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

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Orci OF THE OL et

No. 16-649

IN THE

Supreme Court of the United States

CASIMIR CZYZEWSKI, et al.,

Petitioners,

Vv.

JEVIC HOLDING CoORP., et al.,

Respondents.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

BRIEF FOR AMICI CURIAE LAW PROFESSORS

IN SUPPORT OF PETITIONERS

MELISSA B. JACOBY JONATHAN C. LIPSON

UNIVERSITY OF NORTH Counsel of Record

CAROLINA SCHOOL OF LAW TEMPLE UNIVERSITY—

160 Ridge Road BEASLEY SCHOOL OF LAW

Chapel Hill, NC 27599 1719 North Broad Street

(919) 962-8114 Philadelphia, PA 19122

(215) 204-0608

jlipson@temple.edu

QUESTION PRESENTED

Whether a bankruptcy court may approve a con-

tested settlement agreement that distributes assets

in violation of the Bankruptcy Code’s statutory prior-

ity rules and that departs from long-held absolute

priority principles underlying the American bank-

ruptcy system.

(i)

TABLE OF CONTENTS

Page

QUESTION PRESENTED......................................022... i

, "i Sf . , scams v

INTEREST OF AMICI CURIAE ...............0.ccccccc0eceeeee l

SUMMARY OF ARGUMENT. .................cc-ccccecseeceeceeee l

Oe i deemeinenae 2

A. The Bankruptcy And Settlement

ERA SA 5 a SSS Ee 3

ERE SEE eee NORE ae 6

Re ES ee eee 7

FRE ey UE SE OY PO AR ar a Or 12

I. THE OPINION BELOW ERRS BECAUSE IT

SUBVERTS CONGRESS’ POWER TO

ESTABLISH BANKRUPTCY’S PAYMENT

ESR 12

A. Congress, Not Courts, Determines

Payment Priorities To Advance

a edcccetuntone 12

B. Settlements In Bankruptcy Are

Subject To The “Absolute Priority

TIENT tetiedsiheicscninanionhasabaninictiaiapiibsiniitaneiibadaiutaiansctngs 17

Il. SUBVERTING BANKRUPTCY’S PRIORITY

STRUCTURE WILL CREATE COSTLY

EERE SEE SESS SESSA SE 20

A. Jevic’s Triggers And Scope Are

BEERS eS 20

iv

1. Jevic’s Trigger Is Unclear

Because This Case Is Not Rare.............. 21

2. Jevic’s Limits Are Unclear..................... 23

SENSE EE EP ae er ee 24

EEE EEE RTS aCe eae ere 28

SEI sickicgasannonneesinnincinaniiioenisienaubebiipassunieiiimenli la

Vv

TABLE OF AUTHORITIES

CASES

Page(s)

Bank of America National Trust & Savings

Ass'n v. 203 North LaSalle Street Part-

nership, 526 U.S. 434 (1999) ........................ 8, 11

Boyer v. Crown Stock Distribution, Inc., 587

F.3d 7B7 (7the Cit. BOOB)........cccccccccccccccccscccccccsceess 22

Howard Delivery Service, Inc. v. Zurich

American Insurance Co., 547 U.S. 651

Hunter Savings Associates v. Padgett (In re

Padgett), 74 B.R. 65 (Bankr. S.D. Ohio

EEE aa mene wr alee Neco nagern Xe Oe Sea 9

In re Acme Cake Co., 495 B.R. 212 (Bankr.

a eiaiierepvndcn 21

In re Arnold, 471 B.R. 578 (Bankr. C. D. Cal.

RISER era SAR Dic ele eC ty i)

In re Buffet Partners, L.P., No. 14-30699-

HDH-11, 2014 WL 3735804 (Bankr. N.D.

_ EE eee 14

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

I ila iil 17, 18, 20

In re Iridium Operating LLC, No. 99-45005

(JMP) (Bankr. S.D.N.Y, May 20, 2008).............. 18

In re Jevic Holding Corp., No. 08-11006 BLS,

2011 WL 4345204 (Bankr. D. Del. Sept.

EE ey ee ea ee 6

In re Jevic Holding Corp., No. 14-4331, 2016

WL 4011149 (3d Cir. July 27, 2016)................... 16

In re Kmart Corp., 359 F.3d 866 (7th Cir.

SI Gcnetecneensageinecnutiiiesingumaianenreniiedninestanbianenes 13

In re Lyondell Chemical Co., 503 B.R. 348

en ee cpseueaiipenianesiens 22

vi

TABLE OF AUTHORITIES—Continued

In re Martin, 91 F.3d 38 (3d Cir. 1996).................... 15

In re Naartjie Custom Kids, Inc., 534 B.R.

416 (Bankr. D. Utah 2015) ................000...0cceee. 14

In re RFE Industries, Inc., 283 F.3d 159 (3d

yg ESE SE ne ee eee 15

In re Sadler, 935 F.2d 918 (7th Cir. 1991) ............... 20

In re Stratford of Texas, Inc., 635 F.2d 365

ENCES EA TRAE SR ee a g

In re Tribune Co. Fraudulent Conveyance Lit-

igation, 499 B.R. 310 (S.D.N.Y. 2013)................ 22

Law v. Siegel, 134 S. Ct. 1188 (2014) ..............00...0.. 14

Local No. 93, International Ass'n of Firefight-

ers, AFL-CIO C.L.C. v. City of Cleveland,

A es i Se rcecnntoasntisctbsttbisbbetennepnennencesees 15

Louisville Trust Co. v. Louisville, New Alba-

ny & Chicago Railway Co., 174 U.S. 674

I cicada inital enact ab eaaminiaatemaenetinaiaiaanansonns 23

Northern Pacific Railway v. Boyd, 228 U.S.

ESE ES I Cee oe ea 23

Protective Committee for Independent Stock-

holders of TMT Trailer Ferry, Inc. v. An-

derson, 390 U.S. 414 (1968).......................08 12,17

LEGISLATIVE MATERIALS

ee SNE, Pei, CIT cntaccnciensosnnsscesezsntcccssccnoes 20

STATUTES AND RULES

11 U.S.C.

eg inaisamain 12, 19

EES EERE ASR ane ee nae Danes eae m NEN ORT Hee 8

ESTES ERE SR Ea Pon eRe e lene ee #

a 10, 12, 13

vil

TABLE OF AUTHORITIES—Continued

STE, aed ae Dace AC REA SM REE USN HO TOOE, ae 8

I nhac cis a dickinaabicenenceshnndubninieliioteninetaannsedaetounnias 12

ERE NOL INDE eine as Meta 8

iota cisnaiiatnseuipeeahsinpibianiadinlansiaieensinidiidiidiaians 8

SN 6s sd seed scehdisiuaininbonibaweiiniaiaibainiienebunavoaetnid 8

Ee SARE TL AE CRs sel Ree Rr em Sr a 8

I oc ceticickdeasiashaneatinnradinnitanaeetesaainnnestonds 11

ER AEN RESGL PRES Oe Soe aW ten S)

nn oan cndlescplideniailaeieiebelinnineanehaanniel 10

Sia Lic cacincinecntadiatinsivctiaplindnieeiiidanninataninatonte 10

iia ard ceadancdeinendnnemsanmanessaeguisibatnian 10

III sn cniniesicscsnevisdediascceishesensicesosagits 10

IE oni aivsanadiundcasdislenssivicabeeiensientiiny 10-11

BD Pi ciccicescese ER SERRE EN wet pa eS SOAP See 11, 12

ee ae 9

I os ccciscccnvnbstnacoahsapesnineeeensonedad 4

aha caikd iceedc tanndsivatndanadoansumennians 24

es isc cicceteiensneesennbessesanteneh 19

Ps Cs Fs Tr ee OOF crinccciciccisiveseccecocscevsesene 4

OTHER AUTHORITIES

American Bankruptcy Institute, Commission

to Study the Reform of Chapter 11, 201 2-

2014 Final Report and Recommendations

(2014), http://commission.abi.org/full-report ......... 21

Brunstad, Jr., Eric G., Sigal, Mike &

Schorling, William H., Review of the Pro-

posals of the Nationai Bankruptcy Review

Commission Pertaining to Business

Bankruptcies: Part One, 53 Bus. Law.

IRR te RR AR EN PG SEER Ew 8

vill

TABLE OF AUTHORITIES—Continued

Christie, Jim, Caesars Invites Bankruptcy

Examiner to Probe Leveraged Buyout,

Reuters, July 2, 2015, http://www.

reuters.com/article/bankruptcy-caesars-id

USL1NO0ZIOFB20150702#EQIcL2jYOSC!

ET tin ddtectacenanimidisiddalaitatdeiseidaacticininiitescesesews 22

Frost, Christopher W., Structured Dismis-

sals: Smooth Off-Ramp or Artful Dodge?,

35 Bankr. L. Letter 10 (2015)..................00..00000005 1

Ginsburg, Martin D., Levin, Jack S. & Rocap,

Donald E., Mergers, Acquisitions and

Buyouts (Wolters Kluwer, Sept. 2015)............... 22

Jacoby, Melissa B. & Janger, Edward J., Ice

Cube Bonds: Allocating the Price of Pro-

cess in Chapter 11 Bankruptcy, 123 Yale

| EAT ne eR ee 13, 26-27

Keating, Daniel, The Fruits of Labor, 35 Ariz.

I eenaanece 25

Levine, Matt, Largest Leveraged Buyout Ever

Is Finally Bankrupt, Bloombergview,

Apr. 29, 2014, http://www.bloombergview

.com/articles/2014-04-29/largest-leveraged

-buyout-ever-is-finally-bankrupt........................ 22

Lipson, Jonathan C., Directors’ Duties to

Creditors: Power Imbalance and the Fi-

nancially Distressed Corporation, 50

SPE Bs BEG. BP CD cciccncecscccecccscccccsscvecseses 25

Lipson, Jonathan C., & Vandermeuse, Jen-

nifer, Stern, Seriously: The Article I Ju-

dicial Power, Fraudulent Transfers, and

Leveraged Buyouts, 2013 Wis. L. Rev.

STAIIEN aiagttdatianniiieaiedeeadddedaaens saimabatiisieoasiatdgenbedtacsbiiaee 3, 4

1x

TABLE OF AUTHORITIES—Continued

Lipson, Jonathan C. & Walsh, Steven, Jn re

Jevic Holding Corp., ABA _ Business

Bankr. Committee Newsl. (American Bar

Association, Chicago, II].), May 21, 2015,

http://apps.americanbar.org/buslaw/comm

ittees/CL160000pub/newsletter/201507/fa

aa a i

Lubben, Stephen J., Railroad Receiverships

and Modern Bankruptcy Theory, 89 Cor-

a EE eee

Markell, Bruce A., Owners, Auctions, and

Absolute Priority in Bankruptcy Reorgan-

izations, 44 Stan. L. Rev. 69 (1991)..............

Roe, Mark J. & Skeel, Jr., David A., As-

sessing the Chrysler Bankruptcy, 108

Se is Us ee

Roe, Mark J. & Tung, Frederick, Breaking

Bankruptcy Priority: How Rent-Seeking

Upends the Creditors’ Bargain, 99 Va. L.

IE RS ASS SIS SER Ee ee

Taking a Stand Where Few Have Trodden:

Structured Dismissal Held Clearly Author-

ized by the Bankruptcy Code, Jones Day,

Sept./Oct. 2014, http://www.jonesday.com/

taking-a-stand-where-few-have-trodden-s

tructured-dismissal-held-clearly-authoriz

ed-by-the-bankruptcy-code-10-01-2014/.......

Warren, Elizabeth & Westbrook, Jay, The

Law of Debtors and Creditors (6th ed.

poeene 25

INTEREST OF AMICI CURIAE'

Amici, whose names and affiliations are set forth

in alphabetical order on Appendix A, are law profes-

sors who study the United States’ bankruptcy sys-

tem. They write solely based on their concern about

the effect that the opinion below will have on this

system.

SUMMARY OF ARGUMENT

The opinion below threatens the foundation of

the bankruptcy system—its priority structure. Con-

gress created a detailed and deliberate order in

which creditors should be paid. On the facts of this

case, the Bankruptcy Code’s priority structure enti-

tled the Petitioners to an estimated $8.3 million dol-

lars for a claim concerning unpaid wages. Instead, a

divided panel of the Third Circuit approved a settle-

ment agreement and dismissal order (known collec-

tively as a “structured dismissal”)? that expressly

disregarded the Petitioners’ priority entitlement and,

despite properly lodged objections, awarded them

nothing. By distributing the debtor’s estate to junior

creditors rather than paying wage claims with un-

contested priority, the Third Circuit’s opinion flouted

the Bankruptcy Code’s priority rules and longstand-

! The parties have consented to the filing of this brief in

blanket letters on file with the Clerk. No counsel for a party

authored this brief in whole or in part, and no persons or enti-

ties other than amici and their counsel made a monetary con-

tribution to the preparation or submission of this brief.

2 See generally Christopher W. Frost, Structured Dismis-

sals: Smooth Off-Ramp or Artful Dodge?, 35 Bankr. L. Letter

10 (2015) (describing structured dismissals).

2

ing norms. Nothing in the Bankruptcy Code—not a

liquidation under Chapter 7 or a reorganization plan

under Chapter 11—permits this kind of priority-

skipping settlement in the absence of creditor con-

sent.

The Third Circuit's majority held that deviating

from the Bankruptcy Code's priority rules was justi-

fied because “rare” cases require this sort of “flexibil-

ity.” Pet. App. 2a, 12a & 18a. There is, however, no

workable standard for determining what makes this

case “rare,” and, as Judge Scirica’s dissenting opin-

ion observed, there is correspondingly little guidance

on what should trigger deviations in future cases—or

how far such deviations may go.

By creating an end run around the Bankruptcy

Code’s explicit priority rules, the Third Circuit’s ap-

proach fosters perverse incentives: powerful parties

will increasingly seek to resolve corporate bankrupt-

cy cases through structured dismissals which lack

creditor safeguards that Congress built into the

bankruptcy process. The decision below will increase

the costs of resolving Chapter 11 cases without any

corresponding benefits, while also undermining core

fairness goals in the Chapter 11 bankruptcy system.

I. CASE HISTORY

Jevic Transportation, Inc. (“Jevic,” or the “Debt-

or”) was a New Jersey trucking company. Pet. App.

2a.5 A subsidiary of Respondent Sun Capital Part-

* Appendix citations refer to the appendices in the Peti-

tioners' certiorari petition (“Petition”) or in the joint appendix

(JA) filed by the parties at the merits stage.

3

ners,‘ a private equity firm, acquired Jevic in a lev-

eraged buyout (LBO) in 2006.5 Id. After the LBO,

Jevic refinanced its debt with CIT Group (“CIT”),

which lent Jevic $85 million in revolving credit se-

cured by Jevic’s assets. JA22.

A. The Bankruptcy And Settlement Agree-

ment

Jevic could not service this debt. It filed a Chap-

ter 11 bankruptcy on May 20, 2008, one day after

terminating 90% of its employees, including Peti-

tioners, Jevic’s truck drivers (the “Drivers”). JA161.6

‘ This brief refers to Sun Capital Partners and its affiliated

entities as “Sun.”

5 In a leveraged buyout, a purchaser such as Sun will ac-

quire the stock of a target company, such as the Debtor.

The acquirer finances the acquisition by borrowing a

significant portion of the purchase price, liability

which it causes [Debtor (D)] to assume after closing,

secured by D’s assets. The (borrowed) purchase price

is then remitted to D’s pre-acquisition shareholders.

This has the effect of giving D’s selling shareholders

the benefit of using D’s assets to gain priority over D's

pre-bankruptcy unsecured creditors, who will be jun-

ior in right to LBO lenders with liens encumbering D's

assets.

Jonathan C. Lipson & Jennifer Vandermeuse, Stern, Seriously:

The Article I Judicial Power, Fraudulent Transfers, and Lever-

aged Buyouts, 2013 Wis. L. Rev. 1161, 1220.

® See also Joint Motion of the Debtors, CIT, Sun Capital

and the Official Committee of Unsecured Creditors Pursuant to

11 U.S.C. §§ 105(a), 349 and 1112(b) and Fed. R. Bankr. P.

9019 for Entry of an Order: (I) Approving Settlement Agreement

and Releasing Claims; (II) Dismissing the Debtors’ Cases Upon

Implementation of Settlement; and (III) Granting Related Relief

at 2, J 1 (“Settlement Motion”).

4

Petitioners hold an estimated $8.3 million in priority

wage claims against Jevic for violating New Jersey's

version of the federal Worker Adjustment and Re-

training Notification (“WARN”) Act, which requires

notification before mass layoffs. See CAJA1087—99

(complaint), CAJA1137—38 (class certification); 29

U.S.C. §§ 2101-2109; N.J. Stat. Ann. §§ 34:21-1 to -7.

The Official Committee of Unsecured Creditors

(“Committee”) was given permission to sue Sun and

CIT on behalf of the bankruptcy estate, alleging that

the LBO transfers were avoidable fraudulent and

preferential transfers (the “Adversary Proceeding”).’

Pet. App. 3a. Sun and CIT moved to dismiss the Ad-

versary Proceeding. The Bankruptcy Court denied

the motion to dismiss, concluding that the Commit-

tee adequately pleaded such claims. JA36—47. If the

Adversary Proceeding succeeded, the estate could

avoid liens and potentially recover more than $100

million from Sun and CIT. JA54—56.

Jevic borrowed more from CIT during its case on

a “super-priority,” secured basis. Settlement Motion

3—4, J 8. This left Jevic “administratively insolvent,”

meaning that its operating expenses in bankruptcy

exceeded the value of its unencumbered assets. Pet.

5-6, 10.

? Leveraged buyouts may be avoided as fraudulent trans-

fers if the transfers (e.g., lenders’ liens or payments to selling

shareholders) were made for less than reasonably equivalent

value while the debtor was insolvent. If the debtor was (or was

rendered) insolvent and “receives nothing but debt in the LBO,

it is not difficult to establish that it received inadequate value,”

thus establishing a prima facie case to avoid the LBO transfers.

Lipson & Vandermeuse, supra n.5, at 1220.

5

All major parties—except the Drivers—entered

into an agreement (the “Settlement Agreement”) set-

tling the claims in the Adversary Proceeding. Pet.

App. 4a. The Settlement Agreement had two main

elements relevant to this dispute:

First, Sun and CIT would pay about $3.7 mil-

lion to satisfy certain administrative expens-

es, such as fees of the Committee's counsel,

with the remainder going to general unse-

cured creditors—failing to pay the priority

claims of the Drivers. Pet. 11.

Second, Sun and CIT would be released from

any liability associated with the LBO, includ-

ing the fraudulent transfer claims asserted in

the Adversary Proceeding.*®

The Drivers objected. On December 4, 2012, the

Bankruptcy Court entered an order, over the Drivers’

objection, approving the Settlement Agreement (the

* Specifically, the Settlement Agreement releases CIT and

Sun from—

any and all claims or counterclaims, causes of action,

remedies, damages, liabilities, debts, suits, demands,

actions, costs, expenses, fees, controversies, set-offs,

third party actions or proceedings relating in any way

to, or arising from any transaction with or in connec-

tion to, the Debtors or their estates of whatever kind or

nature including, without limitation, any and all

claims asserted in or which could have been asserted

in, or which related to the subject matter of the Adver-

sary Proceeding, or which are based on any avoidance

or other powers afforded the Estate Releasing Parties

under the Bankruptcy Code gs

Settlement Agreement 4 2(c)(i), (ii), at 4-6 (emphasis supplied)

(exhibit A to the Settlement Motion).

6

“Dismissal Order” and, together with the Settlement

Agreement, the “Structured Dismissal”). Pet. App.

45a. The Bankruptcy Judge’s reasoning included a

factual finding that the estate was administratively

insolvent and thus could not remain in bankruptcy.

But the Dismissal Order also included the legal con-

clusion that the Bankruptcy Code’s priority rules did

not apply to a settlement, as distinct from a Chapter

11 plan or Chapter 7 liquidation. Jd. 58a.

The Bankruptcy Judge rejected the suggestion

that the case should be converted to a Chapter 7 liq-

uidation, where the priority rules would undoubtedly

apply, because the lenders made clear that they

would refuse to reach the same settlement if the case

were converted, and “it does not appear that a Chap-

ter 7 Trustee would have any money to operate, in-

vestigate or litigate.” Id. Yet, the fraudulent trans-

fer claims asserted in the Adversary Proceeding were

at least strong enough to survive motions to dismiss.

See In re Jevic Holding Corp., No. 08-11006 BLS,

2011 WL 4345204, at *10—-12 (Bankr. D. Del. Sept.

15, 2011); see also Pet. 10. As noted above, if the Ad-

versary Proceeding succeeded, the estate could po-

tentially recover more than $100 million.

B. The Appeal

The Drivers appealed. The District Court and a

divided Third Circuit Court of Appeals affirmed the

Bankruptcy Court.

The majority below concurred with the reasoning

of the Bankruptcy Judge that the Bankruptcy Code’s

priority rules did not apply to the distribution of es-

tate assets under a settlement agreement. Pet. App.

17a. In “rare instances,” the majority reasoned, a

7

court may skip priority claims when distributing es-

tate assets if the bankruptcy court has “specific and

credible grounds to justify [the] deviation.” Jd. 12a,

21a (alteration in original; internal quotations omit-

ted). The majority found such grounds here, endors-

ing the Bankruptcy Court’s conclusion that the set-

tlement and structured dismissal were the “least bad

alternative.” Id. 21a-22a.

Judge Scirica dissented. In his view, “the bank-

ruptcy court’s order undermined the [Bankruptcy]

Code’s essential priority scheme” by “skip[ping] over

an entire class of creditors” in distributing estate

property. Jd. 23a, 29a-30a. While he left open the

possibility that in “extraordinary circumstances” the

Bankruptcy Code might permit a settlement that de-

viates from the priority scheme, he found that the

Structured Dismissal here was “an impermissible

end run around the carefully designed routes by

which a debtor may emerge from Chapter 11 pro-

ceedings.” Jd. 24a, 27a-28a. Judge Scirica also

warned that, contrary to the majority's assertion, the

circumstances here were not “sui generis” and that it

is “not difficult to imagine another secured creditor

who wants to avoid providing funds to priority unse-

cured creditors.” Id. 31a.

The Petition followed.

Il. THE CHAPTER 11 SYSTEM

Chapter 11 of the Bankruptcy Code is the princi-

pal legal mechanism for restructuring troubled busi-

ness organizations. Commencing a Chapter 11 case

has three simultaneous legal consequences:

8

e First, an “estate” is created, comprised of all

property of the debtor. 11 U.S.C. § 541(a)(1).

The estate includes hard assets as well as in-

tangible assets, such as causes of action.

e Second, a fiduciary manages the debtor's es-

tate. Chapter 11 presumes that the debtor's

management team will serve this role as the

“debtor in possession” (DIP) unless the court

orders otherwise. 11 U.S.C. §§ 1101(1), 1104.

As fiduciaries, the DIP has a duty to act in

the best interest of the bankruptcy estate. 11

U.S.C. § 1107(a). The DIP may operate the

debtor in the ordinary course. 11 U.S.C.

§§ 363(b)(1), 1108.

e Third, a stay of collection actions goes into ef-

fect. 11 U.S.C. § 362(a). This “automatic

stay” is meant to create an opportunity for

the DIP and creditors to determine the best

way to maximize the value of the debtor, in-

cluding restructuring or sale.

Bargaining and negotiation are central features

of Chapter 11. “[T)he Chapter 11 process,” this

Court has explained, “relies on creditors and equity

holders to engage in negotiations toward resolution

of their interests. Bank of Am. Natl Trust & Sav.

Ass'n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 457

n.28 (1999) (quoting Eric G. Brunstad, Jr., Mike

Sigal, & William H. Schorling, Review of the Pro-

posals of the National Bankruptcy Review Commis-

sion Pertaining to Business Bankruptcies: Part One,

53 Bus. Law. 1381, 1406 n.136 (1998)). A Chapter 11

case is often characterized as “an invitation to a ne-

gotiation” between the debtor and its stakeholders.

9

See In re Ai nold, 471 B.R. 578, 592 (Bankr. C.D. Cal.

2012) (quoting Elizabeth Warren & Jay Lawrence

Westbrook, The Law of Debtors and Creditors 397

(6th ed. 2009)). These negotiations are meant to

channel participants toward a “plan of reorganiza-

tion,” a complex instrument that “represents a kind

of consent decree which has many attributes of a

contract.” See In re Stratford of Texas, Inc., 635 F.2d

365, 368 (5th Cir. 1981).

Although reorganization of the debtor was tradi-

tionally the goal of Chapter 11, the Bankruptcy Code

expressly contemplates that the plan process can be

used to effectuate a sale of assets, whether as a going

concern or piecemeal. 11 U.S.C. § 1123(a)(5). Plans

can be used even when (as in Jevic) a debtor has

gone out of business, because they provide a fair and

efficient means for liquidating and distributing the

value of the debtor's estate. See, e.g., Hunter Savings

Assocs. v. Padgett (In re Padgett), 74 B.R. 65, 67

(Bankr. S.D. Ohio 1987) (characterizing liquidating

plans as an “effective reorganization.”).

Plans can have a wide range of effects. Among

other things, they will generally pay creditors a por-

tion of their claims and discharge—eliminate legal

liability for—the balance. 11 U.S.C. §§ 1123(a)(5) &

1141(d).

The Bankruptcy Code contains procedural and

substantive protections that must be met to confirm

a plan, four of which stand out in this case:

e First, the plan must have been presented to

creditors in a “disclosure statement” which

contains “adequate information” about the

plan and the debtor sufficient to enable credi-

10

tors to vote for or against it. 11 U.S.C.

§ 1125(b).° When cases are resolved via

structured dismissal, as in Jevic, creditors

receive no disclosure statement.

e Second, the plan must have a minimum level

of stakeholder support, generally speaking

the vote of 2/3 in dollar amount and more

than half in number of creditors. 11 U.S.C.

§ 1126(c). Having this requisite level of cred-

itor support is an essential precondition to

binding holdouts and objectors to a plan. In

Jevic, creditors had no vote.

¢ Third, the plan must pay each creditor no

less than such creditor would receive in a

Chapter 7 liquidation. 11 U.S.C.

§ 1129(a)(7)(A)Gi). In a Chapter 7 liquida-

tion, the trustee would have had to pay the

Drivers in full before paying lower priority

creditors. This is because a Chapter 7 distri-

bution must strictly follow the priority rules

in section 507 of the Bankruptcy Code. Sec-

tion 507(a)(4) provides that unpaid wage

claims, such as the Drivers’, must be paid

fourth in order of priority from assets of the

debtor's estate. 11 U.S.C. § 507(a)(4). Thus,

section 507 bars final distributions to junior

claimants unless priority creditors either are

paid in full in cash or agree otherwise. 11

“Adequate information” is defined as “information of a

kind. and in sufficient detail. as far as is reasonably practicable

in light of the nature and history of the debtor and the condi-

tion of the debtor's hooks and records that would enable [] a

hypothetical investor of the relevant class to make an informed

judgment about the plan.” 11 U.S.C. § 1125(a).

11

U.S.C. § 1129(a)(9)(B). The Drivers received

nothing on account of their priority claims,

and did not agree otherwise, while general

unsecured creditors received about $1.7 mil-

lion from Jevic’s estate.

e Fourth, a dissenting class of creditors cannot

be bound by a Chapter 11 plan unless the

court makes additional findings about their

treatment. Specifically, to approve a plan

over the objections of a dissenting class, the

court must find, among other things, that the

plan is “fair and equitable.” 11 U.S.C.

§ 1129(b). “Fair and equitable” is a term of

art which implements the so-called “absolute

priority rule” (APR). “{T)he absolute priority

rule ... require[s] that ‘the creditors . . be

paid before the stockholders could retain [eq-

uity interests) for any purpose whatever.”

LaSalle, 526 U.S. at 444 (internal citations

omitted). The absolute priority rule is the

“cornerstone of reorganization practice and

theory.” See Bruce A. Markell, Owners, Auc-

tions, and Absolute Priority in Bankruptcy

Reorganizations, 44 Stan. L. Rev. 69, 123

(1991). Here, there was no plan and no such

analysis to protect the Drivers.

If plan negotiations fail, or the debtor's reorgani-

zation otherwise appears hopeless, the case may be

converted to a liquidation under Chapter 7 of the

Bankruptcy Code or dismissed. 11 U.S.C.

§ 1112(b)(1). In the event of conversion to Chapter 7,

the debtor's assets will be liquidated by a trustee. If

the case is dismissed, the Bankruptcy Code generally

contemplates that the debtor and its stakeholders

12

are to be returned to the pre-bankruptcy status quo.

11 U.S.C. § 349(b).

ARGUMENT

I. THE OPINION BELOW ERRS BECAUSE IT SuB-

VERTS CONGRESS’ POWER TO ESTABLISH BANK-

RUPTCY’S PAYMENT PRIORITY STRUCTURE

The majority opinion below concludes that, at

least in some instances, a settlement agreement and

dismissal order need not comply with the rules just

reviewed. That conclusion conflicts with the Bank-

ruptcy Code and longstanding, core bankruptcy prin-

ciples.

A. Congress, Not Courts, Determines Pay-

ment Priorities To Advance Bankruptcy

Policy

As noted, above, bankruptcy uses two sets of

priority rules: (i) those created by Congress, in § 507

of the Bankruptcy Code, and (ii) the “absolute priori-

ty rule” used, among other things, to assess plans (11

U.S.C. § 1129(b)) and settlements.!° Those rules ap-

ply in the only two ways that final distributions may

be made in a bankruptcy case. (i) a confirmed Chap-

ter 11 plan, or (ii) a Chapter 7 liquidation.’ Unless

a party with a priority entitlement agrees otherwise,

there is simply no basis for deviating from the Bank-

‘© As discussed below, the absolute priority rule applies to

settlements as a matter of common law, not statute. See Protec-

tive Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v.

Anderson, 390 U.S. 414, 432 (1968).

11 U.S.C. § 726.

13

ruptcy Code’s priority structure when making final

distributions. !2

The statutory priority rules set out in section

507—including the uncontested priority of the Driv-

ers’ claims in Jevic—reflect explicit legislative judg-

ments. “Code-authorized priorities among unsecured

claims are rooted both in the exigencies of bankrupt-

cy, and in other public policy considerations.” Melis-

sa B. Jacoby & Edward J. Janger, Ice Cube Bonds:

Allocating the Price of Process in Chapter 11 Bank-

ruptcy, 123 Yale L.J. 862, 906 (2014). These political

judgments made by Congress, in turn, reflect demo-

cratic decision-making about the resolution of finan-

cial distress. Priority treatment for claims of rank-

and-file workers—the very category of claim that the

Structured Dismissal in Jevic intentionally exclud-

ed—is a key example of Congress deliberately pro-

tecting a class of claimants that otherwise might

have little leverage in a Chapter 11 case.

This Court’ recently—and unanimously—

reminded us of the importance of honoring Congress’

judgments of this sort even if, under the facts of

some cases, the outcome is perceived as undesirable

or inconvenient. In the context of property exemp-

tions for individual debtors, this Court observed that:

“The Code’s meticulous—not to say mind-numbingly

‘2 We focus here on final distributions of estate property.

Courts and scholars debate the circumstances under which the

bankruptcy estate can make interim distributions to creditors

in the absence of statutory authority, if doing so maximizes the

bankruptcy estate overall. See, e.g.. In re Kmart Corp., 359

F.3d 866, 868 (7th Cir. 2004). That issue need not be resolved

to determine that the distribution of assets in Jevic was im-

permissible.

14

detailed—enumeration of exemptions and exceptions

to those exemptions confirms that courts are not au-

thorized to create additional exceptions.” Law uv.

Siegel, 134 S. Ct. 1188, 1196 (2014).

“To give priority to a claimant not clearly entitled

thereto,” this Court said in Howard Delivery Ser-

vices, “is not only inconsistent with the policy of

equality of distribution; it dilutes the value of the

priority for those creditors Congress intended to pre-

fer.” Howard Delivery Serv., Inc. v. Zurich Am. Ins.

Co., 547 U.S. 651, 667 (2006) (internal quotations

and citation omitted). By giving the Drivers’ priority

entitlement to junior unsecured creditors instead,

that is what the Settlement Agreement did. Yet, it is

not the province of courts to displace Congressional-

ly-established priorities, as happened in this case.

Neither Respondents (to date) nor the lower

court majority have cited any published or un-

published decisions in which priority was altered in a

final distribution of estate property over the objec-

tion of a priority creditor, and we are aware of

none.'*? This may be because the Bankruptcy Code’s

priority structure is clear, and courts recognize that

'3 Indeed, structured dismissal cases on which the majority

rely, such as Buffet Partners, were careful to point out the ab-

sence of objections to the dismissal there. See Jn re Buffet Part-

ners, L.P.. No. 14-30699-HDH-11, 2014 WL 3735804, at *3

(Bankr. N.D. Tex. July 28, 2014) (approving structured dismis-

sal where “[t]here are no non-consenting creditors [and]

[t]he proposed structured dismissal appears fair and equita-

ble.”), cited in Pet. App. 15a; see also In re Naartjie Custom

Kids, Inc., 534 B.R. 416, 426 (Bankr. D. Utah 2015) (approving

structured dismissal because, among other things, “no economic

stakeholder has objected”).

15

they are not at liberty to subvert Congress’ policy

judgments in this regard.

Respondents and the lower court appear to rec-

ognize that the Structured Dismissal here advances

no bankruptcy policy. Indeed, as Judge Scirica noted

in dissent, “it is difficult to see how the settlement is

directed at estate-value maximization. The settle-

ment deviates from the [Bankruptcy] Code’s priority

scheme so as to maximize the recovery that certain

creditors receive.” Pet. App. 26a (Scirica, J., concur-

ring in part and dissenting in part). Instead, the Re-

spondents and lower court have posited more gener-

ally that “settlements are favored in bankruptcy.”

Resp. Opp. 19.'4

This truism cannot solve the problem with Jevic.

This Court has previously condemned the prospect of

two parties stripping the rights of a third party un-

der the guise of a settlement. “[P]Jarties who choose

to resolve litigation through settlement,” this Court

has stated, “may not dispose of the claims of a third

party, and a fortiori may not impose duties or obliga-

tions on a third party, without that party's agree-

ment.” Local No. 93, Intl Ass'n of Firefighters, AFL-

CIO C.L.C. v. City of Cleveland, 478 U.S. 501, 529

'‘ Bankruptcy settlements in the Third Circuit are gov-

erned by the four-part test articulated in Jn re Martin. 91 F.3d

389, 393 (3d Cir. 1996) (Courts should assess “(1) the probabil-

ity of success in litigation; (2) the likely difficulties in collection:

(3) the complexity of the litigation involved, and the expense.

inconvenience and delay necessarily attending it; and (4) the

paramount interest of the creditors.”). As the Third Circuit has

neted elsewhere, the purpose of the Martin test is “to maximize

the recovery of those to whom the company has obligations.” /n

re RFE Indus., Inc., 283 F.3d 159, 165 (3d Cir. 2002).

16

(1986). That, however, is exactly the effect of Jevic’s

Structured Dismissal: it takes the Drivers’ entitle-

ment to recoveries on their undisputed priority

claim—which the Drivers estimate to be over $8 mil-

lion—and distributes it, instead, to junior unsecured

creditors.

It is no answer to say that Respondents would

not settle on other terms, and thus the Drivers’ stat-

utory priority rights must be ignored.'® As Judge

Scirica correctly observed in his dissent, it was

“[c]ritical to th[e] analysis . . . that the money paid by

the secured creditors in the settlement was property

of the estate.” Pet. App. 28a. (Scirica, J. dissenting

in part and concurring in part). While Respondents

could have walked away, they would have faced the

risk of continued litigation over the failed LBO.

Having chosen to purchase peace, instead, they had

no power to direct the distribution of proceeds re-

ceived by the estate in derogation of the Bankruptcy

Code’s priority rules.

'’ Sun's expressed reason for refusing to settle with the

Drivers is especially ironic. Its counsel argued that payment to

the Drivers would have amounted to funding an adversary's

litigation. Pet. App. 24a (“As Sun’s counsel explained at the

settlement hearing, ‘if the money goes to the WARN plaintiffs,

then you're funding someone who is suing you who otherwise

doesn't have funds and is doing it on a contingent fee basis.)

(Scirica, J. dissenting in part and concurring in part). Yet, even

without being paid on account of their priority claim, the Driv-

ers pursued the WARN Act litigation against Sun—which was

not settled in the Settlement Agreement—and Sun won. See In

re Jevic Holding Corp., No. 14-4331, 2016 WL 4011149, at *1

(3d Cir. July 27, 2016).

17

B. Settlements In Bankruptcy Are Subject

To The “Absolute Priority Rule”

Respondents have argued that “[t]here is not a

single reported decision from any circuit holding that

any provision of the Bankruptcy Code extends the

absolute priority rule to settlements.” Resp. Opp. 12.

Respondents are wrong.

Respondents and the majority below rely heavily

on the Second Circuit’s decision in Jn re Iridium Op-

erating LLC, 478 F.3d 452, 463—64 (2d Cir. 2007).

Pet. App. 19a (“We agree with the Second Circuit’s

approach in Jridium.”); Resp. Opp. 2 (citing Jridium,

478 F.3d at 455). The reliance is misplaced.

In Iridium, the unsecured creditors’ committee

sought to settle a suit it had brought against a group

of secured lenders that would have divided the es-

tate’s cash between the lenders and a litigation trust

created to sue Motorola, a priority administrative

creditor (and the debtor's corporate parent). 478

F.3d at 456, 459-60. Motorola objected to the set-

tlement, arguing that the distribution violated the

absolute priority rule by skipping its first-priority

claim. Id. at 456.

The Second Circuit looked to this Court's opinion

in TMT Trailer Ferry v. Anderson, which “held that

‘[t]he requirements that plans of reorganization

be both ‘fair and equitable’ apply to compromises just

as to other aspects of reorganizations.” See Iridium,

478 F.3d at 463 (quoting Protective Comm. for Indep.

Stockholders, 390 U.S. at 424).

Consistent with TMT Trailer Ferry, the Second

Circuit did not approve the priority-skipping distri-

bution sought in Jridium. Rather, it remanded with

18

the observation that whether a settlement “complies

with the Bankruptcy Code’s priority scheme will be

the most important factor for a bankruptcy court to

consider in approving a settlement.” See Iridium,

478 F.3d at 455 (emphasis supplied).

Iridium provides no support for the Structured

Dismissal here, for two reasons. First, the majority

below strayed far from the language of Iridium. Re-

specting the priority claims of the Drivers was hardly

the “most important factor” in approving the Struc-

tured Dismissal.

Second, no court in Jridium ultimately blessed a

priority-skipping settlement. Rather, on remand, it

appears that Motorola, the debtors, and other credi-

tors continued to negotiate. Their disputes were re-

solved in a “Global Settlement” under which priority-

creditor Motorola apparently released its adminis-

trative expense claims and consented to distributions

to (junior) unsecured creditors. See Order Approving

a Global Settlement of Disputes Between and/or

Among the Debtors, The Statutory Creditors’ Com-

mittee, the Debtors’ Prepetition Secured Lenders and

Motorola, Inc. (Dkt. No. 1540), In re Iridium Operat-

ing LLC, No. 99-45005 (JMP) (Bankr. S.D.N.Y. May

20, 2008). Thus, it appears no priority-skipping dis-

tribution was made over the objection of a non-

consenting priority creditor.

What ultimately happened in Jridium is what

should have happened in Jevic. Rather than approve

the Structured Dismissal over the Drivers’ objection,

the court below should have sent it back to the

Bankruptcy Court for further proceedings. Con-

sistent with the bargaining dynamic that is central

19

to bankruptcy, it is likely (although not guaranteed)

that the parties here would have negotiated to revise

the Settlement Agreement which, if acceptable to all

parties, would have resolved their disputes, and

paved the way for a resolution of this case consistent

with the Bankruptcy Code’s priority system.

Unfortunately, the Jevic majority failed to appre-

ciate the bargaining dynamic at work in I/ridium.

While bankruptcy, like other fields of law, seeks to

promote settlement, the desire to settle is not license

to violate the law over the objection of a party

harmed by the violation.

Here, the Structured Dismissal released Sun and

CIT from liability—inside bankruptcy and out—for

the failed leveraged buyout that led to the company’s

bankruptcy. It therefore not only skipped the Driv-

ers’ priority claim; it also foreclosed their only re-

maining source of recovery. But for Jevic’s bank-

ruptcy, the Drivers would have been able to assert in

state court fraudulent transfer claims similar to

those in the Adversary Proceeding, because every

state has a law permitting avoidance of fraudulent

transfers. See, e.g., N.J. Stat. Ann. § 25:2-20 (2015)

(New Jersey's version of Uniform Fraudulent Trans-

fer Act). Absent the releases, the dismissal of the

bankruptcy would have revested those claims with

non-settling creditors, here the Drivers.'®

‘6 Section 349 of the Bankruptcy Code governs the effect of

dismissals. It provides, in pertinent part, that “[ujnless the

court, for cause, orders otherwise, a dismissal of a case (3)

revests the property of the estate in the entity in which such

property was vested immediately before the commencement of

the case under this title.” 11 U.S.C. § 349(b). This means that

dismissal should “undo the bankruptcy case, as far as practica-

20

Il. SUBVERTING BANKRUPTCY’S PRIORITY STRUC-

TURE WILL CREATE COSTLY UNCERTAINTY

The opinion below creates uncertainty about the

conditions that would permit its deviations, and how

far such deviations may go. This uncertainty impos-

es steep costs.

A. Jevic’s Triggers And Scope Are Uncertain

The Jevic majority justified deviating from the

Bankruptcy Code’s priority and dismissal rules due

to the “dire circumstances” of the case. Pet. App. 8a.

Thus, the Third Circuit majority concluded that pri-

ority-skipping settlements may be approved “in a ra-

re case,” if the bankruptcy court has “specific and

credible grounds to justify [the] deviation.” Jd. 2la

(quoting Jridium, 478 F.3d at 466) (alteration in orig-

inal). Unfortunately, as Judge Scirica observed, the

majority opinion offers no guidance on what makes

this case “rare.”!7

ble.” H.R. Rep. No. 95-595, at 338 (1977). In this case, the

Structured Dismissal and Settlement Agreement released Sun

and CIT from “third party actions or proceedings relating in any

way to, or arising from any transaction with or in connection to,

the Debtors or their estates of whatever kind or nature in-

cluding, without limitation, any and ail claims asserted in or

which could have been asserted in, or which related to the sub-

ject matter of the Adversary Proceeding " Settlement

Agreement 4 2(c)(i), (ii), at 4~6 (emphasis supplied). In so do-

ing, the Jevic majority significantly expanded the “cause” ex-

ception in § 349. Cf. In re Sadler, 935 F.2d 918, 921 (7th Cir.

1991) (reversing lower courts’ approval of a dismissal order that

stripped a secured creditor of its collateral).

'7“T depart from the majority opinion,” he explained “in

holding this appeal presents an extraordinary case where de-

21

1. Jevic’s Trigger Ia Unclear Because

This Case is Not Rare

The key factor appears to have been the estate's

administrative insolvency. See JA180; Pet. App. 58a.

Administrative insolvency means that a debtor is

unable to pay the ongoing expenses of operating in

bankruptcy. That may be grounds to convert or dis-

miss a case. See, e.g., In re Acme Cake Co., 495 B.R.

212, 217 (Bankr. E.D.N.Y. 2010). Administrative in-

solvency does not, however, make a case “rare.” See

American Bankruptcy Institute, Commission to

Study the Reform of Chapter 11, 2012-2014 Final

Report and Recommendations 173 (2014) (noting that

“administratively insolvent’ cases have become more

common”). Nor does it justify deviation from the

Bankruptcy Code’s priority rules.

Conditioning priority rule deviations on the

debtor’s financia] condition arguably creates perverse

incentives to impair a debtor’s solvency, further un-

dercutting Congress’ authority in creating the priori-

ty structure. Indeed, Jevic would seem to reward

those who contribute to administrative insolvency

through pre- and post-bankruptcy lending transac-

tions while they also seek to dictate the terms of a

final distribution that defies the bankruptcy priority

rules.

At bottom, this case was a garden-variety failed

leveraged buyout (LBO). Failed-LBO bankruptcies

are hardly rare.'* They often result in fraudulent

parture from the general rule is warranted.” Pet. App. 24a

(Scirica, J. dissenting in part and concurring in part).

'* The recent bankruptcies of Caesar's Entertainment and

Energy Future Holdings Corp., for example. were precipitated

22

transfer suits, as happened here. See, e.g., Boyer v.

Crown Stock Distribution, Inc., 587 F.3d 787 (7th

Cir. 2009); In re Lyondell Chem. Co., 503 B.R. 348

(Bankr. S.D.N.Y. 2014); In re Tribune Co. Fraudulent

Conveyance Litigation, 499 B.R. 310 (S.D.N.Y. 2013);

see also Martin D. Ginsburg, Jack S. Levin & Donald

E. Rocap, Mergers, Acquisitions and Buyouts 9 1706

(Wolters Kluwer, Sept. 2015) (collecting

LBO/fraudulent transfer cases).

Neither the Third Circuit majority opinion nor

the underlying facts reveal what makes Jevic rare.

Because its facts are not rare, the decision is simply

not clear as to what should trigger similar deviations

in the future. This uncertainty “would seem to invite

further litigation to test [Jevic’s] boundaries.” See

Jonathan C. Lipson & Stephen Walsh, In re Jevic

Holding Corp., 3, ABA Business Bankr. Committee

Newsl. (American Bar Association, Chicago, IIl.),

May 21, 2015, http://apps.americanbar.org/buslaw/

com mittees/CL160000pub/newsletter/201507/fa_3.pdf.

This state of affairs may be attractive to repeat play-

ers in Chapter 11 cases who would prefer a distribu-

tion of estate assets other than the one the Bank-

ruptcy Code requires.

by failed leveraged buyouts. See Jim Christie, Caesars Invites

Bankruptcy Examiner to Probe Leveraged Buyout, Reuters, July

2, 2015, http:/Awww.reuters.com/article/hankruptcy-caesars-

idUSL1NOZIOFB20150702#EQIcL2jYOSCIJILY.97; Matt Lev-

ine, Largest Leveraged Buyout Ever Is Finally Bankrupt,

Bloombergview, Apr. 29. 2014, http://www.bloombergview.com/

articles/2014-04-29/largest-leveraged-buyout-ever-is-finally-bank

rupt (discussing Energy Future Holdings).

23

2. Jevic’s Limite Are Unclear

As Jevic’s trigger is uncertain, so too is its stop-

ping point. If a settlement can skip the Drivers’

statutory priority, other equally foundational priority

rules and standards may be up for grabs, too.

Consider, for example, the classic application of

the absolute priority rule, to prevent the “squeeze

out” of unsecured creditors in a _ reorganization

plan.'® Absolute priority developed in response to

railroad reorganizations in which senior creditors

and junior shareholders were sometimes said to col-

lude in an effort to retain control of a distressed

debtor, skipping over intermediate creditors. Ste-

phen J. Lubben, Railroad Receiverships and Modern

Bankruptcy Theory, 89 Cornell L. Rev. 1420, 1445

(2004) (calling this dynamic “[o]ne of the most con-

troversial features of receiverships’).

Absolute priority became “the familiar rule that

the stockholder's interest in the [debtor's] property is

subordinate to the rights of creditors. . first, of se-

cured, and then of unsecured, creditors.” See Louis-

ville Trust Co. v. Louisville, N.A. & C. Ry. Co., 174

U.S. 674, 684 (1899). “Any arrangement of the par-

ties by which the subordinate rights and interests of

the stockholders are attempted to be secured at the

expense of the prior rights of either class of creditors

comes within judicial denunciation,” this Court has

said. See N. Pac. Ry. Co. v. Boyd, 228 U.S. 482, 505

(1913) (quoting Louisville Trust, 174 U.S. at 684). If

Jevic permits the squeeze-out of the Drivers in a set-

19 The Bankruptcy Code’s current use of the absolute prior-

ity rule in connection with Chapter 11 plans is discussed above.

24

tlement and dismissal order, it is not clear why a set-

tlement and dismissal order could not also eliminate

the rights of general unsecured creditors using a sim-

ilar rationale.

Likewise, Jevic raises questions about statutes

that confer priority outside of the bankruptcy sys-

tem. Under a federal statute designed to protect

government claims, for example, “a claim of the

United States Government shall be paid first when a

person indebted to the Government is insolvent” and,

intentionally or not, the debtor’s assets are placed

beyond the reach of the federal government.” If fed-

eral courts can deprive the Drivers of the express

priority entitlement of their wage claims, as in Jevic,

beneficiaries of other priority statutes, such as the

United States, can no longer be sure that they are

immune from a similar fate.

B. Jevic’s Costs

The uncertainty created by Jevic imposes at least

three types of costs. First, Jevic will promote rent

seeking: “Contestable priority rules make creditors’

returns more variable and harder to predict. The

greater variance of their returns may cause creditors

2 The statute provides in full: “(a) (1) A claim of the United

States Government shall be paid first when (A) a person in-

debted to the Government is insolvent and (i) the debtor with-

out enough property to pay all debts makes a voluntary as-

signment of property; (ii) property of the debtor, if absent, is

attached; or (iii) an act of bankruptcy is committed; or (B) the

estate of a deceased debtor, in the custody of the executor or

administrator, is not enough to pay all debts of the debtor.” 31

U.S.C. § 3713. It does not apply to a debtor in a bankruptcy

case under title 11. Jd.

25

to raise their prices or forgo what would otherwise be

value-increasing transactions.” Mark J. Roe & Fred-

erick Tung, Breaking Bankruptcy Priority: How

Rent-Seeking Upends the Creditors’ Bargain, 99 Va.

L. Rev. 1235, 1273 (2013).

To be sure, commercial! lenders who can “adjust”

to these new conditions can respond by contracting

the supply of credit or raising its price. A common

critique of uncertain legal rules, and of nonconsen-

sual deviations from rules that were previously

thought to be certain, is that they increase the costs

of credit. Mark J. Roe & David A. Skeel, Jr., As-

sessing the Chrysler Bankruptcy, 108 Mich. L. Rev.

727 (2010). But the Drivers, the objecting creditors

in Jevic, are generally recognized to be “non-

adjusting” creditors. “Non-adjusting” creditors “do

not choose to extend credit to the corporation, and so

cannot through pricing or other market mechanisms

adjust their rights against the debtor, even if the

debtor fully encumbers its assets.” Jonathan C. Lip-

son, Directors’ Duties to Creditors: Power Imbalance

and the Financially Distressed Corporation, 50

UCLA L. Rev. 1189, 1240 (2003). “[{E]mployees,” for

example, “are typically not as able as large institu-

tional creditors to diversify their credit portfolio so as

to minimize the impact of their employer filing bank-

ruptcy.” See Daniel Keating, The Fruits of Labor, 35

Ariz. L. Rev. 905, 907 (1993). If a structured dismis-

sal can strip them of the priority Congress gave their

claims, they will lose whatever bargaining leverage

the Bankruptcy Code gave them.

Put another way, “if the jumped creditors adjust

more slowly than the nimble jumping creditors, val-

ue transfers occur and such jumps make for winners

26

and losers.” Roe & Tung, 99 Va. L. Rev. at 1241-42.

The winners and losers may conflict directly with the

priority system created by Congress that has long

been central to a reasonably efficient bargaining en-

vironment in Chapter 11.

Second, Jevic will make it more difficult to re-

solve Chapter 11 cases through negotiation. Bank-

ruptcy negotiations are most effective when they

begin “inside a priority framework.” Roe & Tung, 99

Va. L. Rev. at 1271. Here, the lower courts teach

that foundational rules on priority can be ignored in

“rare” cases that turn out on inspection not to be ter-

ribly rare. By creating an underspecified exception

to the Bankruptcy Code’s priority rules, Jevic creates

the possibility—or the threat of the possibility—of

priority-evading settlements in a wide range of situa-

tions. This will increase incidents of dispute and the

costs of negotiated resolution because, if the majority

opinion below stands, parties simply have less cer-

tainty about their priorities relative to one another.

A third cost is to the federal judiciary. It does

the bankruptcy courts no favors for an appellate

court to hold that subversions of clear statutory pri-

ority rules are permitted when the judge deems a

case to be “rare.” Past practice suggests that parties

and professionals will regularly test the boundaries

of Jevic’s priority deviation, and seek the same or

analogous treatment in their own cases.2! Jacoby &

2! The website of one prominent law firm, for example,

promotes structured dismissals “as a way to minimize costs and

maximize creditor recoveries.” See Taking a Stand Where Few

Have Trodden: Structured Dismissal Held Clearly Authorized

by the Bankruptcy Code, Jones Day, Sept./Oct. 2014, http://www.

jonesday.com/taking-a-stand-where-few-have-trodden-structured-

27

Janger, 123 Yale L.J. at 887-89. In other words,

supposedly exceptional cases may become the norm.

As parties seek these deviations more frequently,

bankruptcy judges will, in turn, increasingly be

asked to ignore the rule of law.

The Bankruptcy Code’s priority rules are a shield

protecting bankruptcy judges from having to decide

“take-it-or-leave-it” settlements like the one that con-

fronted the Bankruptcy Court here. The challenges

associated with sorting amongst these deals can be

especially acute in business bankruptcies with fewer

resources, less market information, and relatively

modest public scrutiny overall. While the Bankrupt-

cy Code relies on judicial discretion with respect to

many important decisions, Congress wisely gave

judges neither the power—nor the burden—to sort

between priority-subverting settlements in the man-

ner Jevic would require.

dismissal -held-clearly-authorized-by-the-bankruptcy-code- 10-01-

2014/.

28

CONCLUSION

The settlement agreement and dismissal order in

Jevic stripped the Drivers of payment and collection

rights they are promised by the Bankruptcy Code.

This treatment defied the clear language of the

Bankruptcy Code, subverting Congress’ power to de-

termine the priority of final distributions of a debt-

or’s estate in bankruptcy. The Third Circuit majori-

ty, while declaring the case to be “rare,” articulated

no limiting principles, creating a significant risk that

the opinion will distort the resolution of financial

distress in the future. This Court should reverse the

majority opinion below.

Respectfully submitted.

MELISSA B. JACOBY JONATHAN C. LIPSON

UNIVERSITY OF NORTH Counsel of Record

CAROLINA SCHOOL OF LAW TEMPLE UNIVERSITY—

160 Ridge Road BEASLEY SCHOOL OF LAW

Chapel Hill, NC 27599 1719 North Broad Street

(919) 962-8114 Philadelphia, PA 19122

(215) 204-0608

jlipson@temple.edu

SEPTEMBER 2016

APPENDIX

la

APPENDIX

AMICI

Kenneth Ayotte, Professor of Law, U.C. Berkeley

School of Law

Ralph Brubaker, Carl L. Vacketta Professor of Law,

University of Illinois College of Law

Christopher W. Frost, Thomas P Lewis Professor of

Law, University of Kentucky College of Law

S. Elizabeth Gibson, Burton Craige Professor of Law

Emerita, University of North Carolina Schoo] of Law

Edward J. Janger, David M. Barse Professor

Brooklyn Law School & Maurice R. Greenberg Visit-

ing Professor, Yale Law School (Spring 2017)

Angela Littwin, Professor of Law, University of Tex-

as School of Law

Bruce A. Markell, Professor of Bankruptcy Law and

Practice, Northwestern Pritzker School of Law

Juliet M. Moringiello, Professor of Law. Widener

University Commonwealth Law School

Thomas E. Plank, Joel A. Katz Distinguished Profes-

sor of Law. University of Tennessee College of Law

Lawrence Ponoroff, Dean and Professor of Law.

Michigan State University College of Law

Katherine Porter. Professor of Law, University of

California-Irvine

* Affiliations are listed for identification only.

2a

Robert K. Rasmussen, J. Thomas McCarthy Trustee

Chair in Law and Political Science, University of

Southern California—Gould School of Law

Mark J. Roe, David Berg Professor of Law, Harvard

Law School

David A. Skeel, Jr., S. Samuel Arsht Professor of

Corporate Law. University of Pennsylvania Law

School

Frederick Tung, Associate Dean for Academic Affairs

and Howard Zhang Faculty Research Scholar and

Professor of Law, Boston University School of Law

Jay L. Westbrook, Benno C. Schmidt Chair of Busi-

ness Law, University of Texas School of Law

William J. Woodward, Jr., Research Fellow, Santa

Clara University School of Law & Professor of Law

Emeritus, Temple University—Beasley School of

Law