Jevic Holding Corp. v. , 787 F.3d 173 ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 14-1465
___________
In re: JEVIC HOLDING CORP., et al.,
Debtors
OFFICIAL COMMITTEE OF UNSECURED CREDITORS
on behalf of the bankruptcy estates
of Jevic Holding Corp., et al.
v.
CIT GROUP/BUSINESS CREDIT INC.,
in its capacity as Agent;
SUN CAPITAL PARTNERS, INC.;
SUN CAPITAL PARTNERS IV, LP;
SUN CAPITAL PARTNERS MANAGEMENT IV, LLC
CASIMIR CZYZEWSKI; MELVIN L. MYERS;
JEFFREY OEHLERS; ARTHUR E. PERIGARD
and DANIEL C. RICHARDS,
on behalf of themselves and all others similarly situated,
Appellants
__________
On Appeal from the United States District Court
for the District of Delaware
(D.C. Nos. 13-cv-00104 & 1-13-cv-00105)
District Judge: Honorable Sue L. Robinson
___________
Argued January 14, 2015
Before: HARDIMAN, SCIRICA and BARRY,
Circuit Judges
(Filed: May 21, 2015)
Jack A. Raisner, Esq. (Argued)
Rene S. Roupinian, Esq.
Outten & Golden
3 Park Avenue, 29th Floor
New York, NY 10016
Christopher D. Loizides, Esq.
Loizides, P.A.
1225 King Street, Suite 800
Wilmington, DE 19801
Attorneys for Appellants
Domenic E. Pacitti, Esq.
Linda Richenderfer, Esq.
Klehr Harrison Harvey Branzburg
919 Market Street, Suite 1000
Wilmington, DE 19801
Attorneys for Appellee Debtors
2
Robert J. Feinstein, Esq.
Pachulski Stang Ziehl & Jones
780 Third Avenue, 36th Floor
New York, NY 10017
James E. O’Neill III, Esq.
Pachulski Stang Ziehl & Jones
919 North Market Street
P.O. Box 8705, 17th Floor
Wilmington, DE 19801
Attorneys for Appellee Official Committee of
Unsecured Creditors
Christopher Landau, Esq. (Argued)
James P. Gillespie, Esq.
Jason R. Parish, Esq.
Kirkland & Ellis
655 15th Street, N.W., Suite 1200
Washington, DC 20005
Danielle R. Sassoon, Esq.
Kirkland & Ellis
601 Lexington Avenue
New York, NY 10022
Curtis S. Miller, Esq.
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
3
Attorneys for Appellee Sun Capital Partners IV, LP,
Sun Capital Partners, Inc., Sun Capital Partners
Management IV, LLC.
Tyler P. Brown, Esq.
Shannon E. Daily, Esq.
Hunton & Williams
951 East Byrd Street
13th Floor, East Tower, Riverfront Plaza
Richmond, VA 23219
Richard P. Norton, Esq.
Hunton & Williams
200 Park Avenue, 52nd Floor
New York, NY 10166
Attorneys for Appellee CIT Group Business Credit Inc.
Ramona D. Elliott, Esq.
P. Matthew Sutko, Esq.
Wendy L. Cox, Esq. (Argued)
United States Department of Justice
441 G Street, N.W., Suite 6150
Washington, DC 20530
Attorneys for Amicus Curiae
____________
OPINION OF THE COURT
____________
HARDIMAN, Circuit Judge
This appeal raises a novel question of bankruptcy law:
may a case arising under Chapter 11 ever be resolved in a
4
“structured dismissal” that deviates from the Bankruptcy
Code’s priority system? We hold that, in a rare case, it may.
I
A
Jevic Transportation, Inc. was a trucking company
headquartered in New Jersey. In 2006, after Jevic’s business
began to decline, a subsidiary of the private equity firm Sun
Capital Partners acquired the company in a leveraged buyout
financed by a group of lenders led by CIT Group. The buyout
entailed the extension of an $85 million revolving credit
facility by CIT to Jevic, which Jevic could access as long as it
maintained at least $5 million in assets and collateral. The
company continued to struggle in the two years that followed,
however, and had to reach a forbearance agreement with
CIT—which included a $2 million guarantee by Sun—to
prevent CIT from foreclosing on the assets securing the loans.
By May 2008, with the company’s performance stagnant and
the expiration of the forbearance agreement looming, Jevic’s
board of directors authorized a bankruptcy filing. The
company ceased substantially all of its operations, and its
employees received notice of their impending terminations on
May 19, 2008.
The next day, Jevic filed a voluntary Chapter 11
petition in the United States Bankruptcy Court for the District
of Delaware. At that point, Jevic owed about $53 million to
its first-priority senior secured creditors (CIT and Sun) and
over $20 million to its tax and general unsecured creditors. In
June 2008, an Official Committee of Unsecured Creditors
(Committee) was appointed to represent the unsecured
creditors.
5
This appeal stems from two lawsuits that were filed in
the Bankruptcy Court during those proceedings. First, a group
of Jevic’s terminated truck drivers (Drivers) filed a class
action against Jevic and Sun alleging violations of federal and
state Worker Adjustment and Retraining Notification
(WARN) Acts, under which Jevic was required to provide 60
days’ written notice to its employees before laying them off.
See 29 U.S.C. § 2102; N.J. Stat. Ann. § 34:21-2. Meanwhile,
the Committee brought a fraudulent conveyance action
against CIT and Sun on the estate’s behalf, alleging that Sun,
with CIT’s assistance, “acquired Jevic with virtually none of
its own money based on baseless projections of almost
immediate growth and increasing profitability.” App. 770
(Second Am. Compl. ¶ 1). The Committee claimed that the
ill-advised leveraged buyout had hastened Jevic’s bankruptcy
by saddling it with debts that it couldn’t service and described
Jevic’s demise as “the foreseeable end of a reckless course of
action in which Sun and CIT bore no risk but all other
constituents did.” App. 794 (Second Am. Compl. ¶ 128).
Almost three years after the Committee sued CIT and
Sun for fraudulent conveyance, the Bankruptcy Court granted
in part and denied in part CIT’s motion to dismiss the case.
The Court held that the Committee had adequately pleaded
claims of fraudulent transfer and preferential transfer under
11 U.S.C. §§ 548 and 547. Noting the “great potential for
abuse” in leveraged buyouts, the Court concluded that the
Committee had sufficiently alleged that CIT had played a
critical role in facilitating a series of transactions that
recklessly reduced Jevic’s equity, increased its debt, and
shifted the risk of loss to its other creditors. In re Jevic
Holding Corp., 2011 WL 4345204, at *10 (Bankr. D. Del.
Sept. 15, 2011) (quoting Moody v. Sec. Pac. Bus. Credit, Inc.,
971 F.2d 1056, 1073 (3d Cir. 1992)). The Court dismissed
6
without prejudice the Committee’s claims for fraudulent
transfer under 11 U.S.C. § 544, for equitable subordination of
CIT’s claims against the estate, and for aiding and abetting
Jevic’s officers and directors in breaching their fiduciary
duties, because the Committee’s allegations in support of
these claims were too sparse and vague.
In March 2012, representatives of all the major
players—the Committee, CIT, Sun, the Drivers, and what was
left of Jevic—convened to negotiate a settlement of the
Committee’s fraudulent conveyance suit. By that time, Jevic’s
only remaining assets were $1.7 million in cash (which was
subject to Sun’s lien) and the action against CIT and Sun. All
of Jevic’s tangible assets had been liquidated to repay the
lender group led by CIT. According to testimony in the
Bankruptcy Court, the Committee determined that a
settlement ensuring “a modest distribution to unsecured
creditors” was desirable in light of “the risk and the [re]wards
of litigation, including the prospect of waiting for perhaps
many years before a litigation against Sun and CIT could be
resolved” and the lack of estate funds sufficient to finance
that litigation. App. 1275.
In the end, the Committee, Jevic, CIT, and Sun
reached a settlement agreement that accomplished four
things. First, those parties would exchange releases of their
claims against each other and the fraudulent conveyance
action would be dismissed with prejudice. Second, CIT would
pay $2 million into an account earmarked to pay Jevic’s and
the Committee’s legal fees and other administrative expenses.
Third, Sun would assign its lien on Jevic’s remaining $1.7
million to a trust, which would pay tax and administrative
creditors first and then the general unsecured creditors on a
7
pro rata basis.1 Lastly, Jevic’s Chapter 11 case would be
dismissed. The parties’ settlement thus contemplated a
structured dismissal, a disposition that winds up the
bankruptcy with certain conditions attached instead of simply
dismissing the case and restoring the status quo ante. See In
re Strategic Labor, Inc., 467 B.R. 11, 17 n.10 (Bankr. D.
Mass. 2012) (“Unlike the old-fashioned one sentence
dismissal orders—‘this case is hereby dismissed’—structured
dismissal orders often include some or all of the following
additional provisions: ‘releases (some more limited than
others), protocols for reconciling and paying claims, “gifting”
of funds to unsecured creditors[, etc.]’” (citation omitted)).
There was just one problem with the settlement: it left
out the Drivers, even though they had an uncontested WARN
Act claim against Jevic.2 The Drivers never got the chance to
present a damages case in the Bankruptcy Court, but they
estimate their claim to have been worth $12,400,000, of
1
This component of the agreement originally would
have paid all $1.7 million to the general unsecured creditors,
but the United States Trustee, certain priority tax creditors,
and the Drivers objected. The general unsecured creditors
ultimately received almost four percent of their claims under
the settlement.
2
Although Sun was eventually granted summary
judgment in the WARN Act litigation because it did not
qualify as an employer of the Drivers, In re Jevic Holding
Corp., 492 B.R. 416, 425 (Bankr. D. Del. 2013), the
Bankruptcy Court entered summary judgment against Jevic
because it had “undisputed[ly]” violated the state WARN Act,
In re Jevic Holding Corp., 496 B.R. 151, 165 (Bankr. D. Del.
2013).
8
which $8,300,000 was a priority wage claim under 11 U.S.C.
§ 507(a)(4). See Drivers’ Br. 6 & n.3; In re Powermate
Holding Corp., 394 B.R. 765, 773 (Bankr. D. Del. 2008)
(“Courts have consistently held that WARN Act damages are
within ‘the nature of wages’ for which § 507(a)(4)
provides.”). The record is not explicit as to why the
settlement did not provide for any payment to the Drivers
even though they held claims of higher priority than the tax
and trade creditors’ claims.3 It seems that the Drivers and the
other parties were unable to agree on a settlement of the
WARN Act claim, and Sun was unwilling to pay the Drivers
as long as the WARN Act lawsuit continued because Sun was
a defendant in those proceedings and did not want to fund
litigation against itself.4 The settling parties also accept the
3
For example, Jevic’s chief restructuring officer
opaquely testified in the Bankruptcy Court: “There was no
decision not to pay the WARN claimants. There was a
decision to settle certain proceedings amongst parties. The
WARN claimants were part of that group of people that
decided to create a settlement. So there was no decision not to
pay the WARN claimants.” App. 1258.
4
Sun’s counsel acknowledged as much in the
Bankruptcy Court, stating:
[I]t doesn’t take testimony for Your Honor . . .
to figure out, Sun probably does care where the
money goes because you can take judicial
notice that there’s a pending WARN action
against Sun by the WARN plaintiffs. And if the
money goes to the WARN plaintiffs, then
you’re funding somebody who is suing you who
9
Drivers’ contention that it was “the paramount interest of the
Committee to negotiate a deal under which the [Drivers] were
excluded” because a settlement that paid the Drivers’ priority
claim would have left the Committee’s constituents with
nothing. Appellees’ Br. 26 (quoting Drivers’ Br. 28).
B
The Drivers and the United States Trustee objected to
the proposed settlement and dismissal mainly because it
distributed property of the estate to creditors of lower priority
than the Drivers under § 507 of the Bankruptcy Code. The
Trustee also objected on the ground that the Code does not
permit structured dismissals, while the Drivers further argued
that the Committee breached its fiduciary duty to the estate by
“agreeing to a settlement that, effectively, freezes out the
[Drivers].” App. 30–31 (Bankr. Op. 8–9). The Bankruptcy
Court rejected these objections in an oral opinion approving
the proposed settlement and dismissal.
The Bankruptcy Court began by recognizing the
absence of any “provision in the code for distribution and
dismissal contemplated by the settlement motion,” but it
noted that similar relief has been granted by other courts.
App. 31 (Bankr. Op. 9). Summarizing its assessment, the
otherwise doesn’t have funds and is doing it on
a contingent fee basis.
App. 1363; accord Appellees’ Br. 26. This is the only reason
that appears in the record for why the settlement did not
provide for either direct payment to the Drivers or the
assignment of Sun’s lien on Jevic’s remaining cash to the
estate rather than to a liquidating trust earmarked for
everybody but the Drivers.
10
Court found that “the dire circumstances that are present in
this case warrant the relief requested here by the Debtor, the
Committee and the secured lenders.” Id. The Court went on to
make findings establishing those dire circumstances. It found
that there was “no realistic prospect” of a meaningful
distribution to anyone but the secured creditors unless the
settlement were approved because the traditional routes out of
Chapter 11 bankruptcy were impracticable. App. 32 (Bankr.
Op. 10). First, there was “no prospect” of a confirmable
Chapter 11 plan of reorganization or liquidation being filed.
Id. Second, conversion to liquidation under Chapter 7 of the
Bankruptcy 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.
The Bankruptcy Court then rejected the objectors’
argument that the settlement could not be approved because it
distributed estate assets in violation of the Code’s “absolute
priority rule.” After noting that Chapter 11 plans must comply
with the Code’s priority scheme, the Court held that
settlements need not do so. The Court also disagreed with the
Drivers’ fiduciary duty argument, dismissing the notion that
the Committee’s fiduciary duty to the estate gave each
creditor veto power over any proposed settlement. The
Drivers were never barred from participating in the settlement
negotiations, the Court observed, and their omission from the
settlement distribution would not prejudice them because
their claims against the Jevic estate were “effectively
worthless” since the estate lacked any unencumbered funds.
App. 36 (Bankr. Op. 14).
11
Finally, the Bankruptcy Court applied the multifactor
test of In re Martin, 91 F.3d 389 (3d Cir. 1996), for
evaluating settlements under Federal Rule of Bankruptcy
Procedure 9019. It found that the Committee’s likelihood of
success in the fraudulent conveyance action was “uncertain at
best,” given the legal hurdles to recovery, the substantial
resources of CIT and Sun, and the scarcity of funds in the
estate to finance further litigation. App. 34–35 (Bankr. Op.
12–13). The Court highlighted the complexity of the litigation
and expressed its skepticism that new counsel or a Chapter 7
trustee could be retained to continue the fraudulent
conveyance suit on a contingent fee basis. App. 35–36
(Bankr. Op. 13–14) (“[O]n these facts I think any lawyer or
firm that signed up for that role should have his head
examined.”). Faced with, in its view, either “a meaningful
return or zero,” the Court decided that “[t]he paramount
interest of the creditors mandates approval of the settlement”
and nothing in the Bankruptcy Code dictated otherwise. App.
36 (Bankr. Op. 14). The Bankruptcy Court therefore approved
the settlement and dismissed Jevic’s Chapter 11 case.
C
The Drivers appealed to the United States District
Court for the District of Delaware and filed a motion in the
Bankruptcy Court to stay its order pending appeal. The
Bankruptcy Court denied the stay request, and the Drivers did
not renew their request for a stay before the District Court.
The parties began implementing the settlement months later,
distributing over one thousand checks to priority tax creditors
and general unsecured creditors.
The District Court subsequently affirmed the
Bankruptcy Court’s approval of the settlement and dismissal
of the case. The Court began by noting that the Drivers
12
“largely do not contest the bankruptcy court’s factual
findings.” Jevic Holding Corp., 2014 WL 268613, at *2 (D.
Del. Jan. 24, 2014). In analyzing those factual findings, the
District Court held, the Bankruptcy Court had correctly
applied the Martin factors and determined that the proposed
settlement was “fair and equitable.” Id. at *2–3. The Court
also rejected the Drivers’ fiduciary duty and absolute priority
rule arguments for the same reasons explained by the
bankruptcy judge. Id. at *3. And even if the Bankruptcy Court
had erred by approving the settlement and dismissing the
case, the District Court held in the alternative that the appeal
was equitably moot because the settlement had been
“substantially consummated as all the funds have been
distributed.” Id. at *4. The Drivers filed this timely appeal,
with the United States Trustee supporting them as amicus
curiae.
II
The Bankruptcy Court had jurisdiction under 28
U.S.C. § 157(b), and the District Court had jurisdiction under
28 U.S.C. §§ 158(a) and 1334. We have jurisdiction under 28
U.S.C. §§ 158(d) and 1291.
“Because the District Court sat below as an appellate
court, this Court conducts the same review of the Bankruptcy
Court’s order as did the District Court.” In re Telegroup, Inc.,
281 F.3d 133, 136 (3d Cir. 2002). We review questions of law
de novo, findings of fact for clear error, and exercises of
discretion for abuse thereof. In re Goody’s Family Clothing
Inc., 610 F.3d 812, 816 (3d Cir. 2010).
13
III
To the extent that the Bankruptcy Court had discretion
to approve the structured dismissal at issue, the Drivers tacitly
concede that the Court did not abuse that discretion in
approving a settlement of the Committee’s action against CIT
and Sun and dismissing Jevic’s Chapter 11 case.
First, Federal Rule of Bankruptcy Procedure 9019
expressly authorizes settlements as long as they are “fair and
equitable.” Protective Comm. for Indep. Stockholders of TMT
Trailer Ferry, Inc. v. Anderson (TMT Trailer Ferry), 390 U.S.
414, 424 (1968). In Martin, we gleaned from TMT Trailer
Ferry four factors to guide bankruptcy courts in this regard:
“(1) the probability 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.” 91 F.3d at 393. None of the objectors contends that
the Bankruptcy Court erred in concluding that the balance of
these factors favors settlement, and we agree. Although the
Committee’s fraudulent conveyance suit survived a motion to
dismiss, it was far from compelling, especially in view of
CIT’s and Sun’s substantial resources and the Committee’s
lack thereof. App. 35 (Bankr. Op. 13); see App. 1273
(summarizing expert testimony CIT planned to offer that
Jevic’s failure was caused by systemic economic and
industrial problems, not the leveraged buyout); In re World
Health Alts., Inc., 344 B.R. 291, 302 (Bankr. D. Del. 2006)
(“[S]uccessful challenges to a pre-petition first lien creditor’s
position are unusual, if not rare.”). The litigation promised to
be complex and lengthy, whereas the settlement offered most
of Jevic’s creditors actual distributions.
14
Nor do the Drivers dispute that the Bankruptcy Court
generally followed the law with respect to dismissal. A
bankruptcy court may dismiss a Chapter 11 case “for cause,”
and one form of cause contemplated by the Bankruptcy Code
is “substantial or continuing loss to or diminution of the estate
and the absence of a reasonable likelihood of
rehabilitation[.]” 11 U.S.C. § 1112(b)(1), (b)(4)(A). By the
time the settling parties requested dismissal, the estate was
almost entirely depleted and there was no chance of a plan of
reorganization being confirmed. But for $1.7 million in
encumbered cash and the fraudulent conveyance action, Jevic
had nothing.
Instead of challenging the Bankruptcy Court’s
discretionary judgments as to the propriety of a settlement
and dismissal, the Drivers and the United States Trustee argue
that the Bankruptcy Court did not have the discretion it
purported to exercise. Specifically, they claim bankruptcy
courts have no legal authority to approve structured
dismissals, at least to the extent they deviate from the priority
system of the Bankruptcy Code in distributing estate assets.
We disagree and hold that bankruptcy courts may, in rare
instances like this one, approve structured dismissals that do
not strictly adhere to the Bankruptcy Code’s priority scheme.
A
We begin by considering whether structured dismissals
are ever permissible under the Bankruptcy Code. The Drivers
submit that “Chapter 11 provides debtors only three exits
from bankruptcy”: confirmation of a plan of reorganization,
conversion to Chapter 7 liquidation, or plain dismissal with
no strings attached. Drivers’ Br. 18. They argue that there is
no statutory authority for structured dismissals and that “[t]he
Bankruptcy Court admitted as much.” Id. at 44. They cite a
15
provision of the Code and accompanying legislative history
indicating that Congress understood the ordinary effect of
dismissal to be reversion to the status quo ante. Id. at 45
(citing 11 U.S.C. § 349(b)(3); H.R. Rep. No. 595, 95th Cong.,
1st Sess. 338 (1977)).
The Drivers are correct that, as the Bankruptcy Court
acknowledged, the Code does not expressly authorize
structured dismissals. See App. 31 (Bankr. Op. 9). And as
structured dismissals have occurred with increased
frequency,5 even commentators who seem to favor this trend
have expressed uncertainty about whether the Code permits
them.6 As we understand them, however, structured
dismissals are simply dismissals that are preceded by other
orders of the bankruptcy court (e.g., orders approving
5
See Norman L. Pernick & G. David Dean, Structured
Chapter 11 Dismissals: A Viable and Growing Alternative
After Asset Sales, Am. Bankr. Inst. J., June 2010, at 1; see,
e.g., In re Kainos Partners Holding Co., 2012 WL 6028927
(D. Del. Nov. 30, 2012); World Health Alts., 344 B.R. at 293–
95. But cf. In re Biolitec, Inc., 2014 WL 7205395 (Bankr.
D.N.J. Dec. 16, 2014) (rejecting a proposed structured
dismissal as invalid under the Code).
6
See, e.g., Brent Weisenberg, Expediting Chapter 11
Liquidating Debtor’s Distribution to Creditors, Am. Bankr.
Inst. J., April 2012, at 36 (“[T]he time is ripe to make crystal
clear that these procedures are in fact authorized by the
Code.”). But cf. Nan Roberts Eitel et al., Structured
Dismissals, or Cases Dismissed Outside of Code’s Structure?,
Am. Bankr. Inst. J., March 2011, at 20 (article by United
States Trustee staff arguing that structured dismissals are
improper under the Code).
16
settlements, granting releases, and so forth) that remain in
effect after dismissal. And though § 349 of the Code
contemplates that dismissal will typically reinstate the pre-
petition state of affairs by revesting property in the debtor and
vacating orders and judgments of the bankruptcy court, it also
explicitly authorizes the bankruptcy court to alter the effect of
dismissal “for cause”—in other words, the Code does not
strictly require dismissal of a Chapter 11 case to be a hard
reset. 11 U.S.C. § 349(b); H.R. Rep. No. 595 at 338 (“The
court is permitted to order a different result for cause.”); see
also Matter of Sadler, 935 F.2d 918, 921 (7th Cir. 1991)
(“‘Cause’ under § 349(b) means an acceptable reason.”).
Quoting Justice Scalia’s oft-repeated quip “Congress
. . . does not, one might say, hide elephants in mouseholes,”
Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 468 (2001),
the Drivers forcefully argue that Congress would have spoken
more clearly if it had intended to leave open an end run
around the procedures that govern plan confirmation and
conversion to Chapter 7, Drivers’ Br. 22. According to the
Drivers, the position of the District Court, the Bankruptcy
Court, and Appellees overestimates the breadth of bankruptcy
courts’ settlement-approval power under Rule 9019,
“render[ing] plan confirmation superfluous” and paving the
way for illegitimate sub rosa plans engineered by creditors
with overwhelming bargaining power. Id.; see also id. at 24–
25. Neither “dire circumstances” nor the bankruptcy courts’
general power to carry out the provisions of the Code under
11 U.S.C. § 105(a), the Drivers say, authorizes a court to
evade the Code’s requirements. Id. at 32–35, 40–41.
But even if we accept all that as true, the Drivers have
proved only that the Code forbids structured dismissals when
they are used to circumvent the plan confirmation process or
17
conversion to Chapter 7. Here, the Drivers 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. So this
appeal does not require us to decide whether structured
dismissals are permissible when a confirmable plan is in the
offing or conversion to Chapter 7 might be worthwhile. For
present purposes, it suffices to say that absent a showing that
a structured dismissal has been contrived to evade the
procedural protections and safeguards of the plan
confirmation or conversion processes, a bankruptcy court has
discretion to order such a disposition.
B
Having determined that bankruptcy courts have the
power, in appropriate circumstances, to approve structured
dismissals, we now consider whether settlements in that
context may ever skip a class of objecting creditors in favor
of more junior creditors. See In re Buffet Partners, L.P., 2014
WL 3735804, at *4 (Bankr. N.D. Tex. July 28, 2014)
(approving a structured dismissal while “emphasiz[ing] that
not one party with an economic stake in the case has objected
to the dismissal in this manner”). The Drivers’ primary
argument in this regard is that even if structured dismissals
are permissible, they cannot be approved if they distribute
estate assets in derogation of the priority scheme of § 507 of
the Code. They contend that § 507 applies to all distributions
of estate property under Chapter 11, meaning the Bankruptcy
Court was powerless to approve a settlement that skipped
priority employee creditors in favor of tax and general
unsecured creditors. Drivers’ Br. 21, 35–36; see 11 U.S.C.
§ 103(a) (“[C]hapters 1, 3, and 5 of this title apply in a case
under chapter 7, 11, 12, or 13[.]”); Law v. Siegel, 134 S. Ct.
18
1188, 1194 (2014) (“‘[W]hatever equitable powers remain in
the bankruptcy courts must and can only be exercised within
the confines of’ the Bankruptcy Code.” (citation omitted)).
The Drivers’ argument is not without force. Although
we are skeptical that § 103(a) requires settlements in Chapter
11 cases to strictly comply with the § 507 priorities,7 there is
some tacit support in the caselaw for the Drivers’ position.
For example, in TMT Trailer Ferry, the Supreme Court held
that the “requirement[] . . . that plans of reorganization be
both ‘fair and equitable,’ appl[ies] to compromises just as to
other aspects of reorganizations.” 390 U.S. at 424. The Court
also noted that “a bankruptcy court is not to approve or
confirm a plan of reorganization unless it is found to be ‘fair
and equitable.’ This standard incorporates the absolute
priority doctrine under which creditors and stockholders may
participate only in accordance with their respective
priorities[.]” Id. at 441; see also 11 U.S.C. § 1129(b)(2)(B)(ii)
(codifying the absolute priority rule by requiring that a plan
of reorganization pay senior creditors before junior creditors
in order to be “fair and equitable” and confirmable). This
latter statement comports with a line of cases describing “fair
7
There is nothing in the Code indicating that Congress
legislated with settlements in mind—in fact, the bankruptcy
courts’ power to approve settlements comes from a Federal
Rule of Bankruptcy Procedure promulgated by the Supreme
Court, not Congress. See Rules Enabling Act, 28 U.S.C.
§ 2075. If § 103(a) meant that all distributions in Chapter 11
cases must comply with the priorities of § 507, there would
have been no need for Congress to codify the absolute
priority rule specifically in the plan confirmation context. See
11 U.S.C. § 1129(b)(2)(B)(ii).
19
and equitable” as “‘words of art’ which mean that senior
interests are entitled to full priority over junior ones[.]” SEC
v. Am. Trailer Rentals Co., 379 U.S. 594, 611 (1965); accord
Otis & Co. v. SEC, 323 U.S. 624, 634 (1945); Case v. L.A.
Lumber Prods. Co., 308 U.S. 106, 115–16 (1939).
Although these cases provide some support to the
Drivers, they are not dispositive because each of them spoke
in the context of plans of reorganization, not settlements. See,
e.g., TMT Trailer Ferry, 424 U.S. at 441; Am. Trailer
Rentals, 379 U.S. at 611; see also In re Armstrong World
Indus., Inc., 432 F.3d 507 (3d Cir. 2005) (applying the
absolute priority rule to deny confirmation of a proposed
plan). When Congress codified the absolute priority rule
discussed in the line of Supreme Court decisions cited above,
it did so in the specific context of plan confirmation, see
§ 1129(b)(2)(B)(ii), and neither Congress nor the Supreme
Court has ever said that the rule applies to settlements in
bankruptcy. Indeed, the Drivers themselves admit that the
absolute priority rule “plainly does not apply here,” even as
they insist that the legal principle embodied by the rule
dictates a result in their favor. Drivers’ Br. 37.
Two of our sister courts have grappled with whether
the priority scheme of § 507 must be followed when
settlement proceeds are distributed in Chapter 11 cases. In
Matter of AWECO, Inc., the Court of Appeals for the Fifth
Circuit rejected a settlement of a lawsuit against a Chapter 11
debtor that would have transferred $5.3 million in estate
assets to an unsecured creditor despite the existence of
outstanding senior claims. 725 F.2d 293, 295–96 (1984). The
Court held that the “fair and equitable” standard applies to
settlements, and “fair and equitable” means compliant with
the priority system. Id. at 298.
20
Criticizing the Fifth Circuit’s rule in AWECO, the
Second Circuit adopted a more flexible approach in In re
Iridium Operating LLC, 478 F.3d 452 (2007). There, the
unsecured creditors’ committee sought to settle a suit it had
brought on the estate’s behalf against a group of secured
lenders; the proposed settlement split the estate’s cash
between the lenders and a litigation trust set up to fund a
different debtor action against Motorola, a priority
administrative creditor. Id. at 456, 459–60. Motorola objected
to the settlement on the ground that the distribution violated
the Code’s priority system by skipping Motorola and
distributing funds to lower-priority creditors. Id. at 456.
Rejecting the approach taken by the Fifth Circuit in AWECO
as “too rigid,” the Second Circuit held that the absolute
priority rule “is not necessarily implicated” when “a
settlement is presented for court approval apart from a
reorganization plan[.]” Id. at 463–64. The Court held that
“whether a particular settlement’s distribution scheme
complies with the Code’s priority scheme must be the most
important factor for the bankruptcy court to consider when
determining whether a settlement is ‘fair and equitable’ under
Rule 9019,” but a noncompliant settlement could be approved
when “the remaining factors weigh heavily in favor of
approving a settlement[.]” Id. at 464.
Applying its holding to the facts of the case, the
Second Circuit noted that the settlement at issue deviated
from the Code priorities in two respects: first, by skipping
Motorola in distributing estate assets to the litigation fund
created to finance the unsecured creditors committee’s suit
against Motorola; and second, by skipping Motorola again in
providing that any money remaining in the fund after the
litigation concluded would go straight to the unsecured
creditors. 478 F.3d at 459, 465–66. The Court indicated that
21
the first deviation was acceptable even though it skipped
Motorola:
It is clear from the record why the Settlement
distributes money from the Estate to the
[litigation vehicle]. The alternative to settling
with the Lenders—pursuing the challenge to the
Lenders’ liens—presented too much risk for the
Estate, including the administrative creditors. If
the Estate lost against the Lenders (after years
of litigation and paying legal fees), the Estate
would be devastated, all its cash and remaining
assets liquidated, and the Lenders would still
possess a lien over the Motorola Estate Action.
Similarly, administrative creditors would not be
paid if the Estate was unsuccessful against the
Lenders. Further, as noted at the Settlement
hearing, having a well-funded litigation trust
was preferable to attempting to procure
contingent fee-based representation.
Id. at 465–66. But because the record did not adequately
explain the second deviation, the Court remanded the case to
allow the bankruptcy court to consider that issue. Id. at 466
(“[N]o reason has been offered to explain why any balance
left in the litigation trust could not or should not be
distributed pursuant to the rule of priorities.”).
We agree with the Second Circuit’s approach in
Iridium—which, we note, the Drivers and the United States
Trustee cite throughout their briefs and never quarrel with.
See Drivers’ Br. 27, 36; Reply Br. 11–13; Trustee Br. 21. As
in other areas of the law, settlements are favored in
bankruptcy. In re Nutraquest, 434 F.3d 639, 644 (3d Cir.
2006). “Indeed, it is an unusual case in which there is not
22
some litigation that is settled between the representative of
the estate and an adverse party.” Martin, 91 F.3d at 393.
Given the “dynamic status of some pre-plan bankruptcy
settlements,” Iridium, 478 F.3d at 464, it would make sense
for the Bankruptcy Code and the Federal Rules of Bankruptcy
Procedure to leave bankruptcy courts more flexibility in
approving settlements than in confirming plans of
reorganization. For instance, if a settlement is proposed
during the early stages of a Chapter 11 bankruptcy, the
“nature and extent of the [e]state and the claims against it”
may be unresolved. Id. at 464. The inquiry outlined in Iridium
better accounts for these concerns, we think, than does the per
se rule of AWECO.
At the same time, we agree with the Second Circuit’s
statement that compliance with the Code priorities will
usually be dispositive of whether a proposed settlement is fair
and equitable. Id. at 455. Settlements that skip objecting
creditors in distributing estate assets raise justifiable concerns
about collusion among debtors, creditors, and their attorneys
and other professionals. See id. at 464. Although Appellees
have persuaded us to hold that the Code and the Rules do not
extend the absolute priority rule to settlements in bankruptcy,
we think that the policy underlying that rule—ensuring the
evenhanded and predictable treatment of creditors—applies in
the settlement context. As the Drivers note, nothing in the
Code or the Rules obliges a creditor to cut a deal in order to
receive a distribution of estate assets to which he is entitled.
Drivers’ Br. 42–43. If the “fair and equitable” standard is to
have any teeth, it must mean that bankruptcy courts cannot
approve settlements and structured dismissals devised by
certain creditors in order to increase their shares of the estate
at the expense of other creditors. We therefore hold that
bankruptcy courts may approve settlements that deviate from
23
the priority scheme of § 507 of the Bankruptcy Code only if
they have “specific and credible grounds to justify [the]
deviation.” Iridium, 478 F.3d at 466.
C
We admit that it is a close call, but in view of the
foregoing, we conclude that the Bankruptcy Court had
sufficient reason to approve the settlement and structured
dismissal of Jevic’s Chapter 11 case. This disposition,
unsatisfying as it was, remained the least bad alternative since
there was “no prospect” of a plan being confirmed and
conversion to Chapter 7 would have resulted in the secured
creditors taking all that remained of the estate in “short
order.” App. 32 (Bankr. Op. 10).
Our dissenting colleague’s contrary view rests on the
counterfactual premise that the parties could have reached an
agreeable settlement that conformed to the Code priorities. He
would have us make a finding of fact to that effect and order
the Bankruptcy Court to redesign the settlement to comply
with § 507. We decline to do so because, even if it were
appropriate for us to review findings of fact de novo and
equitably reform settlements on appeal, there is no evidence
calling into question the Bankruptcy Court’s conclusion that
there was “no realistic prospect” of a meaningful distribution
to Jevic’s unsecured creditors apart from the settlement under
review. App. 32 (Bankr. Op. 10). If courts required
settlements to be perfect, they would seldom be approved;
though it’s regrettable that the Drivers were left out of this
one, the question—as Judge Scirica recognizes—is whether
the settlement serves the interests of the estate, not one
particular group of creditors. There is no support in the record
for the proposition that a viable alternative existed that would
have better served the estate and the creditors as a whole.
24
The distribution of Jevic’s remaining $1.7 million to
all creditors but the Drivers was permissible for essentially
the same reasons that the initial distribution of estate assets to
the litigation fund was allowed by the Second Circuit in
Iridium.8 As in that case, here the Bankruptcy Court had to
choose between approving a settlement that deviated from the
priority scheme of § 507 or rejecting it so a lawsuit could
proceed to deplete the estate. Although we are troubled by the
fact that the exclusion of the Drivers certainly lends an
element of unfairness to the first option, the second option
would have served the interests of neither the creditors nor
the estate. The Bankruptcy Court, in Solomonic fashion,
reluctantly approved the only course that resulted in some
payment to creditors other than CIT and Sun.
* * *
Counsel for the United States Trustee told the
Bankruptcy Court that it is immaterial whether there is a
viable alternative to a structured dismissal that does not
8
Judge Scirica reads Iridium as involving a settlement
that deviated from the § 507 priority scheme in just one
respect, and a minor one at that. As we have explained,
however, the Iridium settlement involved two deviations: (1)
the initial distribution of estate funds to the litigation fund
created to sue Motorola; and (2) the contingent provision that
money left in the fund after the litigation concluded would go
directly to the unsecured creditors. See supra Section III-B.
The Second Circuit held that, while the second deviation
needed to be explained on remand, the first was acceptable
despite the fact that it impaired Motorola because it clearly
served the interests of the estate. See Iridium, 478 F.3d at
465–66.
25
comply with the Bankruptcy Code’s priority scheme. “[W]e
have to accept the fact that we are sometimes going to get a
really ugly result, an economically ugly result, but it’s an
economically ugly result that is dictated by the provisions of
the code,” he said. App. 1327. We doubt that our national
bankruptcy policy is quite so nihilistic and distrustful of
bankruptcy judges. Rather, we believe the Code permits a
structured dismissal, even one that deviates from the § 507
priorities, when a bankruptcy judge makes sound findings of
fact that the traditional routes out of Chapter 11 are
unavailable and the settlement is the best feasible way of
serving the interests of the estate and its creditors. Although
this result is likely to be justified only rarely, in this case the
Bankruptcy Court provided sufficient reasons to support its
approval of the settlement under Rule 9019. For that reason,
we will affirm the order of the District Court.
26
SCIRICA, Circuit Judge
I concur in parts of the Court’s analysis in this difficult
case, but I respectfully dissent from the decision to affirm.
Rejection of the settlement was called for under the
Bankruptcy Code and, by approving the settlement, the
bankruptcy court’s order undermined the Code’s essential
priority scheme. Accordingly, I would vacate the bankruptcy
court’s order and remand for further proceedings, described
below.
At the outset, I should state that this is not a case
where equitable mootness applies. We recently made clear in
In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013), that this
doctrine applies only where there is a confirmed plan of
reorganization. I would also adopt the Second Circuit’s
standard from In re Iridium Operating LLC, 478 F.3d 452 (2d
Cir. 2007), and hold that settlements presented outside of plan
confirmations must, absent extraordinary circumstances,
comply with the Code’s priority scheme.
Where I depart from the majority opinion, however, is
in holding this appeal presents an extraordinary case where
departure from the general rule is warranted. The bankruptcy
court believed that because no confirmable Chapter 11 plan
was possible, and because the only alternative to the
settlement was a Chapter 7 liquidation in which the WARN
Plaintiffs would have received no recovery, compliance with
the Code’s priority scheme was not required. For two reasons,
however, I respectfully dissent.
First, it is not clear to me that the only alternative to
the settlement was a Chapter 7 liquidation. An alternative
settlement might have been reached in Chapter 11, and might
have included the WARN Plaintiffs. The reason that such a
settlement was not reached was that one of the defendants
being released (Sun) did not want to fund the WARN
Plaintiffs in their ongoing litigation against it. 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.” Sun therefore insisted that,
as a condition to participating in the fraudulent conveyance
action settlement, the WARN Plaintiffs would have to drop
their WARN claims. Accordingly, to the extent that the only
alternative to the settlement was a Chapter 7 liquidation, that
reality was, at least in part, a product of appellees’ own
making.
More fundamentally, I find the settlement at odds with
the goals of the Bankruptcy Code. One of the Code’s core
goals is to maximize the value of the bankruptcy estate, see
Toibb v. Radloff, 501 U.S. 157, 163 (1991), and it is the duty
of a bankruptcy trustee or debtor-in-possession to work
toward that goal, including by prosecuting estate causes of
action,1 see Commodity Futures Trading Comm’n v.
Weintraub, 471 U.S. 343, 352 (1985); Official Comm. of
Unsecured Creditors of Cybergenics Corp. v. Chinery, 330
F.3d 548, 573 (3d Cir. 2003). The reason creditors’
1
Of course, it was the creditors’ committee, rather than
a bankruptcy trustee or debtor-in-possession, who was
responsible for prosecuting the fraudulent conveyance action
here.
2
committees may bring fraudulent conveyance actions on
behalf of the estate is that such committees are likely to
maximize estate value; “[t]he possibility of a derivative suit
by a creditors’ committee provides a critical safeguard against
lax pursuit of avoidance actions [by a debtor-in-possession].”
Cybergenics, 330 F.3d at 573. The settlement of estate causes
of action can, and often does, play a crucial role in
maximizing estate value, as settlements may save the estate
the time, expense, and uncertainties associated with litigation.
See Protective Comm. for Ind. Stockholders of TMT Trailer
Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (“In
administering reorganization proceedings in an economical
and practical manner it will often be wise to arrange the
settlement of claims as to which there are substantial and
reasonable doubts.”); In re A&C Props., 784 F.2d 1377,
1380-81 (9th Cir. 1986) (“The purpose of a compromise
agreement is to allow the trustee and the creditors to avoid the
expenses and burdens associated with litigating sharply
contested and dubious claims.”). Thus, to the extent that a
settlement’s departure from the Code’s priority scheme was
necessary to maximize the estate’s overall value, I would not
object.
But here, it is difficult to see how the settlement is
directed at estate-value maximization. Rather, the settlement
deviates from the Code’s priority scheme so as to maximize
the recovery that certain creditors receive, some of whom (the
unsecured creditors) would not have been entitled to recover
anything in advance of the WARN Plaintiffs had the estate
property been liquidated and distributed in Chapter 7
proceedings or under a Chapter 11 “cramdown.” There is, of
course, a substantial difference between the estate itself and
specific estate constituents. The estate is a distinct legal
3
entity, and, in general, its assets may not be distributed to
creditors except in accordance with the strictures of the
Bankruptcy Code.2
In this sense, then, the settlement and structured
dismissal raise the same concern as transactions invalidated
under the sub rosa plan doctrine. In In re Braniff Airways,
Inc., 700 F.2d 935 (5th Cir. 1983), the Court of Appeals for
the Fifth Circuit rejected an asset sale that “had the practical
effect of dictating some of the terms of any future
reorganization plan.” Id. at 940. The sale was impermissible
because the transaction “short circuit[ed] the requirements of
Chapter 11 for confirmation of a reorganization plan by
establishing the terms of the plan sub rosa in connection with
a sale of assets.” Id. “When a proposed transaction specifies
terms for adopting a reorganization plan, ‘the parties and the
district court must scale the hurdles erected in Chapter 11.’”
2
This point is reinforced with an analogy to trust law.
Where there are two or more beneficiaries of a trust, the
trustee is under a duty to deal with them impartially, and
cannot take an action that rewards certain beneficiaries while
harming others. Restatement (Second) of Trusts § 183 (1959);
see also Varity Corp. v. Howe, 516 U.S. 489, 514 (1996)
(“The common law of trusts recognizes the need to preserve
assets to satisfy future, as well as present, claims and requires
a trustee to take impartial account of the interests of all
beneficiaries.”). Yet that is what the Committee did here. This
duty persists even where the trustee is a beneficiary of the
trust himself, like the creditors’ committee was here. See
Restatement (Third) of Trusts § 32 (2003) (“A natural person,
including a settlor or beneficiary, has capacity . . . to
administer trust property and act as trustee . . . .”)
4
In re Cont’l Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir.
1986) (quoting Braniff, 700 F.2d at 940). Although the
combination of the settlement and structured dismissal here
does not, strictly speaking, constitute a sub rosa plan — the
hallmark of such a plan is that it dictates the terms of a
reorganization plan, and the settlement here does not do so —
the broader concerns underlying the sub rosa doctrine are at
play. The settlement reallocated assets of the estate in a way
that would not have been possible without the authority
conferred upon the creditors’ committee by Chapter 11 and
effectively terminated the Chapter 11 case, but it failed to
observe Chapter 11’s “safeguards of disclosure, voting,
acceptance, and confirmation.” In re Lionel Corp., 722 F.2d
1063, 1071 (2d Cir. 1982); see also In re Biolitec Inc., No.
13-11157, 2014 WL 7205395, at *8 (Bankr. D.N.J. Dec. 17,
2014) (rejecting settlement and structured dismissal that
assigned rights and interests but did not allow parties to vote
on settlement’s provisions in part because it “resemble[d] an
impermissible sub rosa plan”). This settlement then appears
to constitute an impermissible end-run around the carefully
designed routes by which a debtor may emerge from Chapter
11 proceedings.
Critical to this analysis is the fact that the money paid
by the secured creditors in the settlement was property of the
estate. A cause of action held by the debtor is property of the
estate, see Bd. of Trs. of Teamsters Local 863 v. Foodtown,
Inc., 296 F.3d 164, 169 (3d Cir. 2002), and “proceeds . . . of
or from property of the estate” are considered estate property
as well, 11 U.S.C. § 541(a)(6). Here, the administrative and
unsecured creditors received the $3.7 million as consideration
for the releases from the fraudulent conveyance action, so this
payment qualifies as “proceeds” from the estate’s cause of
5
action.3 See Black’s Law Dictionary 1325 (9th ed. 2009)
(defining proceeds as “[s]omething received upon selling,
exchanging, collecting, or otherwise disposing of collateral”);
see also Strauss v. Morn, Nos. 97-16481 & 97-16483, 1998
WL 546957, at *3 (9th Cir. 1998) (Ҥ 541(a)(6) mandates the
broad interpretation of the term ‘proceeds’ to encompass all
proceeds of property of the estate”); In re Rossmiller, No. 95-
1249, 1996 WL 175369, at *2 (10th Cir. 1996) (similar). This
case is thus distinguishable from the so-called “gifting” cases
such as In re World Health Alternatives, 344 B.R. 291
(Bankr. D. Del. 2006), and In re SPM Manufacturing Corp.,
984 F.2d 1305 (1st Cir. 1993). In fact, those courts explicitly
distinguished estate from non-estate property, and approved
the class-skipping arrangements only because the proceeds
being distributed were not estate property. See World Health,
344 B.R. at 299-300; SPM, 984 F.3d at 1313. The
arrangement here is closer to a § 363 asset sale where the
proceeds from the debtor’s assets are distributed directly to
certain creditors, rather than the bankruptcy estate. Cf. In re
Chrysler LLC, 576 F.3d 108, 118 (2d Cir. 2009) (noting, in
upholding a § 363 sale, that the bankruptcy court
3
On June 30, 2006, Sun acquired Jevic in a leveraged
buyout, which included an $85 million revolving credit
facility from a bank group led by CIT. The fraudulent
conveyance action complaint sets forth that Jevic and Sun
allegedly knew that Jevic would default on the CIT financing
agreement by September 11 of that year. The fraudulent
conveyance action sought over $100 million in damages, and
the unsecured creditors’ committee alleged that “[w]ith CIT’s
active assistance . . . Sun orchestrated a[n] . . . LBO whereby
Debtors’ assets were leveraged to enable a Sun affiliate to pay
$77.4 million . . . with no money down.”
6
demonstrated “proper solicitude for the priority between
creditors and deemed it essential that the [s]ale in no way
upset that priority”), vacated as moot, 592 F.3d 370. It is
doubtful that such an arrangement would be permissible.
The majority likens the deviation in this case to the
first deviation in Iridium, in which the settlement would
initially distribute funds to the litigation trust instead of the
Motorola administrative creditors. For two reasons, however,
I find this analogy unavailing. First, it is not clear to me that
the Second Circuit saw the settlement’s initial distribution of
funds to the litigation trust as a deviation from the Code’s
priority scheme at all. As the Second Circuit explained, if the
litigation was successful, the majority of the proceeds from
that litigation would actually flow back to the estate, then to
be distributed in accordance with the Code’s priority scheme.
459 F.3d at 462.4 Second, the critical (and, in my view,
determinative) characteristic of the settlement in this case is
that it skips over an entire class of creditors. That is precisely
what the second “deviation” in Iridium did, and the Second
Circuit remanded to the bankruptcy court for further
consideration of that aspect of the settlement.
In fact, the second “deviation” in Iridium deviated
from the priority scheme in a more minor way than the
settlement at issue here. In Iridium, the settlement would have
deviated from the priority scheme only in the event that
Motorola, an administrative creditor and a defendant in
various litigation matters brought by the creditors’ committee,
had prevailed in the litigation or if its administrative claims
4
Here, by contrast, none of the settlement proceeds
flowed to the estate.
7
had exceeded its liability in the litigation. Iridium, 478 F.3d at
465. The Second Circuit thus characterized this aspect of the
settlement as a mere “possible deviation” in “one regard,” but
nevertheless remanded for the bankruptcy court to assess the
“possible” deviation’s justification. Id. at 466. Here, of
course, it is clear that the settlement deviates from the priority
scheme, as it provides no compensation for an entire class of
priority creditors, while providing $1.7 million to the general
unsecured creditors.
Finally, I do not question the factual findings made by
the bankruptcy court. That court found that there was “no
realistic prospect” of a meaningful distribution to Jevic’s
unsecured creditors apart from the settlement under review.
But whether there was a realistic prospect of distribution to
the unsecured creditors in the absence of this settlement is not
relevant to my concerns. What matters is whether the
settlement’s deviation from the priority scheme was necessary
to maximize the value of the estate. There is a difference
between the estate and certain creditors of the estate, and
there has been no suggestion that the deviation maximized the
value of the estate itself.
The able bankruptcy court here was faced with an
unpalatable set of alternatives. But I do not believe the
situation it faced was entirely sui generis. It is not unusual for
a debtor to enter bankruptcy with liens on all of its assets, nor
is it unusual for a debtor to enter Chapter 11 proceedings —
the flexibility of which enabled appellees to craft this
settlement in the first place — with the goal of liquidating,
8
rather than rehabilitating, the debtor.5 It is also not difficult to
imagine another secured creditor who wants to avoid
providing funds to priority unsecured creditors, particularly
where the secured creditor is also the debtor’s ultimate parent
and may have obligations to the debtor’s employees.
Accordingly, approval of the bankruptcy court’s ruling in this
case would appear to undermine the general prohibition on
settlements that deviate from the Code’s priority scheme.
I recognize that if the settlement were unwound, this
case would likely be converted to a Chapter 7 liquidation in
5
See Ralph Brubaker, The Post-RadLAX Ghosts of
Pacific Lumber and Philly News (Part II): Limiting Credit
Bidding, Bankr. L. Letter, July 2014, at 4 (describing the
“ascendancy of secured credit in Chapter 11 debtors’ capital
structures, such that it is now common that a dominant
secured lender has blanket liens on substantially all of the
debtor’s assets securing debts vastly exceeding the value of
the debtor’s business and assets”); Kenneth M. Ayotte &
Edward R. Morrison, Creditor Control & Conflict in Chapter
11, 1 J.L. Analysis 511, 519 (2009) (finding that secured
claims exceeded the value of the company in twenty-two
percent of the bankruptcies surveyed); Stephen J. Lubben,
Business Liquidation, 81 Am. Bankr. L.J. 65 (2007) (noting
that although “chapter 7 is the prevailing method of business
liquidation, . . . a sizable number of firms first attempt either
a reorganization or liquidation under chapter 11”); 11 U.S.C.
§ 1123(b)(4) (providing that a chapter 11 plan may “provide
for the sale of all or substantially all of the property of the
estate, and the distribution of the proceeds of such sale among
holders of claims or interests”).
9
which the secured creditors would be the only creditors to
recover. Accordingly, I would not unwind the settlement
entirely. Instead, I would permit the secured creditors to
retain the releases for which they bargained and would not
disturb any of the proceeds received by the administrative
creditors either. But I would also require the bankruptcy court
to determine the WARN Plaintiffs’ damages under the New
Jersey WARN Act, as well as the proportion of those
damages that qualifies for the wage priority.6 I would then
have the court order any proceeds that were distributed to
creditors with a priority lower than that of the WARN
Plaintiffs disgorged, and apply those proceeds to the WARN
Plaintiffs’ wage priority claim. To the extent that funds are
left over, I would have the court redistribute them to the
remaining creditors in accordance with the Code’s priority
scheme.
6
At this point, the WARN litigation has largely
concluded, with the WARN Plaintiffs having established
liability on their New Jersey WARN claims against Jevic but
having lost on all other claims. On May 10, 2013, the
bankruptcy court dismissed the WARN Plaintiffs’ claims
against Sun (but not Jevic) on the grounds that Sun was not a
“single employer” for purposes of the WARN Acts. The
district court affirmed that decision on September 29, 2014.
In re Jevic Holding Corp., No. 13-1127-SLR, 2014 WL
4949474 (D. Del. Sept. 29, 2014). In a separate opinion on
May 10, 2013, the bankruptcy court dismissed the federal
WARN Act claims against Jevic, but granted summary
judgment in favor of the WARN Plaintiffs against Jevic on
their New Jersey WARN Act claims. No appeal was taken of
that ruling; in fact, Jevic did not contest liability on the New
Jersey WARN Act claims.
10