Last Monday (May 21, 2018), the Bankruptcy Court for the District of Delaware converted the chapter 11 bankruptcy of Jevic Transportation Corp. to a chapter 7 liquidation. This means that the ten-year effort to “reorganize” the former trucking company will become a straight liquidation supervised by a trustee.
I put “reorganize” in quotes because everyone knew from the start of the case, in 2008, that the debtor could not reorganize in a conventional sense because the business had already collapsed. Instead, the managers (and the senior lenders) would remain in possession and control of the debtor to engage in an orderly liquidation, which is permitted by chapter 11. Most believed this was better than a straight liquidation under chapter 7 of the Bankruptcy Code because they would have greater expertise in maximizing asset values, and more flexibility in making distributions, than a chapter 7 trustee, who would be a stranger to the company.
This last point—flexibility in distributions—earned the case a trip to the Supreme Court, where a 6-2 majority held last spring that final distributions must follow the Bankruptcy Code’s order of priority strictly, unless (in simple terms) creditors “consent,” e.g., by voting for a deviation under a plan of reorganization, a cross between a contract and a consent decree, and the presumptive way out of chapter 11. But, because management could not muster support for a plan, they had tried to resolve the case through a so-called “structured dismissal,” a procedural concoction that had many features of a plan but none of its protections, such as voting.
The details of Jevic are complex, but the bottom line, in my view, is that Jevic is about two things, although it receives attention only for one. First, SCOTUS affirmed—yet again—that “absolute priority” applies in final distributions in any kind of bankruptcy absent meaningful consent to an alternative. Distributive priority was in dispute here because management and senior creditors did not want to honor the priority payment rights of the debtor’s former truck drivers, who objected to this treatment, and who were the successful petitioners in the Supreme Court. [Disclosure: I was co-counsel to a group of academics who were amici curiae in support of petitioners]. On remand, the parties tried, but could not come to a negotiated deal that respected the Supreme Court’s ruling, so Judge Shannon converted the case to one under chapter 7, which permits no flexibility in distributions.
Absolute priority is important, but not really news, since it has been the law of the land for over one hundred years.
Instead, I think Jevic’s more important, but more subtle, contribution reflects concern about the integrity of the chapter 11 process. Read More