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

CASIMIR CZYZEWSKI, et al.,

Petitioners,

JEviC HOLDING CORP., et al.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF OF AMICI CURIAE PROVESSORS

JAGDEEP S. BHANDARI, SUSAN BLOCK-LIEB,

JESSICA GABEL CMO, LINDA E. COCO,

ROBERT D’AGOSTINO, IRINA J. POX; C. @COTT FRFYOR,

THERESA J. PULLEY RADWAN, NANCY . RAPOPORT,

MICHAEL SOUSA, AND LAUn A M. SPITZ

IN SUPPORT OF RESPONDENTS

Of Counsel:

JohN COLLEN

DIRECTOR, INSTITUTE FOR

BANKRUPTCY POLICY

ST. JOHN'S UNIVERSITY

SCHOOL OF LAW

October 17, 2016

RICHARD LEB

Counsel of Record |

RESEARCH PROFESSOR

OF L

St. JOHN'S UNIVERSITY

SCHOOL OF Law

8000 Utopta Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

lim@stjohns.edu

Attorney for Amici Curiae

Professors

— — — a ae

TABLE OF CONTENTS

PAGE

INTEREST OF AMICI CURIAE............. 1

PRELIMINARY STATEMENT. 2

SUMMARY OF ARGUMENT ................ 5

I. UNDER WELL-ESTABLISHED LAW,

INCURRING INJURY IS ESSENTIAL

TO RECOVER FOR VIOLATION OF

A RIGHT; SPECULATION DOES

“““ 9

A. Damages are awarded only if there

has been injury or prejudice........ 9

B. Petitioners suffered no injury from

approval of the settlement 10

C. Origin of the requirement

.““ 12

D. Injury continues to be required

across the law as a basis for

— GUND . K 13

1. Cee „ 14

3. (( ˙ ˙ ˙˙ 14

3. Tort and Contract LW 15

II. THE PRIORITY RULE IS NOT

ABSOLUTE AND MANY TYPES OF

DEPARTURES ARE RECOGNIZED ... 17

ii

The Absolute Priority Rule was

Not “Absolute” Even When it Was

r ES

Absolute Rules Invite Injustice ....

There Are Many Approved

Departures from the Priority

/ ] ʃ˙’Trl.L.̃ ³uv¹ůe

1. Substantive Consolidation is an

Accepted Departure From the

D .....

2. Critical Vendor Orders Are

an Accepted Departure from

D R ..

3. Cross-Collateralization is an

Accepted Departure From

e èIJ̃ m..

Settlements May Deviate from

ER TS BI Ra c..

1. This Court’s Decision in TMT

Trailer does not Prevent Any

and All Departures from the

Rule in Settlements.............

2. Iridium is a Well Reasoned Case

Allowing the Possibility that a

Settlement May Depart from

r ˙—˙ caus ky epaciecees se

(a) The priority rule is not a

per se ban under Iridium

PAGE

17

18

20

20

22

23

24

24

26

26

ill

PAGE

(b) A remand is the proper course

if the Court considers the

record to be inadequate.... 27

E. Congress Made Exceptions to

EEC 28

III. THE FINDINGS BELOW WERE BASED

ON A THOROUGH RECORD, HAVE

BEEN CONCEDED, AND WERE MORE

THAN SUFFICIENT TO APPROVE

J... sce vecccccceseccecses 29

IV. THE DEPARTURE FROM THE

PRIORITY RULE WAS APPROPRIATE

BECAUSE REJECTION OF THE

SETTLEMENT AND CONVERSION

TO CHAPTER 7 WOULD HAVE

HARMED THE ESTATE WITHOUT

HELPING PETITIONERS .............. 32

r sduccdscaddeswOrinadasdune 35

iv

TABLE OF AUTHORITIES

Cases PAGE(S)

In re Adams Apple,

829 F.2d 1484 (9th Cir. 1987) )7ꝓ2ʒ 24

Alabama Power Co. v. Ickes,

302 U.S. 464 (16 0̃m . 10

In re Augie / Restivo Baking Co., Lid.

860 F. 2d 515 (2d Cir. 1980ù))))) 20

In re Auto- Train Corp.. Inc.,

810 F. 2d 270 (D.C. Cir. 1987: 20, 21

Matter of AWE CO, Inc..

725 F. 2d 293 (5th Cir. 108000ù⸗)ghů h 27

In re B&W Enters., Inc.,

713 F. ad 534 (9th Cir. 198))))) 22

Bain Peanut Co. v. Pinson,

282 U.S. 499 (1930) 19

Brecht v. Abrahamson,

507 U.S. 619 (199 3))))))))))) 15

Brock v. Dou Chemical LU. S. A.,

801 F. 2d 926 (7th Cir. 19860) 14

Case v. Los Angeles Lumber Products.

308 U.S. 106 (1939), 7, 17, 28

Chapman v. California,

386 U.S. 18 (1967) )).. 15

Chemical Bank New York Trust Co. v. Kheel,

369 F.2d 845 (2d Cir. 19660ù)))))))) 21

In re Chemtura Corp.,

439 B. R. 561 (Bankr. 8. D. N. v. 2010) 11

PAGE(S)

CQ, Inc. v. TXU Min. Co., L. P.,

565 F.3d 268 (5th Cir. D 9,16

Eastgroup Props. v. S. Motel Ass'n, Lid.

935 F.2d 245 (11th Cir. 1991)............ 20

In re Ellingsen MacLean Oil Co.,

834 F. 2d 599 (6th Cir. 1987) 24

In re Exide Techs.,

303 B.R. 48 (Bankr. D. Del. IIA 11, 33

Grantham & Mann, Inc. v.

Am. Safety Prod., Inc.,

831 F.2d 596 (6th Cir. 1987) ............. 9

Hamling v. United States,

ee te 19

Howard v. Stillwell & Bierce Mfg. Co.,

139 U.S. 199 (1891)....................... 9

In re Ionosphere Clubs, Inc.

98 B. R. 174 (Bankr. S. D., eiiie 23

In re Iridium Operating LLC.

478 F.3d 452 (2d Cir. e passim

In re K-Mart Corp.,

359 F.3d 866 (7th Cir. 2004) ............. 22

Kansas City Terminal Ry v.

Cent Union Trust Co.

J ee 18

In re Lehigh & New England Railway Co.,

657 F.2d 570 (3d Cir. 1981) .............. 22, 23

Lehman v. Vision Span, Inc. In re Lehman),

205 F. 3d 1255 (11th Cir. 2000) 20

In re Lids Corp.,

281 B.R. 535 (Bankr. D. Del. 2002)

Mapp v. Ohio,

eee.

In re Martin.

91 F.3d 389 (3d Cir. 1999)

McGovern v. New York,

eee.

In re Meridian Auto Sys.- Composites

Operations, Inc. (In re Meridian),

PAGE(S)

“ee eee

372 B.R. 710 (Bankr. D. Del. 2007) ...

Miller v. Omi Sul (In re Miller),

299 F.3d 183 (3d Cir. 2002) ........

Miranda v. Arizona,

384 U.S. 436 (1966).................

Nelson v. Scala,

192 F.3d 32 (1st Cir. 1999).........

Northern Pacific Railway Co. v. Boyd,

ese. cc ccccescccce

Official Committee of Equity

Security Holders v. Mabey,

832 F.2d 299 (4th Cir. 1987) .......

In re Owens Corning,

419 F.3d 195 (3d Cir. 2005) ........

In re Oxford Mgmt., Inc.,

4 F.3d 1329 (5th Cir. 1993).........

In re Parcel Consultants, Inc.,

8 F. App’x 946 (3d Cir. 2003).............

12

„31

22

14

vil

PAGE(S)

Perry v. Blum,

r 14

Protective Comm. for Indep. Stockholders

of TMT Trailer Ferry, Inc. v. Anderson,

e passim

RadLAX Gateway Hotel, LLC

v. Amalgamated Bank,

4 ere 19

Rapp v. U.S. Dep't of Treasury,

Office of Thrift Supervision,

52 F.3d 1510 (10th Cir. 1995) ............ 14

Reynolds v. Sims,

Dr 19

Roe v. Flores- Ortega,

I os cccvencceovndcccesss 15

Sanders v. Flanders,

564 Fed. App’x 742 (5th Cir. 2014)....... 10

Savina Home Indus., Inc. v. Sec yo Labor,

594 F.2d 1358 (10th Cir. 1979)........... 14

Shapiro v. Saybrook Mfg. Co.

(In re Saybrook Mfg. Co.),

963 F.2d 1494 (11th Cir. 1992)........... 24

Strickland v. Washington,

466 U.S. 668 (1984)....................... 15

Tenn. Valley Authority v. Powelson,

„ ow vccccccccccecsccececs 9,12

In re Texlon Corp.,

596 F.2d 1092 (2d Cir. 1979) ............. 24

viii

PAGE(S)

In re Tower Air,

397 F.3d 191 (3d Cir. 2005) .............. 24

United States v. U.S. Gypsum Co.,

Py EP ebb desccnevecccscccces 32

In re Vanguard Diversified, Inc.,

31 B. R. 364 (Bankr. E. D. N. V. 1983) 24

Walz v. Tax Comm n. of N. V.,

e I db ccc cwecdctideceecoes 19

Statutes

, ˙ w 28

R ũ ⸗ —FĩF ::: . 25

, ̃ TA... 3

,, ³.¹WL¹w·ĩ Z 28

11 U.S.C. § 5480) (I) (HG)( i))... 30

, AAA 26

11 U.S.C. § 11% 0 ))) 26

Sec. 77B of the Bankruptcy Act. 17

Sec. 77B(f) of the Bankruptcy Act ............ 17

Chapter 7 of the Bankruptcy Code passim

Chapter 11 of the Bankruptcy Code....... passim

Chapter X of the Former

,, ͤ ⅛!L2ᷣ—2TS ,. 8. 25

ix

PAGE(S)

Other Authorities

1 C.G. Addison, Wrongs and Their Remedies:

A Treatise on the Law of Torts 2

(4th English ed., F.S.P. Wolferstan

D AAA •·Q=A edaberete

1 Francis Hillard, The Law of Torts or Private

Wrongs 83-84 (2d ed. 18617777

2 Collier on Bankruptcy, J 105.09

D ¹*ůu'VÜĩ

24 Williston on Contracts § 64.8

D t

William Blackstone, 3 Commentaries on

the Law of England 117

D, ² w mm T2

Craig R. Bucki, Cracking the Code: The Legal

Authority Behind Extrastatutory Debtor-

In-Possession Financing Mechanisms

and Their Prospects for Survival,

2005 Colum. Bus. L. Rev. 357, 361

/ ».

Bruce Grohsgal, How Absolute Is the

Absolute Priority Rule in Bankruptcy?

The Case for Structured Dismissals,

William & Mary Bus. L. Rev. (forth-

coming 2017); (manuscript available

at http://ssrn.com/abstract=

13

23

„„ „ 18, 25, 28

Randolph Haines, Eleventh Circuit Distorts

Equity With Formalism, 2016 No. 4

Norton Bankr. L. Advisor 1, 6 (2016) ..

19

PAGE(S)

Lubben, “The Overstated Absolute Priority

Rule,” 21 Fordham J. Corp. &

, eure 18

William L. Prosser, Handbook of the Law

e ͤ -à˙—— 16

Restatement of Torts §1 cmt. d (1934 16

Jennifer J. Rickert, Cross Collateralization:

An Appropriate Method of Section 364

Post-Petition Financing, 66 Temp. L.

Rev. 239, 239—40 (1993) .................. 23

Benjamin Shipman, Handbook of Common-

Law Pleading sections 7, 77

D cc civedauvaslceaeudersteaiene’ 13

Elizabeth Shumejda, Critical Vendor Trade

Agreements in Chapter 11 Bankruptcy,

24 Am. Bankr. Inst. L. Rev. (2016)....... 23

Paul Vinogradoff, Common Sense in Law 209

(The Lawbook Exchange, Ltd. 2006,

originally published in 1914) ........... 19

Edward P. Weeks, The Doctrine of Damnum

Absque Injuria Considered in its Relation

to the Law of Torts ix (1879) ............ 13, 16

INTEREST OF AMICI CURIAE'

The Amici’ are law professors who have devoted

their careers to the study and teaching of

bankruptcy law. They represent no institution,

group, or association.

Their interest in this appeal arises from the

impact that the Court’s decision in this case could

have on negotiated settlements in future bank-

ruptcy cases, by upsetting years of practice in

which the courts have allowed exceptions to the

so-called absolute priority rule (hereinafter, the

“priority rule” or the “Rule”). Settlements are

often the most practical and economical way of

resolving contentious cases, saving valuable

judicial time, and speeding up distributions to the

creditors. Because the priority rule may stand in

the way of achieving a settlement in some

instances, the Amici hope to assist the Court in

reaching a result that will keep the Rule from

' Pursuant to Rule 37 of the Rules of this Court, the

Amici file this brief with the written consent of all parties,

which is on file with this Court. No person or entity including

the Amici or their counsel made a monetary contribution for

the preparation or submission of this brief.

The Amici are the following law professors who teach

at the law schools indicated next to their names: Jagdeep S.

Bhandari, Wake Forest University School of Law; Susan

Block-Lieb, Fordham Law School; Jessica Gabel Cino, Georgia

State University College of Law; Linda E. Coco, Barry

University School of Law; Robert D'Agostino. John Marshall

Law School; Irina J. Fox, Creighton University School of

Law; C. Scott Pryor, Campbell University School of Law;

Theresa J. Pulley Radwan, Stetson University College of Law;

Nancy B. Rapoport, University of Nevada's William S. Boyd

School of Law; Michael Sousa, University of Denver Sturm

College of Law; and Laura M. Spitz, Cornell Law School.

2

unnecessarily preventing settlement in instances

where, as in the instant case, the settlement

would benefit the estate and the objecting parties

would suffer no loss from permitting the settle-

ment. The Amici also believe that because the

settlement in this case would not prejudice

Petitioners, the decision of the Court of Appeals

below could be affirmed on that basis alone.

The Amici thus file this brief supporting

Respondents to urge the Court to decide this

appeal with these considerations in mind, and to

reject Petitioners’ incorrect and inflexible position

that the Rule is a per se rule that leaves

absolutely no room for any departure in any case

or under any circumstances.

PRELIMINARY STATEMENT

In the case at bar, the Bankruptcy Court

approved a so-called “structured dismissal” under

which it both approved a settlement and

dismissed a chapter 11 bankruptcy. At the time of

the settlement, the estate possessed only two

assets: (1) $1.7 million in cash, which was

indisputably subject to the lien of Sun Capital

Partners; and (2) a highly speculative fraudulent

transfer claim asserted by the Creditors’

Committee against Sun and CIT Group. The

estate was without resources to prosecute that

claim since its cash was encumbered by Sun.

Unrebutted proferred testimony established that

it would cost millions of dollars, aside from

attorneys’ fees, to bring the claim to trial. J.A. 234

(Hearing Transcript). There was also unrebutted

proffered testimony that there were substantive

3

obstacles to succeeding on that claim, including a

litany of affirmative defenses and a counterclaim.

Id. at 235. Finally, there was an unrebutted

proffer of testimony that even if the litigation

succeeded, there might be benefit only to

administrative creditors (i.e., no benefit or

distribution to general unsecured or priority

creditors) because there would still be an

overhang of tens of millions of dollars in claims.

Id. at 236; see 11 U.S.C. § 502(h) (2012).

Under the foregoing circumstances, the

Bankruptcy Court approved a settlement under

which Sun released its lien on the cash of $1.7

million, CIT paid $2 million into the estate and

both were released from all claims in the

fraudulent transfer litigation. The settlement

therefore created a monetized $3.7 million benefit.

for the estate, which paid all administrative

claims, and provided a modest but meaningful

distribution to 1,010 general unsecured creditors.

Pet. App. 39a. (Dist. Ct. opinion).

Very significantly, it is uncontested that the

Bankruptcy Court properly applied the relevant

legal factors in approving the settlement. As

stated in the opinion below, Inlone of the objectors

contend that the bankruptcy court erred in

concluding that the balance of these factors [in

In re Martin, 91 F.3d 389, 393 (3d Cir. 1996)] favors

settlement, and we agree.” Pet. App. lla (citing

Bankr. Ct. opinion). Also very significantly, no-one

contested the Bankruptcy Court’s findings that:

(1) there was “no prospect” of a confirmable

chapter 11 plan, id. at 14—15a (quoting Bankr. Ct.

opinion); (2) conversion to chapter 7 would have

been unavailing since the trustee would have no

funds for prosecuting the fraudulent transfer

4

claims, Sun and CIT credibly having stated that

they would not settle in a chapter 7, id. at 8a; (3) the

omission of the Petitioners from the settlement

“would not prejudice them,” id., and (4) the choice

between approving and not approving the settle-

ment was a choice between a “meaningful return

or zero.” Jd. at 9a (quoting Bankr. Ct. opinion).

Against that background, Petitioners opposed

the settlement because it did not provide a

recovery for them on their WARN Act claims.

They urge that the settlement is invalid as

violating the so-called “absolute priority rule.”

At the outset, Amici note that the Petitioners’

objection is more academic than real. Had the

settlement been disapproved as Petitioners urge,

the Petitioners still would have had no recovery

from the $1.7 million in the estate because that

money would have gone to Sun, the $2 million

paid by CIT would not have existed, and the

estate would have been left with a hotly contested

fraudulent transfer action that it had no way to

fund or prosecute. Indeed, the estate’s fraudulent

transfer claim, its only lien-free asset, was highly

speculative and remote, and found to be

“effectively worthless”, id. at 6la (Bankr. Ct.

opinion), a finding which is unchallenged. In

short, Petitioners are not worse off under the

approved settlement than they would have been if

the settlement had been rejected. Because

Petitioners were not injured or prejudiced by the

settlement, the decision of the Circuit Court below

should be affirmed for that reason alone.

In stark contrast, however, the general unsecured

and administrative creditors would have been

indisputably far worse off had the settlement not

5

been approved. In the absence of the settlement,

they would have received nothing. Even the

attorney for the United States Trustee, in opposing

the settlement, conceded in oral argument that

disapproving the settlement involved “a really

ugly result... Id. at 23a. (3d Cir. opinion

quoting Bankr. Ct. opinion). As the Bankruptcy

Court recognized, and as is undisputed on appeal,

the settlement provided a choice between a “mean-

ingful return or zero.” Jd. at 9a, 61a. Nevertheless,

Petitioners urge, in effect, that the so-called

absolute priority rule must always apply, without

exception, even when it leads to “a really ugly

result,” id. at 23a, as it indisputably would have

in this case.

Amici disagree with Petitioners. For the reasons

given below, the instant case is one in which

the priority rule need not be followed, and,

particularly in the absence of injury to the

objectant, should yield to the benefit of the estate

rather than blindly following the Rule and thereby

arriving at a really ugly result.

SUMMARY OF ARGUMENT

As a threshold argument, Amici urge that the

decision of the Circuit Court below should be

affirmed because Petitioners were not injured or

prejudiced by the settlement, under which they

are not worse off than if the settlement had been

rejected. Aside from that, the sole remaining issue

on this appeal is whether, given the facts and

record summarized above, the bankruptcy court

had discretion to approve the instant settlement,

even though it did not strictly follow the priority

6

rule. The adequacy of the settlement itself is not

an issue in this case. As stated by the Circuit

Court below, “None of the objectors contends that

the Bankruptcy Court erred in concluding that the

balance of these factors favors settlement, and we

agree.” Id. at 11a (citing Bankr. Ct. opinion).

The Amici believe that the courts below

correctly decided not to apply the Rule under the

circumstances of this case. They urge that the

Rule need not be followed by a bankruptcy court

in approving a settlement where it finds that the

benefit, if any, to an objecting party is highly

speculative and remote, and where settlement

demonstrably provides substantial assets to the

estate, in this case a $3.7 million fund, thus

making it possible for distribution to be made to

most creditors who would otherwise receive

absolutely nothing.

Notably, while the present case is a rare one,

the Amici do not suggest that the bankruptcy

court has unrestrained discretion to approve a

settlement that deviates from the Rule. Rather,

the Amici suggest that a bankruptcy court's

discretion is limited by the requirement that it

make specific findings, based on the record, that

the settlement will substantially benefit the

estate, that there is no realistic prospect that its

disapproval would benefit an objecting party, and

that there is no available basis for a party not

included in a settlement to obtain a distribution in

the bankruptcy if the approved settlement had

been rejected by the bankruptcy court.

Several reasons support the Amici's position.

First. It is fundamental! that the violation of a

right is not actionable if it does not result in

7

injury. In the present case, the injury, if any,

incurred by Petitioners is not cognizable, for it

was highly speculative and remote at best. The

principle requiring injury as an essential element

of a right to relief is recognized under long-

established jurisprudence universally applicable

throughout the law. So strong is this principle

that even the violation of a constitutional right is

not actionable in the absence of injury. For this

reason alone, Petitioners are not entitled to relief.

Second. Despite its moniker, the priority rule is

not absolute. Even when the term was coined by

Mr. Justice Douglas in Case v. Los Angeles Lumber

Products, 308 U.S. 106 (1939) (hereinafter, “Los

Angeles Lumber”), the priority rule really was not

absolute. Subsequently to Los Angeles Lumber,

there have been many instances in which courts

have not followed the priority rule, including

where no statutory text explicitly creates an

exception. A prime example is the well-established

doctrine permitting the substantive consolidation

of a debtor estate with another debtor estate or

even a non-debtor estate, resulting in out-of-

priority treatment of creditors. Other examples

are found in the many cases allowing cross-

collateralization orders that transform pre-petition

unsecured claims into secured claims, and

payment of pre-petition employee wages, in order

to keep the debtor's business going. A further

example is the so-called critical vendor orders that

transmute pre-petition claims into post-petition

claims so as to secure trade credit. Not only have

the courts chosen to depart from the priority rule,

but Congress has chosen to do so in the Code as

well. Examples include assumption of contracts

8

where pre-petition defaults are converted from

general unsecured claims into cure amounts

payable as administrative expenses, and reclama-

tion claims that convert pre-petition claims into

post-petition claims.

In light of such examples showing that the Rule

is not absolute, it is unsurprising that well-

reasoned decisions have approved settlements

departing from the Rule. See, e.g., In re Iridium

Operating LLC, 478 F.3d 452 (2d Cir. 2007)

(hereinafter “Jridium”), discussed infra. Crucially,

such settlements do not violate this Court's

precedent in Protective Comm. for Indep. Stock-

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

390 U.S. 414, 453 (1968) (hereinafter “TMT

Trailer”) as that case, which addressed a plan

under chapter X of the former Bankruptcy Act, did

not extend the priority rule to settlements.

Third, the findings and conclusions made below

are sufficient to uphold approval of the

settlement. Further, the requisite findings, which

are based on the record carefully developed at the

hearing, are conceded and can no longer be

controverted by any party. If, however, for any

reason the Court finds them to be inadequate, the

appropriate action is a remand. Significantly, in

that regard, the Court simply required new

hearings on valuation and insolvency by way of

remand in TMT Trailer. Indeed the most that

TMT Trailer would require in the present case is a

remand. And if this Court were to believe that a

further record and findings would be appropriate,

the Amici request that the Court direct that new

hearings be held to clarify why it was necessary

for the settlement to deviate from the priority

9

rule, and, if the Bankruptcy Court were again to

approve the settlement, to require that court

carefully to articulate its reasons for its approval.

Remand was also what the court ordered in

Iridium, 478 F.3d at 466.

POINT I

UNDER WELL-ESTABLISHED LAW, INCUR-

RING INJURY IS ESSENTIAL TO RECOVER

FOR VIOLATION OF A RIGHT; SPECULATION

DOES NOT COUNT

A. Damages are awarded only if there has

been injury or prejudice

Under this Court's jurisprudence, relief is not

granted for violation of a right that does not cause

injury or prejudice. As stated by this Court,

damages are not allowable on the basis of injury

that is “too remote and speculative to have any

legitimate effect upon the valuation.” Tenn. Valley

Authority v. Powelson, 319 U.S. 266, 276 (1943),

citing McGovern v. New York, 229 U.S. 363, 372

(1913); see also, Howard v. Stillwell & Bierce Mfg.

Co., 139 U.S. 199, 210 (1891) (stating “Tested by

them, such losses were, in our opinion, rather

remote and speculative than direct and immediate,

resulting from the breach alleged.”). Accord: CQ,

Inc. v. TXU Min. Co., L.P., 565 F.3d 268, 278 (5th

Cir, 2009) (explaining damages for breach of

contract are not awarded for damages that are

“remote, contingent, speculative, or conjectural”)

quoting City of Dallas v. Villages of Forest Hills,

L.P., Phase I, 931 S.W.2d 601, 605 (Tex. App.—

Dallas 1996); Grantham & Mann, Inc. v. Am.

10

Safety Prod., Inc., 831 F.2d 596, 601—02 (6th Cir.

1987) (“As a general rule, ‘damages are not

permitted which are remote and speculative in

nature.“) (quoting Agricultural Services Ass'n v.

Ferry-Morse Seed Co., 551 F.2d 1057, 1072 (6th

Cir. 1977)); Sanders v. Flanders, 564 Fed. App'x

742, 745 (5th Cir. 2014) (“It is well settled that

damages cannot be established merely through

speculation or conjecture.”).

This Court has made it abundantly clear that

the requirement of injury is at the heart of a claim

for damages for violation of a right.

An injury, legally speaking, consists of a

wrong done to a person, or, in other

words, a violation of his right. It is an

ancient maxim, that a damage to one,

without an injury in this sense, (damnum

absque injuria), does not lay the

foundation of an action ... Want of right

and want of remedy are justly said to be

reciprocal. Where therefore there has

been a violation of a right, the person

injured is entitled to an action.

Alabama Power Co. v. Ickes, 302 U.S. 464, 479

(1938) (quoting Parker v. Griswold, 17 Conn. 288,

302—03 (1864)) (emphasis added).

B. Petitioners suffered no injury from

approval of the settlement

Tested by this Court’s long-established

jurisprudence, Petitioners have not been injured

or prejudiced by the approval of the settlement at

issue, and cannot prevail for that reason alone.

They would not have had any recovery in this

bankruptcy even if, as they demanded, the

11

settlement had been rejected by the Bankruptcy

Court and this chapter 11 case had been converted

to chapter 7. This was made evident by two of the

many uncontested findings made by the

Bankruptcy Court and adopted by the Circuit

Court below. First, it found that “there was ‘no

realistic prospect’ of a meaningful distribution

leither in chapter 7 or chapter 11] to anyone but

the secured creditors unless the settlement were

approved... Pet. App. 8a (quoting Bankr.

Ct. opinion). Second, it found that Petitioners

“omission from the settlement distribution would

not prejudice them.” Jd. This is “because their

claims against the Jevic estate were ‘effectively

worthless’ since the estate lacked any unencum-

bered funds,” essential to prosecute the estate's

highly speculative fraudulent transfer claims

against the secured creditors. Id. (quoting Bankr.

Ct. opinion).

Moreover, the courts below realistically recog-

nized that there were substantial questions over

causation and valuation in claims arising from the

Debtor's leveraged buyout, and that the estate had

no funds to shoulder the enormous costs for expert

trial testimony and a host of other litigation costs,

apart from legal fees, to go forward with litigating

its claims and defeating the asserted substantive

defenses and counterclaims. Jd. at 9a. In that

regard, see In re Exide Techs., 303 B.R. 48, 70

(Bankr. D. Del. 2003) (hereinafter, “Exide”)

(“There is no doubt that [fraudulent transfer]

litigation involves complex issues on a variety of

topics that will require costly and time-consuming

discovery in addition to a potentially lengthy trial,

possibly delaying the Debtor's exit from chapter

11.”); In re Chemtura Corp., 439 B. R. 561, 607

12

(Bankr. S. D. N. V. 2010) (“[T]he legal issues by

themselves are many and complex Dealing

with them would be expensive and time-

consuming.”); In re Lids Corp., 281 B. R. 535, 540

(Bankr. D. Del. 2002) (Litigating the worth of a

business enterprise requires using multiple

complex valuation methodologies in testimony by

financial experts).

The courts below thus properly applied the

fundamental principle that there can be no

recovery for the violation of a right in the absence

of injury. They denied relief because Petitioners’

claimed harm was based on nothing more than

their wishful thinking that blocking the settlement

and converting to chapter 7 might have produced

some recovery for them. Their position, however,

was unsubstantiated at the hearing before the

Bankruptcy Court, at which they chose not to offer

any evidence of value for the estate's fraudulent

transfer claims, despite Respondents’ showing that

those claims were of dubious, if any, value. There

was simply no basis in evaluating those claims at

the hearing on settlement for the Bankruptcy

Court to find that Petitioners’ speculation and

hope could have “any legitimate effect upon the

valuation.” Powelson, 319 U.S. at 276.

The Bankruptcy Court correctly approved the

settlement on the basis, among others, that

Petitioners were not injured by the approval of the

settlement.

C. Origin of the requirement of injury

Injury is not a recent requirement of the law.

For centuries, injury was a critical feature of early

common law, which required a lawsuit to be

commenced by means of an established form of

13

complaint, which required an allegation of actual

injury to the plaintiff. See Benjamin Shipman,

Handbook of Common-Law Pleading sections 7, 77

(38d ed. 1923). See also William Blackstone, 3

Commentaries on the Law of England 117

(1765-1769); Edward P. Weeks, The Doctrine of

Damnum Absque Injuria Considered in Relation to

the Law of Torts ix (1879) (hereinafter, “Weeks”)

(premising the requirement of injury on the right

of a person to be secure in his life, liberty, health,

reputation, and real and personal property).

Under that doctrine, a person cannot maintain an

action for a wrongful act unless he has sustained

an injury. Id.

Although the common law forms of pleading

have long since been superseded by the modern,

less stringent requirements for pleadings in a

case, injury remains an essential ingredient of

every type of right to recover for a violation of a

right and of every claim for relief. It is a

fundamental requirement without which relief is

not available. There is no theoretical or statutory

basis to disregard the requirement of injury.

D. Injury continues to be required across

the law as a basis for providing relief

Current jurisprudence continues to include

injury as a requisite for maintaining a cause of

action or for obtaining relief for the violation of a

right. Under modern practice, the fundamental

requirement of injury is a mandatory element of

every type of cause of action if relief is to be

available. As a consequence, a violation of the

priority rule does not result in the grant of an

award in the absence of injury to the objectant.

Illustrations of this requirement can be found

14

across the law, including constitutional law,

criminal! law, tort law and contract law, among all

others.

1. Constitutional law

Despite the high level of importance of

constitutional rights, a violation of such rights is

not actionable if the plaintiff has not incurred

injury or prejudice as a result of the violation. As

uniformly held by Courts of Appeals, a violation of

a constitutional right is not actionable if the

plaintiff has not been injured by the violation. See

Perry v. Blum, 629 F.3d 1, 17 (ist Cir. 2010); Rapp

v. U.S. Dep’t of Treasury, Office of Thrift

Supervision, 52 F.3d 1510, 1520 (10th Cir. 1995);

Brock v. Dow Chemical U.S.A., 801 F.2d 926,

930—31 (7th Cir. 1986); Savina Home Indus., Inc.

v. Sec y of Labor, 594 F.2d 1358, 1365 (10th Cir.

1979); In re Parcel Consultants, Inc., 8 F. App'x

946, 951 (3d Cir. 2003). Thus, even a right as

important as due process of law is not actionable

in the absence of injury to the complainant. The

right asserted by Petitioners on the basis of the

priority rule has no greater value than the right to

due process. Thus, without a cognizable injury to

Petitioners resulting from the settlement, they are

not entitled to relief from the settlement by way of

vacating the approval of the settlement and a

conversion to chapter 7, or requiring the disgorge-

ment of the distributions received years ago by

over 1,000 creditors for redistribution under the

priority rule, or otherwise.

2. Criminal Law

It is similarly fundamental to American

criminal law that criminal prosecutions be

15

conducted with constitutionally afforded

protections for the accused. See Miranda v.

Arizona, 384 U.S. 436, 479 (1966); Mapp v. Ohio,

367 U.S. 643, 655 (1961): Strickland v.

Washington, 466 U.S. 668, 684 (1984). Never-

theless, despite the importance of personal rights

afforded a defendant in a criminal prosecution, a

conviction is not reversed where the violation of a

right is found not to have been prejudicial to the

defendant under the so-called “harmless error”

rule. Strickland, 466 U.S. at 711; see also Roe v.

Flores-Ortega, 528 U.S. 470, 481 (2000); Brecht v.

Abrahamson, 507 U.S. 619, 639 (1993) (Court

denying habeas relief where error that occurred at

trial did not substantially influence the jury's

verdict). Indeed, as the Court observed, all 50

States as well as Congress have established

harmless-error rules. Chapman v. California, 386

U.S. 18, 22 (1967). There is surely no greater

reason to adopt a “harmless error” rule to enable a

claimant to recover in a civil case in the absence of

any cognizable injury than there was in the

criminal law.

3. Tort and Contract Law

The requirement of injury is a central element

in the law of torts. Two of the first treatises on

tort law explained that a plaintiff must have

suffered some “injury” or “damage” to recover on a

claim. See 1 Francis Hillard, The Law of Torts or

Private Wrongs 83-84 (2d ed. 1861); see also 1 C.G.

Addison, Wrongs and Their Remedies: A Treatise

on the Law of Torts 2 (4th English ed., F.S.P.

Wolferstan ed. 1876). A leading treatise writer

also makes clear that injury to the plaintiff is an

essential ingredient of a tort cause of action. See

16

William L. Prosser, Handbook of the Law of Torts

8-9 (1941); see also, Restatement of Torts §1 cmt. d

(1934)).

The underpinning of the injury requirement was

explained in Edward P. Weeks’ leading treatise.

See Weeks, supra at ix. That scholar observes that

early tort common law was premised on the notion

that a person has a right to be secure in his life,

liberty. health, reputation, and real and personal

property, noting that the doctrine, damnum absque

injuria, literally means damage without injury. Id.

To constitute a tort, there must be “actual or legal

damage to the plaintiff, and a wrongful act

committed by the defendant.” Jd. at 2 (citations

omitted).

Just as in tort law, injury must be established to

recover damages in an action for breach of

contract. See 24 Williston on Contracts § 64.8 (4th

ed.); see also, CQ, Inc. v. TXU Min. Co., L.P., 565

F.3d at 278.

The Circuit Court below was correct in relying

on the absence of injury or prejudice to Petitioners

in holding that the Bankruptcy Court properly

approved the settlement without its inclusion of

Petitioners. The decision below should be affirmed

because of the lack of injury to Petitioners,

making it unnecessary for the Court to address

whether the priority rule is a per se pronounce-

ment that does not allow any exceptions.

17

POINT II

THE PRIORITY RULE IS NOT ABSOLUTE

AND MANY TYPES OF DEPARTURES ARE

RECOGNIZED

A. The Absolute Priority Rule was Not

“Absolute” Even When it Was Given Its

Name

The term “absolute priority rule” seems to have

originated with Mr. Justice Douglas in Los

Angeles Lumber, 308 U.S. at 117. That case

presented the question “of the conditions under

which stockholders may participate in a plan of

reorganization under s 77B ... of the Bankruptcy

Act where the debtor corporation is insolvent.

Id. at 108-09. Observing that the words “fair and

equitable” in section 77B(f) were “terms of art,” he

noted that such term of art had acquired “a fixed

meaning” including the prohibition in Northern

Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913),

against old shareholders retaining value under

reorganization plan at the expense of creditors.

Los Angeles Lumber, 308 U.S. at 115. Justice

Douglas called this the “rule of full or absolute

priority.” Jd. at 117. The use of the word

“absolute”, while catching, is, unfortunately

overbroad and therefore inapt. In the first place,

the Court in Los Angeles Lumber was not

addressing inter-creditor priorities, such as those

involved in the case at bar.

Secondly, even at the time Los Angeles Lumber

was decided, this Court had contemplated the

propriety of shareholders being “permitted to

contribute and retain an interest lin the

reorganized entity] sufficiently valuable to move

18

them [to provide funding].” Kansas City Terminal

Ry v. Cent Union Trust Co., 271 U.S. 445, 455

(1926). Hence, calling the rule “absolute”

overstated its reach even in the context of

priorities between creditors and equity holders.

See generally, Lubben, “The Overstated Absolute

Priority Rule,” 21 Fordham J. Corp. & Fin. L. 581

(2016); Bruce Grohsgal How Absolute Is the

Absolute Priority Rule in Bankruptcy? The Case

for Structured Dismissals (September 29, 2016),

William & Mary Bus. L. Rev. (forthcoming 2017);

(manuscript at 25-30), available at http://ssrn.com/

abstract=2845430 (hereinafter, “Grohsgal”). The

reality is that the phrase “absolute priority rule”

is a misnomer; the rule is not absolute and there

are many well-established and fully sanctioned

departures from it, as later discussed herein.

B. Absolute Rules Invite Injustice

Insofar as the priority rule is not absolute, it

should be unnecessary to point out that absolute,

rigid and unyielding rules are disfavored in our jur-

isprudence. Nonetheless, Petitioners’ urging to

apply the priority rule rigidly makes that necessary

to point out.

Civilized systems of justice, harkening back to

Aristotle, have recognized that hard and fast rules

lead to injustice because of the inability to foresee

every circumstance that could arise in the future. As

explained by Paul Vinogradoff, the Corpus Professor

of Jurisprudence in the University at Oxford:

[Llegal rules are necessarily general,

while the circumstances of every case are

particular, and that it is beyond the power

of human insight and science to lay down

19

in advance rules which will fit all future

variations and complications of practice.

Therefore law must be supplemented by

equity (epieikeia); there must be a power

of adaptation and flexible treatment, some-

times suggesting decisions which will be at

variance with formally recognized law, and

yet will turn out to be intrinsically just.

Paul Vinogradoff, Common Sense in Law 209 (The

Lawbook Exchange, Ltd. 2006, originally published

in 1914); see also, Randolph Haines, Eleventh

Circuit Distorts Equity With Formalism, 2016 No.

4 Norton Bankr. L. Advisor 1, 6 (2016) (citing

Aristotle, Nicomachean Ethics Book V, Ch. 10

(W.D. Ross Trans. 1925).

This Court has been wary of absolute rules,

even when dealing with something as sacrosanct

as the Constitution. Nearly a century has passed

since Justice Holmes in Bain Peanut Co. v. Pinson

astutely observed that “[t]he interpretation of

constitutional principles must not be too literal”

and [wle must remember that the machinery of

government would not work if it were not allowed

a little play in its joints.” 282 U.S. 499, 501 (1930).

An inflexible and rigid approach may unwisely

thwart both the administration of justice and the

need properly to address unforeseen circumstances.

See also Reynolds v. Sims, 377 U.S. 533, 577-78

(1964); Walz v. Tax Comm n. of N. V., 397 U.S. 664,

669 (1970) (“there is room for play in the joints.

.. . ); Hamling v. United States, 418 U.S. 87, 138

(1974) (same); Cf. RadLAX Gateway Hotel, LLC v.

Amalgamated Bank, 132 S. Ct. 2065, 2070 (2012)

(Court admonishing hyperliteral application of

statute contrary to common sense); see also Nelson

v. Scala, 192 F.3d 32, 35 (1st Cir. 1999); Miller v.

20

Okmi Sul (In re Miller), 299 F.3d 183, 186—87 (3d

Cir. 2002); Lehman v. VisionSpan, Inc. (In re

Lehman), 205 F.3d 1255, 1257 (11th Cir. 2000).

In sum, this Court’s jurisprudence against

absolutism stands as a general barrier to the

absolutism urged by Petitioners and their amici in

this case.

C. There Are Many Approved Departures

from the Priority Rule

There are many well-known and accepted

departures from the Rule, which are discussed

below. Amici suggest, and the discussion below

shows, that the unifying theme (or explanation) of

these departures is benefit to the estate, which,

together with the absence of harm to the

objectants, is precisely the rationale that led the

Courts below to approve the instant settlement.

1. Substantive Consolidation is an Accepted

Departure From the Priority Rule

The doctrine of substantive consolidation is

one exception. Substantive consolidation allows

courts to disregard the separateness of entities

and thereby pool their assets and claims together

as if they were a single entity from which the

collective creditor body may recover. 2 Collier on

Bankruptcy, J 105.09 (16th ed. 2016). Substantive

consolidation is a judicially created equitable

doctrine without explicit authorization in the

Bankruptcy Code. See In re Auto-Train Corp.,

Inc., 810 F.2d 270, 276 (D.C. Cir. 1987); Eastgroup

Props. v. S. Motel Ass'n, Lid., 935 F.2d 245, 248

(11th Cir. 1991); In re Augie/Restivo Baking Co.,

Ltd., 860 F.2d 515, 518 (2d Cir. 1988).

21

Substantive consolidation ordinarily alters

distributional priorities because, as elaborated by

the Circuit Court for the District of Columbia in

Auto-Train, “every entity is likely to have a

different debt-to-asset ratio, consolidation almost

invariably redistributes wealth among the

creditors of the various entities.” Jn re Auto-Train

Corp., Inc., 810 F.2d at 276. Notwithstanding this

prejudice suffered by some creditors, Inlo court

has held that substantive consolidation is not

authorized.” In re Owens Corning, 419 F.3d 195,

208 (3d Cir. 2005). Rather, substantive consolida-

tion is required under “rare” and “justified” facts.

See e.g., Chemical Bank New York Trust Co. v.

Kheel, 369 F.2d 845, 846-47 (2d Cir. 1966)

(hereinafter, “Chemical Bank”).

The Chemical Bank case also explicitly

recognized that, in a proper case, benefit to the

estate is the dominant priority.

Un the rare case such as this, where the

interrelationships of the group are

hopelessly obscured and the time and

expense necessary even to attempt to

unscramble them [is] so substantial as to

threaten the realization of any net assets

for all the creditors, equity is not helpless

to reach a rough approximation of justice

to some rather than deny any to all.

Id. at 847 (emphasis added). In short, substantive

consolidation is a recognized exception to the Rule

where, as in this case, circumstances present a

choice between justice for some or justice for none.

As eloquently stated in Chemical Bank, “equity is

not helpless to reach a rough approximation of

justice to some rather than deny any to all.” Jd.

22

Accordingly, the Bankruptcy Court in this case

properly approved a settlement conferring justice

on some, rather than disapproving the settlement

and denying justice for all.

2. Critical Vendor Orders Are an Accepted

Departure from the Rule

Critical vendor orders are another compelling

example of where courts set aside the Code’s

priority scheme in order to benefit the bankruptcy

estate by enabling a reorganizing debtor to obtain

goods and services critical to its survival and

prospects of repaying debt. A critical vendor order

permits certain pre-petition creditors to be paid

out of priority as administrative claims to help the

debtor's business continue and provide a better

chance (but not a guaranty) of recovery for the

creditor body as a whole. See generally, Jn re

Lehigh & New England Railway Co., 657 F.2d

570, 581 (3d Cir. 1981). Amici note that critical

vendor orders really are an exception to the Rule,

contrary to what is asserted in Brief for Amici

Curiae Law Professors in Support of Petitioners at

13, n.12. In fact, critical vendor payments are

final and not subject to disgorgement, thus

irrevocably re-arranging priorities. Jn re Meridian

Auto Sys.-Composites Operations, Inc. (In re

Meridian), 372 B.R. 710 (Bankr. D. Del. 2007).

Admittedly, critical vendor orders are not

universally accepted. See, e.g., Official Committee

of Equity Security Holders v. Mabey, 832 F.2d 299

(4th Cir. 1987); In re B&W Enters., Inc., 713 F. ad

534 (9th Cir. 1983); In re Oxford Mgmt., Inc., 4

F.3d 1329 (5th Cir. 1993); and see Jn re K-Mart

Corp., 359 F.3d 866 (7th Cir. 2004) (restricting,

but not banning such orders). That being said,

23

such orders are particularly accepted in the

Second and Third Circuits in which many of the

largest and most significant chapter 11 cases are

filed. Lehigh, 657 F.2d at 581; In re lonosphere

Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D., 1989).

Quite remarkably, a recent survey of large chapter

11 cases found that not one motion for a critical

vendor was denied. See, Elizabeth Shumejda,

Critical Vendor Trade Agreements in Chapter 11

Bankruptcy, 24 Am. Bankr. Inst. L. Rev. at 161

(2016). In short, critical vendor orders are far more

accepted and commonplace than they might appear

to be just based on tabulating the ostensible split

in authorities. Accordingly, such orders stand as a

meaningful accepted exception to the priority rule.

3. Cross-Collateralization is an Accepted

Departure From the Rule

Cross-collateralization is yet another compelling

example of courts setting aside the Code's priority

scheme when necessary to benefit the estate.

Cross-collateralization is a process by which a

debtor-in-possession (“DIP”) grants a lien on post-

petition collateral to secure pre-petition unsecured

debt in order to obtain post-petition financing. See

generally, Jennifer J. Rickert, Cross Collateral-

ization: An Appropriate Method of Section 364

Post-Petition Financing, 66 Temp. L. Rev. 239,

239-40 (1993). Cross-collateralization departs

from the Code's priority scheme because it

“empowers an undersecured creditor-lender to

claim a greater portion of a business’ assets than

it would ordinarily receive under the repayment

rules established in the statutory text of the

Bankruptcy Code.” Craig R. Bucki, Cracking the

Code: The Legal Authority Behind Extrastatutory

Debtor-In-Possession Financing Mechanisms and

24

Their Prospects for Survival, 2005 Colum. Bus. L.

Rev. 357, 361 (2005).

Yet, courts outside the Eleventh Circuit routinely

uphold cross-collateralization to give the DIP

necessary financing to run the business. In re

Adams Apple, 829 F.2d 1484 (9th Cir. 1987); In re

Ellingsen MacLean Oil Co., 834 F.2d 599 (6th Cir.

1987); In re Texlon Corp., 596 F.2d 1092 (2d Cir.

1979) (leading case); In re Vanguard Diversified,

Inc., 31 B. R. 364 (Bankr. E. D. N. V. 1983); In re

Tower Air, 397 F.3d 191 (3d Cir. 2005). But see,

Shapiro v. Saybrook Mfg. Co. (In re Saybrook Mfg.

Co.), 963 F.2d 1494 (11th Cir. 1992) (holding that

cross-collateralization is inconsistent with the Code).

In sum, here again, a majority of courts depart

from the Rule in dire circumstances. Cross-

collateralization is permitted when without it, there

would be no DIP financing, and the reorganization

would be doomed. Accordingly, in approving the

settlement below, the Bankruptcy Court properly

departed from the Rule in order to avoid dooming

all creditors in this case to no recovery.

D. Settlements May Deviate from the Rule

Courts have not only recognized departures

from the Rule in the contexts of substantive

consolidation, critical vendor orders and cross-

collateralization, but also leave room for such

departures in the context of settlements as well.

1. This Court’s Decision in TMT Trailer

does not Prevent Any and All Departures

from the Rule in Settlements.

In TMT Trailer, 390 U.S. 414, this Court

considered a settlement that had been effectuated

in the context of a plan of reorganization under

25

Chapter X of the former Bankruptcy Act. The case,

properly understood, presented two distinct

issues: first, the standard for approving a

settlement vel non; second, the standard for

confirming a Chapter X plan.

As to the first issue, the Court noted that a

settlement must be “fair and equitable” and that

the court in deciding whether to approve a settle-

ment must make an “informed and independent

judgment” which requires that the judge “has

apprised himself of all facts necessary for an

intelligent and objective opinion of the probabil-

ities of ultimate success should the claim be

litigated.” Id. at 424. This Court found, however,

that the record below in TMT Trailer left the Court

“completely uninformed as to whether the trial

court ever evaluated the merits” and that “the

record is devoid of facts which would have permitted

a reasoned judgment that the claims of actions

should be settled in this fashion.” Jd. at 440—41.

These inadequacies were among the reasons

leading the Court to remand the case for “further

investigation.” Jd. at 441.

Separately, this Court in TMT Trailer

considered plan confirmation requirements under

the now statutorily superseded provisions of

Chapter X, former 11 U.S.C. §501, et seg. On that

issue, this Court noted the fair and equitable

standard needed to confirm a chapter X plan

“incorporates the absolute priority doctrine.” Jd.

(emphasis added). Nowhere, however, does the

TMT Trailer opinion instruct that the so-called

absolute priority rule applies to settlements,

except as incorporated in a Chapter X plan. See

Grohsgal at 42—46. Certainly TMT Trailer could

not have addressed the instant settlement, which

26

took place under the current Code but not under a

plan. Indeed, the current Code, for its part,

confines the statutory application of the priority

rule to chapter 11 plans, 11 U.S.C. §1129(b)(2)(B)(ii)

(2012) and to distributions in a chapter 7 case, 11

U.S.C. §726(a) (2012).

Therefore, the Circuit Court below got it right in

recognizing that TMT Trailer is “not dispositive

because [it] spoke in the context of plans of

reorganization, not settlements.” Pet. App. 17a.

And, the Circuit Court also got it right because it

had an ample record, unlike the lower court in

TMT Trailer.

2. Iridium is a Well Reasoned Case Allowing

the Possibility that a Settlement May

Depart from the Rule.

(a) The priority rule is not a per se ban

under Iridium.

In Jridium, 478 F.3d at 455, the Second Circuit

endorsed the possibility of departure from the

priority rule in an appropriate settlement. Iridium

was an ill-fated satellite venture that had been

launched, but later spun off, by Motorola. Id. at

456. In the months preceding its collapse, Iridium

executed a series of credit facilities with its senior

lenders providing for $1.55 billion in loans secured

by first priority liens on all of Iridium’s property,

including causes of action against Motorola. /d. at

457. The unsecured creditors’ committee, given its

limited financial resources, opted to settle the

avoidance claims with senior lenders in order to

receive funds in which to pursue their own claims

against Motorola. Jd. Although a large portion of

any monies recovered from Motorola as a result of

the Motorola Estate Action would likely flow to

27

the Estate and be distributed according to the

Bankruptcy Code's priority scheme, id. at 459,

nevertheless, the litigation trust provided for

payment to unsecured creditors of residual funds

from the litigation trust before full recovery of

some priority creditors, including Motorola. /d.

The Second Circuit rejected the per se ban on

settlements violating the priority rule as “too

rigid a test” because such a rigid test was unable

to “accommodate the dynamic status of some

settlements.” Id. at 464. The Court explained “[i]t

is difficult to employ the rule of priorities in the

approval of a settlement in a case such as this

when the nature and extent of the Estate and the

claims against it are not yet fully resolved.” Jd.

(b) A remand is the proper course if the

Court considers the record to be

inadequate

Since the record in /ridium provided no

justification for departing from the Rule in that

particular settlement, the Second Circuit in

Iridium, as in TMT Trailer, remanded the case for

further development of the record. Jd. at 467. The

court in Jridium stated “[o]ur remand is not a

repudiation of that support—it seeks only clarifi-

cation of why the settlement need require a possible

deviation from the rule in one regard.” Id. at 466.

Although some cases, such as Matter of AWECO,

Inc., 725 F.2d 293 (5th Cir. 1984), have applied a

per se approach, Jridium’s careful methodology is

the better path. Because the central facts

warranting approval of settlement in this case are

uncontested, Amici submit the record here (unlike

that in TMT Trailer and Iridium) supports

28

affirmance. If this Court does not share that view,

however, Amici respectfully submit that the

proper course is a remand, as in both TMT ' Trailer

and Iridium.

E. Congress Made Exceptions to the Rule

The cases just discussed show that the so-called

“absolute” priority rule is not absolute because the

courts have found numerous circumstances where

departure is appropriate and allowable: substantive

consolidation, cross-collateralization, critical

vendor orders and settlements. Still, it is not just

courts that have made the Rule not absolute, but

Congress as well. The term “absolute priority

rule” appears nowhere in the Code.

Further, the Code itself contains a number of

statutory exceptions to the rule: these include

contract and lease assumptions where pre-petition

defaults must be cured as administrative

expenses, 11 U.S.C. § 365 (2012), and reclamation

claims, 11 U.S.C. § 546 (2012).“ The point here is

not that there exists some express statutory

exception authorizing the settlement in the

instant case (although we are quick to note there

* Intriguingly, as Prof. Grohsgal shows, Congressional!

action since Los Angeles Lumber has consistently contracted,

or rolled back, the priority rule. See Grohsgal at 25-30,

discussing the 1952 amendments to the Bankruptcy Act, the

enactment of 1978 Code allowing consensual plans to depart

from the rule, and the 1986 and 2005 legislative rol] backs of

the priority rule as applied to certain family business. Of

course, Amici do not argue that these contractions create

an express statutory exception to approve the present

settlement. The point, rather, is to further illustrate how

unabsolute the priority rule really is.

29

is no express prohibition either); rather, the point

is that the rule is not absolute, it yields statutorily

in some instances and judicially in other instances

where benefit to the estate is properly a dominant

concern.

POINT III

THE FINDINGS BELOW WERE BASED ON

A THOROUGH RECORD, HAVE BEEN CON-

CEDED, AND WERE MORE THAN SUFFI-

CIENT TO APPROVE THE SETTLEMENT

The Bankruptcy Court in the present case

received proffered testimony of Mr. Daniel Dooley,

the Debtors’ Chief Restructuring Officer, J.A. 205

(Hearing Transcript), and of the Creditors’

Committee financial advisor, Mr. Edward Gavin,

id. at 229. Both testified in support of the

settlement. No adverse witness testimony was

offered by proffer or otherwise. On cross-

examination of Mr. Dooley, Petitioners’ attorney

chose not to address the merits of the fraudulent

transfer claims against the secured creditors,

which were being released under the settlement.

See generally id. at 211-26.

Supplementing the testimony of Mr. Dooley, the

proffered testimony in support of the settlement of

Mr. Gavin focused specifically on the fraudulent

transfer claims asserted against the secured

creditors that arose out of the debtor’s pre-

bankruptcy leveraged buyout (“LBO”). He gave

uncontroverted proferred testimony that the

expert testimony that would be offered at trial

would establish that the LBO in 2006, two years

before the debtor’s chapter 11 filing in 2008 “was

30

not the cause of the company’s failure,” J.A. 232,

but the failure was predicated on intervening events

that occurred after the LBO, “such as the declin-

ing economy and the shrinking demand for the

trucking kind of business that Jevic was in,” id.,

thereby undermining the important predicate of

causation of insolvency for winning fraudulent con-

veyance litigation. See 11 U.S.C. § 548(a)(1)(B)(ii).

Mr. Gavin also testified that these facts “would be

serious challenges” to proving that the debtor was

insolvent at the time of the LBO, id. at 232-33,

thereby undermining another predicate for

success. Mr. Gavin also testified that such

litigation would be very complex and costly

through trial and appellate stages, and that

counsel for the plaintiff would have to advance the

costs personally because the estate lacked the

funds to pay them. Id. at 233—36, 243. Mr. Dooley,

apart from Mr. Gavin, suggested the costs of

litigation were multi-million dollar costs, with no

identified source to pay for expert witnesses say-

ing, “[w]ho is going to pay for those?” Id. at 225.

Mr. Gavin further testified that approval of the

settlement was the wiser course because of the

“substantial uncertainty in the further prosecution

of the lawsuit... Id. at 235. Lastly, the settle-

ment deal itself would not have been available in

a chapter 7 case. The testimony offered through

these witnesses was uncontroverted.

31

On the foregoing record, the Bankruptcy Court

had a solid basis for concluding that the settle-

ment should be approved. That court got it dead

right that the choice was between meaningful

recovery or zero, and it correctly chose meaningful

recovery.

In upholding the Bankruptcy Court’s approval of

the settlement, the Circuit Court pointed out that

the Petitioners “mount no real challenge to the

Bankruptcy Court’s findings that there was no

prospect of a confirmable plan in this case and that

conversion to Chapter 7 was a bridge to nowhere.”

Pet. App. 14—15a (citing Bankr. Ct. opinion).

Significantly, the District Court, in affirming the

decision of the Bankruptcy Court, observed that

Petitioners “largely do not contest the bankruptcy

court’s factual findings.” Jd. at 40a. Crucially, the

Third Circuit noted that “even if it were

appropriate for us to review findings of fact de

novo,” there was “no evidence” that questioned the

Bankruptcy Court’s conclusion that approval of the

settlement offered the only basis for making a

distribution to unsecured creditors. Id. at 21a. Nor

was there anything in the record to contradict the

finding that the fraudulent transfer claims “were

‘effectively worthless.” Id. at 8a (3rd Cir. opinion

quoting Bankr. Ct. opinion). Finally, there is no

claim that the applicable standard for approving a

settlement set forth in Jn re Martin, supra, 91 F.3d

389, was not met.

Bluntly, where the factual predicates are

established by competent testimony and are

uncontradicted, and where the applicable legal

standard for approving the motion has concededly

been met, the settlement should be upheld. It is

elemental that absent a clearly erroneous finding

32

of fact or an error of law the approval of a

settlement should be upheld. See United States v.

U.S. Gypsum Co., 333 U.S. 364, 395, (1948) (this

Court may reverse findings of fact by a trial court

where ‘clearly erroneous’); see also id. (“A finding

is ‘clearly erroneous’ when although there is

evidence to support it, the reviewing court on the

entire evidence is left with the definite and firm

conviction that a mistake has been committed.”).

POINT IV

THE DEPARTURE FROM THE PRIORITY

RULE WAS APPROPRIATE BECAUSE

REJECTION OF THE SETTLEMENT AND

CONVERSION TO CHAPTER 7 WOULD

HAVE HARMED THE ESTATE WITHOUT

HELPING PETITIONERS

In the present case, the estate’s assets were

fully encumbered. Pet. App. 8a (3rd Cir. opinion

citing Bankr. Ct. opinion). Conversion to chapter 7

would have been of no avail to Petitioners even if

the fraudulent transfer claims were successful,

because the secured lenders’ liens would have

denuded the estate in short order. Id. The

settlement approved in this case provides wider

recovery for the large creditor body than would

application of the Rule or conversion to chapter 7.

See id. at 57—58a (Bankr. Ct. opinion). Here, not

only would reversing the decision below not

provide a recovery for Petitioners, it would

actually result in injury to the estate and over

1,000 general unsecured creditors. Unrebutted

testimony at the settlement hearing established

that the fraudulent conveyance litigation would

33

cost millions of dollars to bring the case to trial.

J.A. 234 (Hearing Transcript). Indeed, the

Bankruptcy Court specifically opined that any

lawyer that would take this litigation on a

contingency fee basis “should have his head

examined.” Pet. App. 61a (Bankr. Ct. opinion). Cf,

Exide, 303 B.R. at 70.

Moreover, if the case were converted to chapter

7, the recovery that was afforded to the general

unsecured creditors through the settlement would

not have been effectuated. The secured creditors

“stated unequivocally and credibly that they

would not do this deal in a Chapter 7.” Pet. App.

8a (3d Cir. quoting Bankr. Ct. opinion).

Further, the Bankruptcy Court specifically

found that there was “no realistic prospect” of a

meaningful distribution to anyone but the secured

creditors unless the settlement were approved.

[Blecause the traditional routes out of

Chapter 11 bankruptcy were impracticable

there was “no prospect” of a confirm-

able Chapter 11 plan of reorganization or

liquidation being filed. . [C]onversion to

liquidation under Chapter 7 of the Bank-

ruptcy Code would have been unavailing

for any party because a Chapter 7 trustee

would not have had sufficient funds “to

operate, investigate or litigate” (since all

the cash left in the estate was encumbered)

and the secured creditors had “stated

unequivocally and credibly that they

would not do this deal in a Chapter 7.”

Id. (citation omitted). The Bankruptcy Court also

found that the claims against the Jevic estate

34

were “effectively worthless” since the estate lacked

any unencumbered funds. Id. at 613 (Bankr. Ct.

opinion).

The Petitioners largely “[did] not contest the

bankruptcy court’s factual findings” at the District

Court, id. at 40a, and the Third Circuit declined to

question them on appeal. Id. at 21a. Left with

undisturbed factual findings that conclusively

establish that Petitioner’s inability to recover

remains the same regardless of the application of

the Rule, this appeal both has and will only

produce increased costs and harm to the estate

and its large body of general unsecured creditors.

Conversion to a chapter 7 would result in no

payment to creditors other than the secured

creditors because they would not have released

the lien on the $1.7 million and would not have

agreed to provide the $2 million cash infusion for

the benefit of the estate.

The only reason there is any recovery available

under chapter 11 is because the secured lenders

are providing a net gain of $3.7 million to the

estate. The relief requested by Petitioners would

eliminate this net gain, leaving the estate with no

unencumbered assets, thus foreclosing its ability

to pursue the costly fraudulent conveyance

litigation. Therefore, the relief requested by

Petitioners is a “bridge to nowhere.” Id. at 15a (3d

Cir. quoting Bankr. Ct. opinion).

35

CONCLUSION

Based on the foregoing, and Respondents’ brief, it

is respectfully requested that the Third Circuit's

decision be affirmed. Alternatively, if the Court

concludes that further development of the record is

warranted, it is respectfully urged that the Court

order a remand for consideration of why Petitioners

were not included in the settlement and whether

there was any means for them to realize a recovery

in the bankruptcy.

Respectfully submitted,

RICHARD LIEB

Counsel of Record

RESEARCH PROFESSOR OF LAW

ST. JOHN’S UNIVERSITY SCHOOL

OF LAW

8000 Utopia Parkway

Jamaica, New York 11439

(212) 479-6020

(718) 990-1923

Ilm@stjohns.edu

Attorney for Amici Curiae

Professors

Of Counsel:

JOHN COLLEN

DIRECTOR, INSTITUTE FOR

BANKRUPTCY POLICY

St. JOHN’S UNIVERSITY

SCHOOL OF LAW

October 17, 2016