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Jevic: Breathing New Life Into Priority Disputes

Posted on: May 9, 2017

In our article, Jevic: The Supreme Court Gives Structure to Chapter 11 Structured Dismissal, we discussed the narrow holding of Czyzewski et al., v. Jevic Holding Corp., et al., 137 S. Ct. 973, 985 (2017) (“Jevic”), which prohibits non-consensual structured dismissals that violate the Bankruptcy Code’s priority principles.   We also observed that the strong priority-protecting, and rules-driven approach of Jevic would offer new arguments to priority disputes involving “gifting plans” and “structured asset sales.”  Only six weeks later, the Jevic decision is already impacting cases in Delaware and Tennessee.

In In re William Harry Fryar, No. 16-bk-13559, 2017 WL 1489822 (E.D. Tenn. April 25, 2017), the court relied on Jevic to reject a debtor’s proposal to sell certain assets to support a settlement with secured creditor, Pinnacle Bank. Pinnacle had a secured claim in the amount of $200,000 and an unsecured claim in the amount of $181,000.  The debtor proposed to sell certain stock interests in two companies in exchange for $350,000 plus the conveyance of certain real estate.   The stock interests would be sold free and clear of a $90,000 tax lien, and the tax lien would not attach to the proceeds of the sale.  Instead, the lien would attach to two other properties already owned by the Debtor and the real estate conveyed to the Debtor in connection with the sale.  The cash proceeds of the sale would fund a settlement with Pinnacle.  The U.S. Trustee and unsecured creditors objected to the settlement on the grounds that it violated the Code’s priority rules.  There was no dispute that the cash proceeds of the sale, if paid into the estate and not directly to Pinnacle, would be directed to priority creditors, such as the tax lien, before paying Pinnacle’s unsecured claim. 

The court, guided significantly by Jevic, concluded that the settlement was unfair and “is more of a preamble to a conversion or structured dismissal” and the “Debtor has failed to prove that disregard of the priority scheme will promote ‘a significant Code-related objective.’” (quoting Jevic, 137 S. Ct. at 985).

More recently, in In re Constellation Enterprises LLC, et al., 16-bk- 16-11213 (CSS), Jevic features prominently in objections to the Debtors’ and Creditors’ Committee’s joint settlement motion and the Debtor’s motion for dismissal.  The settlement motion proposes to transfer certain causes of action and potential litigation to the General Unsecured Creditor Trust and provide a $2.05 million payment for the Creditors’ Committee’s professional fees. 

The U.S. Trustee and certain lenders filed objections to the settlement and dismissal.  The objections rely heavily on Jevic and attempt to distinguish the Third Circuit’s holding In re ICL Holding, Co., Inc., 802 F.3d 547 (3d Cir. 2015).  In ICL a secured lender credit bid to acquire all of the debtors’ assets in a Section 363 sale.  As part of the sale, the secured lender agreed to make cash payments to escrow accounts to fund debtors’ professional fees and distributions to unsecured creditors.  After the sale, the debtors would have no assets to fund distributions to any of the remaining creditors; however, the escrow account was available to fund the wind-down of the debtors’ chapter 11 cases, including the payment of professional fees of the debtors and any official unsecured creditors committee.  Despite an objection from the federal government – a priority creditor – the Third Circuit affirmed the sale and distributions because “neither of the two payments went into or came out of the bankruptcy estate . . . the cash was not subject to the Code’s distribution priority.”

In Constellation, the sale and settlement proponents rely heavily on ICL.  However, as the U.S. Trustee notes in its objection brief, the impact of Jevic on ICL is unsettled.  Both cases involved “high-priority (secured) creditors and low-priority (unsecured) creditors team[ing] up to squeeze out a dissenting mid-priority creditor (the United States, which held a large tax claim entitled to administrative priority).” See United States Trustee Supplemental Objection, 16-bk-11213 (CSS) (D. Del. May 5, 2017) (Dkt. No. 945).   Although the Third Circuit concluded that the ICL settlement did not involve estate property and was therefore not subject to the Code’s priority rules, the U.S. Trustee argues “Jevic casts doubt on ICL’s continued viability.” It remains to be seen whether the objectors can persuade the court that Constellation’s settlement and dismissal “deviate from the basic system of priority” and ought to be denied as “priority-skipping gifts of non-estate property.”

As predicted, Jevic is breathing new life into priority disputes.  We will keep you posted with further Jevic developments.