justify the bankruptcy court’s impairment

of petitioners’ rights as priority creditors over their

objection, on the ground that the proposed distribu-

tion of estate assets would best serve “the creditors as

a whole.” Pet. App. 22a. Neither the Code itself, nor

the background rules that generally govern settle-

ment of litigation, suggest that the consent of other

parties to a bankruptcy can justify a deviation from

the Code’s priority scheme.

The bankruptcy court sought to justify its

disposition on the ground that petitioners’ WARN Act

claims were “worthless” as a practical matter because

the estate lacked unencumbered funds to pay a

judgment in petitioners’ favor. Pet. App. 6la. That

assessment of the practical value of petitioners’ claims

rested in turn on the court’s perception that the

estate's fraudulent-conveyance claim against Sun and

CIT was too contingent and uncertain to merit

pursuit. If the bankruptcy had simply been dismissed,

however, petitioners could have made their own deter-

mination whether to pursue a fraudulent-transfer

action that, if successful, would have made funds

available to satisfy a favorable WARN Act judgment.

Because one term of the bankruptcy court’s disposi-

tion was to dismiss the estate’s fraudulent-transfer

action with prejudice, that disposition effectively

prevented petitioners from recovering on _ their

15

WARN Act claims. The bankruptcy court’s disposi-

tion thus improperly deprived petitioners of their

priority rights and their fraudulent-conveyance claim

while giving them nothing in return.

ARGUMENT

The Bankruptcy Code prescribes a detailed scheme

for resolving claims against an insolvent debtor. That

scheme reflects Congress’s careful balancing of com-

peting interests and provides important protections

for both debtors and creditors. See H.R. Rep. No.

996, 102d Cong., 2d Sess. 12-13 (1992) (1992 Report).

The administration of a bankruptcy case is not a free-

for-all in which the bankruptcy court may dispose of

claims and distribute assets as it sees fit. Rather,

although bankruptcy courts “are courts of equity and

‘appl[y] the principles and rules of equity jurispru-

dence,’” Young v. United States, 535 U.S. 43, 50 (2002)

(brackets in original) (quoting Pepper v. Litton, 308

U.S. 295, 304 (1939)), their discretion is limited by the

detailed scheme set forth in the Code, which reflects

Congress's effort to strike a balance that is fair, equi-

table, and sufficiently flexible to accommodate the

interests of debtors, creditors, and the public.

In this case, the bankruptcy court ignored the care-

fully crafted options that Congress made available in a

Chapter 11 case and instead approved a distribution of

estate assets that contravenes the Code’s priority

scheme. The court of appeals offered two basic justi-

fications for approving that disposition. First, the

court of appeals relied on the fact that the bankruptcy

court had dismissed the case rather than confirming a

Chapter 11 plan of reorganization. Second, the court

viewed the Code’s priority rules as inapplicable to

bankruptcy “settlements.” Pet. App. 58a-6la. As we

16

explain below, neither of those rationales justifies the

bankruptcy court’s disposition of this case, which

deprived petitioners of their rights as priority credi-

tors without their consent.

A. The Courts Below Erred By Approving A Distribution

Of Estate Assets In A Manner Not Provided For In

The Bankruptcy Code

Under the rules set forth in the Bankruptcy Code,

both debtors and creditors lose certain rights they

would otherwise possess while receiving certain pro-

tections. In the Chapter 11 context, a corporate debt-

or gives up the right to control the distribution of its

assets, and a creditor gives up its state-law right to

seek full repayment on its claim. In exchange, a

Chapter 11 debtor enjoys protections such as the

automatic stay that generally freezes efforts to collect

pre-petition debts, 11 U.S.C. 362; and the discharge of

liability on debts that are addressed in a plan of reor-

ganization, 11 U.S.C. 1141(d); see Burlingham v.

Crouse, 228 U.S. 459, 473 (1913) (noting that the

Bankruptcy Code “give[s] the bankrupt a fresh start

with such * * * rights as the [bankruptcy] statute

left untouched”). A Chapter 11 creditor can rely on

protections such as the Code’s detailed priority

scheme, which requires that certain types of creditors

be paid in full through a bankruptcy before other

types of creditors may receive any distribution,

11 U.S.C. 507; and the rule that a plan of reorganiza-

tion may not pay a junior class of creditors or inter-

ests unless every senior class is either unimpaired or

consents to impairment, 11 U.S.C. 1129(a)(8) and

(b)(1). In this case, the lower courts held that a bank-

ruptcy court may upend this carefully balanced sys-

tern by approving the disposition of a case in a manner

17

that is not authorized by the Code and that does not

respect the protections Congress has extended to

particular types of creditors. The Bankruptcy Code

does not allow such a disposition.

The “uniform national bankruptcy system * * * is

designed to achieve two equally important objectives”:

“to provide honest debtors who have fallen on hard

times the opportunity for a fresh start in life,” and “to

protect creditors in general by preventing an insol-

vent debtor from selectively paying off the claims of

certain favored creditors at the expenve of others.”

1992 Report 12-13; H.R. Rep. No. 835, 103d Cong., 2d

Sess. 32-33 (1994) (1994 Report) (same). Recognizing

the “inevitable temptation among creditors to fiercely

compete over the debtor’s limited funds,” Congress

designed a system “in which the claims of all creditors

are considered fairly, in accordance with established

principles rather than on the basis of the inside influ-

ence or economic leverage of a particular creditor.”

1992 Report 13; see 1994 Report 33. In pursuit of

those goals, the Bankruptcy Code contemplates three

possible dispositions of a Chapter 11 case: a plan of

reorganization, conversion to a Chapter 7 bankruptcy,

or dismissal of the case. The bankruptcy court ex-

ceeded its authority when it ordered a fourth type of

disposition that does not comply with the Code provi-

sions applicable to any of the three dispositions con-

templated by the Code.

1. To achieve a fair and orderly disposition of cred-

itors’ claims in a Chapter 11 bankruptcy, Congress

created a set of rules to govern plans of reorganiza-

tion. 11 U.S.C. 1121-1129. One essential feature of

the statutory scheme is its identification of specific

types of claims that are entitled to priority of pay-

18

ment. The overarching principle of plan construction

(implemented in two steps) is that claimholders (or

classes of claimholders) with senior priority must

either be paid in full or consent to impairment before

a plan may provide for payment to claims or classes of

claims or interests that are junior.

a. In the bankruptcy context, the term “priority”

has long been used to refer to claims that are entitled

to be paid before other claims. See United States v.

Bryan & Woodcock, 13 U.S. (9 Cranch) 374, 387 (1815).

In Section 507 of the Code, 11 U.S.C. 507, Congress

granted “priority” status to a “narrow[] set of speci-

fied types of claims, including certain tax obligations

and limited past due wages to a debtor’s employees,”

by requiring that such claims “be paid in full” before

non-priority (or lower-priority) creditors receive “any

distribution.” 1992 Report 13; see 1994 Report 33;

1978 Report 4 (noting that the Code “givies] priority

in the distribution of assets of the debtor’s estate to

certain claims with special social importance”). Sec-

tion 507 applies to most bankruptcy proceedings,

including cases filed under Chapters 7 and 11, see 11

U.S.C. 103(a), and generally “affect[s] claims of unse-

cured creditors,” 1978 Report 4.

Section 507 provides that certain enumerated “ex-

penses and claims have priority inthe * * * order”

specified. 11 U.S.C. 507(a). Because that provision

“applf{ies) in a case under chapter 7, 11, 12, or 13,”

11 U.S.C. 103(a), it governs Jevic’s Chapter 11 bank-

ruptcy. In the Chapter 11 context, a plan of reorgani-

zation cannot be confirmed unless either claims that

are afforded priority status by operation of Section

507 are paid in full (with cash or deferred cash pay-

ments) or the holders of such claims consent to a dif-

19

ferent treatment. 11 U.S.C. 1129(a)(9). That re-

quirement applies regardless of how other claims are

treated in a reorganization plan.

Since the earliest American bankruptcy laws, Con-

gress has sought to achieve “the equitable distribution

of the debtor’s assets amongst his creditors.” Ku-

ehner v. Irving Trust Co., 299 U.S. 445, 451 (1937); see

United States v. Embassy Rest., Inc., 359 U.S. 29, 31

(1959) (same). Because many bankruptcy estates do

not have sufficient assets to pay all creditors in full,

the Code establishes rules for allocating the existing

assets among the holders of claims. If parity of

treatment were Congress’s only objective in drafting

the Code, Congress would have provided for a pro

rata distribution of assets among all creditors (or

perhaps among all unsecured creditors after secured

claims were satisfied). See 4 Collier 4 507.02[1], at

507-13. Instead, Congress has long chosen to prefer

certain types of claims over other types of claims.

The statutory provisions that assign priority to cer-

tain claims reflect Congress’s policy determination

that full payment of those claims, when possible, is in

the public interest. The type of priority claim at issue

here—employee wage claims—has enjoyed priority

status since at least 1841. See Embassy Rest., 359

U.S. at 31 & n.4 (citing Act of Aug. 19, 1841, ch. 9, § 5,

5 Stat. 445); 4 Collier 1 507.06[1], at 507-27 (“A priori-

ty for wages was included as part of the Bankruptcy

Act upon its original enactment in 1898 and has been a

feature of the bankruptcy law since that time.”). Con-

gress’s objective in establishing that priority “has

constantly been to enable employees displaced by

bankruptcy to secure, with some promptness, the

money directly due to them in back wages, and thus to

20

alleviate in some degree the hardship that unemploy-

ment usually brings to workers and their families.”

Embassy Rest., 359 U.S. at 32; see id. at 33 (“[T]he

purpose for which Congress established the priority

* * * was to provide the workman a ‘protective cush-

ion’ against the economic displacement caused by his

employer’s bankruptcy.”); 4 Collier 9 507.02{1][{d], at

507-14 (“Employees are viewed as having a special

right to payment since their labor has helped to create

the assets from which other creditors will be able to

realize value and because their wages are often their

only source of income. Creditors other than employ-

ees generally have not relied on the debtor as their

sole source of income.”).

Congress has similarly accorded priority status to

tax claims since the early days of the Nation’s bank-

ruptcy laws. 4 Collier 4 507.LH[1], at 507-92. “(T]axes

are the life-blood of government,” Bull v. United States,

295 U.S. 247, 259 (1935), and taxing entities (like em-

ployees, but unlike most Chapter 11 creditors) do not

extend credit voluntarily. Compare 1977 Report 190

(explaining that a “taxing authority is given preferred

treatment because it is an involuntary creditor of the

debtor”), with 4 Collier % 507.02[1][d], at 507-14

(“[E|mployees in waiting for their paychecks do not

consider themselves as extending credit to the debt-

or.”). Although this case does not present any ques-

tion concerning the proper treatment of tax claims,

such claims are frequently at issue in Chapter 11

bankruptcies.

By giving statutory priority to wage claims, tax

claims, and the other types of claims identified in

Section 507 (including, inter alia, domestic-support

obligations, administrative expenses, and contribu-

21

tions to employee benefit plans, 11 U.S.C. 507(a)(1),

(2), and (5)), Congress has expressed its judgment

that those claims have “special social importance.”

1978 Report 4. That judgment may not be overridden

by a bankruptcy court, at least absent the type of

misconduct, not present here, that would justify equi-

table subordination of a priority claim pursuant to

11 U.S.C. 510(c). See United States v. Noland, 517

U.S. 535, 540-543 (1996).

b. As noted, the full payment of claims entitled to

priority under Section 507 is a prerequisite to the

confirmation of any Chapter 11 plan, unless the holder

of a priority claim consents to less favorable treat-

ment. 11 U.S.C. 1129(a)(9). The general principle

that some claims must be paid before other claims

may receive any distribution is also reflected in the

rules that govern the treatment in a plan of classes of

other unsecured creditors (i.e., those with non-priority

claims). An unsecured claim that is not entitled to

priority under Section 507 must be assigned to a class,

either alone or with other “substantially similar”

claims. 11 U.S.C. 1122(a). Then, as a condition of

confirmation, a plan must conform to the “absolute

priority rule,” 1977 Report 413, by providing for the

distribution of estate assets such that a senior class of

claims must receive the value of its claims before any

junior class of claims or interests receives any distri-

bution. See 11 U.S.C. 1129(b). That condition is re-

flected in the requirement that any plan be “fair and

equitable,” 11 U.S.C. 1129(b)(1), a phrase that has

long been construed in the Chapter 11 context to re-

quire that a plan conform to the absolute priority rule.

See Northwest Bank Worthington v. Ahlers, 485 U.S.

197, 202 (1988); George M. Treister et al. Fundamen-

22

tals of Bankruptcy Law § 9.04(f)(1), at 423 (5th ed.

2004). As with Section 507 priority, parties to a bank-

ruptcy may depart from the absolute priority rule, but

only when the class of claimholders whose rights

would be impaired by a contemplated disposition of

assets consents to the impairment. 11 U.S.C.

1129(a)(8) and (b)(2)(B).'

2. If a bankruptcy estate lacks sufficient funds to

pay Section 507 priority creditors in full, and the pri-

ority creditors do not consent to less favorable treat-

ment, the Code provides for two other options: con-

version to Chapter 7 or dismissal. Both of those dis-

positions respect the relative rights of creditors, as

determined hy Congress and state legislatures.

Conversion of a Chapter 11 case to Chapter 7 typi-

cally takes place when an estate does not have suffi-

cient assets to pay all creditors who are entitled to

priority under Section 507. After conversion, the

rights of priority creditors are protected by Chapter

7's requirement that priority creditors must be paid

first and in the order specified in Section 507. 11

U.S.C. 726(a). That requirement ensures that a claim

with relatively lower priority within Section 507 can-

' In discussing the governing legal principles, the court below

referred repeatedly to the “absolute priority rule.” See Pet. App.

l6a-17a. As noted, the term “absolute priority rule” is most accu-

rately used to refer to the requirement in 11 U.S.C. 1129(b) that

junior classes of creditors may not be paid through a plan of reor-

ganization unless senior classes of creditors either receive the full

value of their allowed claims or consent to an impairment of their

rights. The court of appeals used the phrase to encompass the

additional rule that, unless they consent to less favorable treat-

ment, creditors with claims entitled to priority under Section 507

must he paid in full through a plan before any lower-priority (or

non-priority) creditor is paid.

23

not be paid unless all claimholders with higher priori-

ty have been fully paid.

In the alternative, a Chapter 11 case that does not

(or cannot) result in a confirmable plan of reorganiza-

tion (or liquidation, see 11 U.S.C. 1123(b)(4)) can be

dismissed. 11 U.S.C. 349. Such a dismissal leaves

creditors free to pursue their claims outside bank-

ruptcy, pursuant to applicable non-bankruptcy state

and federal law. 11 U.S.C. 349(b). When a bankrupt-

cy is dismissed, the requirements and protections

established by the Code no longer apply, and the par-

ties recover the rights that they lost during the pen-

dency of the bankruptcy case. If the bankruptcy court

had dismissed this case, petitioners would have been

free to pursue their WARN Act claims against Jevic

and a fraudulent-conveyance claim against Sun and

CIT. See pp. 31-32, infra.

3. The court of appeals held that a bankruptcy

court may dispose of a Chapter 11 case in a manner

that is not authorized by the Code and that violates

the priority scheme set forth in Section 507. The

court erred by approving a bankruptcy disposition

that furthered the interests of the debtor and non-

priority creditors at the expense of objecting priority

creditors.

The court below appeared to recognize that a plan

of reorganization must provide full payment to Section

507 priority creditors unless such creditors consent to

less favorable treatment. Pet. App. l6a-17a. The

court concluded, however, that the same principle

does not apply when the disposition of a bankruptcy

case does not involve a plan of reorganization or a

liquidation under Chapter 7. /d. at 17a. Nothing in

the Code supports that conclusion. On the contrary,

24

as noted, the Code specifies that Chapter 5 (which

includes Section 507) applies to all “case[s] under,”

inter alia, Chapters 7 and 11. 11 U.S.C. 103(a). Al-

though Jevic’s bankruptcy did not culminate in con-

firmation of a plan, it was a “case under” Chapter 11,

and any disposition of estate assets authorized by the

terms of its dismissal therefore was subject to the

priority scheme set forth in Section 507.

Although the priority scheme set forth in Section

507 is not inviolable, Congress has specified the cir-

cumstances in which a court may deviate from that

scheme, and none of those circumstances was present

here. See, e.g., 11 U.S.C. 726(a) (incorporating “equi-

table subordination” exception in 11 U.S.C. 510, which

permits a bankruptcy court to reorder particula:

priority claims in a Chapter 7 liquidation); 11 U.S.C.

1129%a)(9), 1222(a)(2)(B), 1322(a) (authorizing plan

confirmation when a priority creditor consents to

abrogation of its rights). “Where Congress explicitly

enumerates certain exceptions to a general prohibi-

tion, additional exceptions are not to be implied, in the

absence of evidence of a contrary legislative intent.”

Hillman v. Maretta, 133 S. Ct. 1943, 1953 (2013)

(quoting Andrus v. Glover Constr. Co., 446 U.S. 608,

616-617 (1980)). No such evidence exists here.

Congress could have created a system in which in-

dividual bankruptcy courts would apply principles of

fairness or equity to determine which Chapter 11

claims should be paid in full and which should be paid

in part or not at all. Congress did not do that. Con-

gress instead created a clear and detailed set of rules

to “standardize| | an expansive (and sometimes unruly)

area of law.” RadLAX Gateway Hotel, LLC v. Amal-

gamated Bank, 132 S. Ct. 2065, 2073 (2012); see James

25

M. Henderson, 6 A Treatise on the Bankruptcy Law

of the United States § 2778, at 343 (5th ed. 1952) (not-

ing, with respect to the pre-Code Bankruptcy Act,

ch. 541, 30 Stat. 544, that “[nJjo power exists in a court

of bankruptcy to accord priority of payment to a gen-

eral creditor on broad principles of equity jurispru-

dence”).

“(I}n exercising [its] statutory and inherent pow-

ers, a bankruptcy court may not contravene specific

statutory provisions.” Law v. Siegel, 134 S. Ct. 1188,

1194 (2014). The Code provides for three possible

dispositions of a Chapter 11 case: (1) a plan of reorgan-

ization; (2) conversion to Chapter 7; or (3) dismissal.

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. That is what the bankruptcy court did

here, and the court of appeals erred in affirming that

disposition.

B. The Code Does Not Permit A Bankruptcy Court To

Abrogate The Rights Of Nonconsenting Priority

Claimholders Based On The Agreement Of Other Par-

ties

In approving the bankruptcy court's disposition of

this case, the court of appeals also relied on the pur-

ported status of that disposition as a voluntary “set-

tlement.” See Pet. App. 17a-2la. That was error.

Although other parties to the case agreed to the bank-

ruptey court’s disposition, those parties had no au-

thority to settle petitioners’ own priority claims.

Their agreement consequently provided no sound

basis for the court to deviate from the Code’s priority

scheme at petitioners’ expense.

26

1. The court of appeals concluded that the Code’s

priority rules “do not extend * * * to settlements in

bankruptcy.” Pet. App. 20a. As noted, the Code spec-

ifies that Section 507 (which is included in Chapter 5)

applies to all “case[{s] under,” inter alia, Chapters 7

and 11. 11 U.S.C. 103(a). Despite the bankruptcy

court's conclusion that no confirmable plan of reorgan-

ization could be devised, the case remained a “case

under” Chapter 11 and was therefore subject to the

priority scheme set forth in Section 507.

Because Section 507’s priority rules apply to Chap-

ter 11 plans “[e}xcept to the extent that the holder of a

particular claim has agreed to a different treatment of

such claim,” 11 U.S.C. 1129(a)(9), a particular priority

creditor can validly consent to an impairment of the

rights it would otherwise possess. The court below,

however, invoked the purported “settlement” excep-

tion to the Code’s priority rules to justify the bank-

ruptcy court's impairment of petitioners’ rights as

priority creditors over their objection, on the ground

that the proposed distribution of estate assets would

best serve “the creditors as a whole.” Pet. App. 22a.

Neither the Code itself, nor the background rules that

generally govern settlement of litigation, support that

result. To the contrary, by authorizing “the holder of

a particular claim” to “agree{] to a different treatment

of such claim,” 11 U.S.C. 1129(a)(9), the Code rein-

forces the natural inference that other parties cannot

give valid consent to impairment of a priority credi-

tor’s rights.

The court of appeals believed that bankruptcy

courts should have “more flexibility in approving

settlements than in confirming plans of reorgan-

ization.” Pet. App. 20a. But the Code itself provides

27

the best evidence of the kind and degree of flexibility

that Congress deemed appropriate. A bankruptcy

court is permitted to approve a disposition of a case

that is not specifically provided for in the Code when

all of the parties whose rights would be impaired by

that disposition have consented. That degree of

flexibility did not exist under pre-Code versions of the

Bankruptcy Act. See Fundamentals of Bankruptcy

Law § 903(f)(1), at 423. But under the Code, plan rules

are flexible when creditors agree to impairment of

their rights, and “Chapter 11 is flexible enough to

accommodate whatever deal the parties with creditor

or equity interests in the debtor can work out among

themselves.” /d. § 9.03(b), at 387.

The court of appeals justified the bankruptcy

court’s disposition of the case by stating that no other

option “would have better served * * * the creditors

as a whole.” Pet. App. 22a. That reasoning was mis-

guided. In certain carefully calibrated respects, the

Code protects “creditors as a whole,” by allowing

parties to work out consensual compromises in craft-

ing a Chapter 11 plan, and by permitting majority-

rule approval of a plan within a class of impaired un-

secured creditors (who are not protected under Sec-

tion 507), even over the objection of a particular credi-

tor within the class. But the Code’s priority scheme

unambiguously gives some creditors a right to collect

that is superior to that of other creditors. That hier-

archical system cannot function in its intended man-

ner if individual judges feel free to disregard it based

on the perceived interests of “the creditors as a

whole.”

2. Bankruptcy Rule 9019 authorizes a bankruptcy

court to approve a “compromise or settlement.” Fed.

28

R. Bankr. P. 9019, 11 U.S.C. App. at 757. That rule

typically governs the settlement of a claim of the es-

tate against a third party (including a creditor). A

bankruptcy court may approve a settlement over the

objection of a creditor if the court determines that the

proposed settlement is “fair and equitable,” after

considering the nature of the claim and the likely

range of outcomes if the estate were to pursue the

claim to judgment. Protective Comm. for Indep.

Stockholders of TMT Trailer Ferry, Inc. v. Anderson,

390 U.S. 414, 424 (1968). If the bankruptcy court had

simply approved a compromise of the estate’s fraudu-

lent-transfer suit against Sun and CIT, while other-

wise administering the case in a manner consistent

with the Code’s priority scheme, petitioners’ status as

priority creditors would not have given them any

absolute right to veto that compromise.

The “settlement” that the courts below approved,

however, did not simply convert the _ estate’s

fraudulent-conveyance action to money that would

become part of the estate pursuant to 11 U.S.C.

541(a)(6). Rather, the agreement and order took the

further step of distributing those assets in a manner

inconsistent with Section 507. Even assuming that the

bankruptcy court could have approved that disposition

with the consent of all affected parties, it had no

authority to abrogate the rights of nonconsenting

creditors in a manner not provided for in the Code.

The consent of other parties who benefitted from the

proposed disposition is not a substitute for the consent

of the impaired party. Cf. Martin v. Wilks, 490 U.S.

755, 768 (1989) (“A voluntary settlement in the form of

a consent decree between one group of employees and

their employer cannot possibly ‘settle,’ voluntarily or

29

otherwise, the conflicting claims of another group of

employees who do not join in the agreement.”).

The court of appeals purported to limit its approval

of this type of disposition to cases in which a bank-

ruptcy court has “specific and credible grounds to

justify [the] deviation.” Pet. App. 21a (citation omit-

ted; brackets in original). But the grounds on which

the court relied—that “there was ‘no prospect’ of a

plan being confirmed and conversion to Chapter 7

would have resulted in the secured creditors taking all

that remained of the estate in ‘short order,’” ibid.

(citation omitted)—are not permissible reasons to

deviate from the Code’s priority scheme over the

objection of the impaired parties. If a plan cannot be

confirmed and conversion to Chapter 7 is not feasible,

the Code provides a third option: dismissal of the

bankruptcy.

The court of appeals is correct that, “[aJs in other

areas of the law, settlements are favored in bankrupt-

cy.” Pet. App. 19a. Both in bankruptcy and in other

legal settings, however, the legal rules that establish

parties’ rights and obligations provide the background

against which parties negotiate towards a settlement.

In this context, the priority scheme in Section 507

provides the default rule that will govern if the parties

fail to reach a global agreement. The public policy

favoring settlement of litigation may justify deviations

from the Code’s priority scheme when a priority credi-

tor consents to a diminution of its rights. But that

policy provides no basis for the disposition that oc-

curred here, in which the bankruptcy court approved

the distribution of estate assets in a manner incon-

sistent with the Code’s priority scheme without the

30

agreement of the creditors whose rights were im-

paired.

The related absolute priority rule under Section

1129 is designed to protect intermediate creditors

from being squeezed out by a deal between senior and

junior creditors. See 1977 Report 416 (explaining that

the absolute priority rule “is designed to prevent a

senior class from giving up consideration to a junior

class unless every intermediate class consents, is paid

in full, or is unimpaired”). Although the priority

scheme in Section 507 has the same goal, the bank-

ruptcy court in this case approved the very machina-

tion that the absolute priority rule is intended to pre-

vent, with secured creditors and junior unsecured

creditors taking all of the estate assets and leaving

unconsenting priority unsecured creditors with noth-

ing. If the bankruptcy court had enforced the Code’s

prohibition of that result, and had treated petitioners’

consent as a precondition for approval of any disposi-

tion that impaired their rights under the Code, the

parties might have reached a different global agree-

ment that gave those priority creditors a share of the

estate’s assets. Cf. Fundamentals of Bankruptcy

§ 9.04(f)(1), at 425 (“{T]he lurking presence of the

absolute priority rule influences the negotiating pro-

cess over the terms of a plan. Seniors are willing to

give up some limited reorganization value to juniors to

achieve a consensual plan so as to avoid the time,

expense, and risks that are involved in testing the

rule. Juniors are motivated to make only reasonable

demands because application of the absolute priority

rule may result in their receiving nothing under the

reorganization plan.”).

31

3. In justifying its disposition of the case, the

bankruptcy court relied on its own assessment of the

strength of the various claims at issue. The court

stated that petitioners would not be prejudiced by

approval of the settlement because petitioners’

WARN Act “claim against the estate is presently,

effectively worthless given that the estate lacks avail-

able unencumbered funds to satisfy it if it were al-

lowed.” Pet. App. 6la. The court’s view that petition-

ers’ WARN Act claims were “worthless” rested on its

belief that the estate’s fraudulent-conveyance claim

was toe contingent and uncertain to merit pursuit. /d.

at 60a-61la.

If the bankruptcy case had simply been dismissed,

petitioners could have pursued a fraudulent-conveyance

action against Sun and CIT on their own behalf as

creditors of Jevic. And if that action had been suc-

cessful, funds would have been available to satisfy

Jevic’s WARN Act obligations to petitioners. Of

course, if petitioners shared the bankruptcy court's

view that a fraudulent-conveyance action would have

no realistic prospect of success, and that their WARN

Act claims therefore were “effectively worthless,” Pet.

App. 6la, they might well have agreed to a global

settlement that provided them only a very modest

recovery. By approving a disposition of the case that

abrogated petitioners’ rights without their consent,

however, the bankruptcy court pretermitted the nego-

tiations that might have produced a truly global

agreement.’

9

* The bankruptcy court’s assessment that petitioners’ claims

were “effectively worthless” because the estate’s fraudulent-

conveyance action was unlikely to produce any actual recovery,

Pet. App. 61a, is difficult to square with the deal that was struck.

32

Within the bankruptcy case, Jevic (as debtor in

possession) had the exclusive right to pursue (on be-

half of all of its creditors) any claim that Jevic’s assets

had been depleted by 4 fraudulent conveyance.

11 U.S.C. 544(b) (assigning such claims to trustee);

11 U.S.C. 1107 (Chapter 11 debtor in possession has

rights of trustee); see 11 U.S.C. 548(a) (trustee has

exclusive right to pursue fraudulent-conveyance ac-

tion in bankruptcy); see also /n re Cybergenics Corp.,

996 F.3d 237, 241-245 (3d Cir. 2000); Patrick A. Mur-

phy et al., Creditors’ Rights in Bankruptcy § 13:5, at

469 (2d ed. 2014). The bankruptcy court initially au-

thorized the Committee to pursue that claim on the

estate’s behalf. When the court subsequently ap-

proved the purported settlement, the fraudulent-

conveyance claim against Sun and CIT (which be-

longed to Jevic’s creditors) was dismissed with preju-

dice, precluding petitioners from pursuing it outside

bankruptcy. See /n re PWS Holding Corp., 303 F.3d

308, 313-315 (3d Cir. 2002), cert. denied, 538 U.S. 924

(2003). The effect of the “settlement” thus was to

deprive petitioners, without their consent and without

complying with the Code’s priority scheme, of a poten-

tially valuable cause of action that they could have

asserted if the bankruptcy case had simply been dis-

missed.

Although Sun presumably would have exited a Chapter 7 conver-

sion with at least some of the $1.7 million that secured its assets,

Sun and CIT together agreed to give up a total of $3.7 million (by

paying $2 million to a fund for legal fees and administrative ex-

penses, and by giving up the $1.7 million that secured Sun's lien) in

exchange for a release from the fraudulent-conveyance claim (held

at the time by the estate on behalf of Jevie’s creditors). /d. at 5a.

33

xe * * &*

The Bankruptcy Code is a detailed scheme that re-

flects Congress’s determination of what constitutes a

fair bargain for debtors and creditors in bankruptcy.

And while the Code contemplates that creditors may

consent to an impairment of the rights they would

otherwise possess, petitioners did not give such con-

sent here. The bankruptcy court’s disposition of the

case was not authorized by any Code provision, it

contravened the Code’s priority scheme, and it was

entered over the objection of the priority creditors

whose rights were impaired. The bankruptcy court’s

view that this result served the best interests of “the

creditors as a whole” was a legally insufficient basis

for the order that it entered, which deprived petition-

ers of their priority rights and their fraudulent-

conveyance claim while giving them nothing in return.

CONCLUSION

The decision of the court of appeals should be

reversed.

Respectfully submitted.

IAN HEATH GERSHENGORN

Acting Solicitor General

BENJAMIN C. MIZER

Principal Deputy Assistant

RAMONA D. ELLIOTT

Attorney General

neral Counsel

Deputy Director/

ce

P. MATTHEW SUTKO

Associate General Counsel

WENDY Cox

Trial Attorney

Department of Justice

Erecutive Office

for United States Trustees

SEPTEMBER 2016

MALCOLM L. STEWART

Deputy Solicitor General

SARAH E. HARRINGTON

Assistant to the Solicitor

General

MICHAEL S. RAAB

DANA KAERSVANG

Attorneys