Supreme Court Agrees to Hear Case Questioning Order Creditors Were Paid in Bankruptcy Deal
June 28 2016 - 4:21PM
Dow Jones News
By Peg Brickley
The Supreme Court on Tuesday agreed to review a bankruptcy deal
that wrapped up the affairs of a New Jersey trucking company but
left truck drivers unpaid.
The Justice Department argues Jevic Holding Corp.'s settlement
ran afoul of the bankruptcy code's so-called priority scheme, which
determines the order that creditors are paid.
In Jevic's case, unsecured creditors received some money, but
workers terminated without notice didn't receive payments required
under federal law in abrupt mass layoffs. Justice Department
lawyers asked the Supreme Court to overturn the ruling on the
grounds it flouts bankruptcy principles that bar troubled companies
from picking and choosing among their creditors.
Jevic Holding, which was based in Delanco, N.J., filed for
chapter 11 bankruptcy protection in May 2008, about two years after
private-equity firm Sun Capital Partners's debt-fueled acquisition
of the company. By the end of the proceeding, secured lender CIT
Group Inc., which had refinanced the Sun deal debt, had a lock on
all the assets.
The official committee of Jevic's unsecured creditors sued Sun
Capital and CIT, accusing them of burdening the trucking company
with too much debt and of allowing it to operate with too little
capital. The suit made some headway, but there was no money in the
chapter 11 coffers to continue to chase the deep-pocketed
defendants.
Sun and CIT denied the allegations.
Unsecured creditors that brought the lawsuit then negotiated a
"structured settlement" of Jevic's bankruptcy, which shielded Sun
and CIT from claims for damages due to Jevic's collapse. Under the
pact, unsecured creditors received some money, but truck drivers
who were supposed to receive benefit payments didn't. Those
truck-driver claims ranked higher on the bankruptcy code's priority
ladder than the claims of unsecured creditors, such as
suppliers.
The deal was an approach to a problem common in chapter 11, when
companies don't have the cash to fund a chapter 11 plan, and
secured lenders hold all the cards.
A bankruptcy judge signed off on Jevic's settlement over the
objection of the unpaid truck drivers, and the decision was upheld
by two reviewing courts.
The question of what to do about bankruptcy rules that get in
the way of a settlement has divided courts of appeal across the
country, with some courts rejecting settlements that don't comply
with the scheme set out by Congress for who gets paid first.
Two of the busiest -- the Delaware bankruptcy court, which
handled the Jevic case, and the New York court -- have taken
positions that allow settlements that skip over claims that
Congress said are entitled to priority in payment. Those courts get
a large share of corporate bankruptcies, so a Supreme Court
decision on the case could set a significant precedent, Justice
Department lawyers noted.
Advocates of structured settlements say they can reduce costs
and encourage settlements. Critics disagree. Structured settlements
will make "it more difficult and expensive, if not impossible, for
small creditors, such as employees with unpaid wages and customers
with unrefunded deposits, to recover from corporate debtors in
bankruptcy," lawyers for the National Employment Law Project and
National Consumers League wrote in a brief urging the high court to
take up the case.
The case also has implications for tax authorities. While the
case deals specifically with benefit claims by truck drivers, the
practice also applies to tax claims that could be targeted by
sophisticated creditors anxious to deal their way around the rules,
Justice Department lawyers told the Supreme Court in their brief
arguing for review.
(END) Dow Jones Newswires
June 28, 2016 16:06 ET (20:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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