Through Jevic’s Mirror: Orders, Fees, and Settlements

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By Nicholas L. Georgakopoulos (McKinney School of Law, Indiana University)

This article takes the United States Supreme Court’s simple “no” to nonconsensual structured dismissals in Jevic as an opportunity to study its contours. The first issue is the pending clarification on whether the right to object to a structured dismissal is an individual or a class right. An individual right would leave little space for consensual structured dismissals, whereas a class right would fit with the anti-hold-out scheme of reorganization law. Second, Jevic implies increased scrutiny on first-day orders, especially in liquidating reorganizations, pushing for additional caution and negotiation before early payments. Third is the issue of fees—latent in Jevic but burning in the academy—the tension between race-to-the-bottom and race-to-the-top views of jurisdictional competition with the Court’s silence in the foreground. Fourth is the Court’s approval of settlements (via interim orders) that violate priorities provided they promote a bankruptcy goal, as Iridium’s approval did. Fifth, the juxtaposition of the settlements in Iridium and Jevic stresses the importance of the bankruptcy court’s role in approving settlements when the parties’ incentives are biased.

The full article is available here.


The roundtable has posted previously on Jevic, including a report of the case by Melissa Jacoby & Jonathan Lipson and a roundup of law firm perspectives on the Court’s decision. For opposing views on the case leading up to oral argument, see Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. For other Roundtable posts related to priority, see Casey & Morrison, “Beyond Options”; Baird, “Priority Matters”; and Roe & Tung, “Breaking Bankruptcy Priority,” an article that the Jevic opinion referenced.

Post-Jevic, Expansive Interpretation by Bankruptcy Courts Possible

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By Andrew C. Kassner and Joseph N. Argentina, Jr. (Drinker Biddle & Reath LLP)

In Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), the Supreme Court held that structured dismissals that violate the distribution scheme set forth in the Bankruptcy Code are not permitted.  The Court distinguished such situations from other, somewhat common bankruptcy practices that also violate the Code’s distribution scheme, such as critical vendor orders, employee wage orders, and lender “roll-ups.”  Those practices, the Court noted, “enable a successful reorganization and make even the disfavored creditors better off.”  The question remained, however, how subsequent bankruptcy courts would analyze such practices in light of the Supreme Court’s decision in Jevic.

This article summarizes two early post-Jevic decisions and concludes that at least some courts will read the Jevic holding expansively into areas of chapter 11 practice other than structured dismissals.  In In re Fryar, 2017 Bankr. LEXIS 1123 (Apr. 25, 2017), the Bankruptcy Court for the Eastern District of Tennessee would not approve a settlement agreement and § 363 sale that provided payment to a lender on account of its prepetition claims.  In In re Pioneer Health Servs., 2017 Bankr. LEXIS 939 (Apr. 4, 2017), the Bankruptcy Court for the Southern District of Mississippi would not permit a hospital debtor to pay three physicians as “critical vendors.”  These courts concluded that Jevic required additional scrutiny of distribution-violating proposals other than structured dismissals.

The full article is available here.

Andrew C. Kassner is the chairman and chief executive officer of Drinker Biddle & Reath, and former chair of its corporate restructuring group. Joseph N. Argentina Jr. is an associate in the firm’s corporate restructuring practice group in the Philadelphia and Wilmington offices. The views expressed in the article are those of Mr. Kassner and Mr. Argentina, and not of Drinker Biddle & Reath.


The roundtable has posted previously on Jevic, including a report of the case by Melissa Jacoby & Jonathan Lipson and a roundup of law firm perspectives on the Court’s decision. For opposing views on the case leading up to oral argument, see Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. For other Roundtable posts related to priority, see Casey & Morrison, “Beyond Options”; Baird, “Priority Matters”; and Roe & Tung, “Breaking Bankruptcy Priority,” an article referred to in the Jevic opinion.

Jevic: Law Firm Perspectives

On March 22, the Supreme Court decided Czyzewski v. Jevic Holding Corp., holding that bankruptcy courts may not approve structured dismissals that provide for distributions that deviate from ordinary priority rules without the affected creditors’ consent. According to the Court, Chapter 11 contemplates three possibilities: (1) a confirmed plan; (2) conversion to Chapter 7; or (3) dismissal. Absent an affirmative indication of congressional intent, the Court was unwilling to endorse a departure from the Code’s priority scheme; thus, it rejected the Third Circuit’s “rare cases” exception allowing courts to disregard priority in structured dismissals for “sufficient reasons.”

Dechert warns the decision could short-circuit “creative solutions to difficult and unique issues” and impose a “real economic cost” on debtors, creditors, and the courts. PretiFlaherty speculates that Jevic might give additional leverage to priority claimholders who know that debtors and secured creditors now “have one less arrow in their quiver.” More generally, Winston & Strawn predicts bankruptcy professionals will “look to Jevic for insight” when developing exit strategies in difficult cases.

Foley & Lardner highlights the Court’s basic commitment to absolute priority, while noting the Court’s careful distinction between final distributions, which must follow absolute priority, and interim distributions, which may break from priority to serve the Code’s ultimate objectives.

DrinkerBiddle emphasizes that Jevic provides “support for employee wage orders, critical vendor orders, and roll-ups,” a “shot in the arm for the sub rosa plan doctrine,” and “fodder for objections to class-skipping gift plans.” Duane Morris agrees, noting that Jevic may be “cited in unexpected ways” in battles about gift plans, critical vendor payments, and the like.

Sheppard Mullin wonders how consent will be determined in structured dismissals and whether features of plan confirmation other than absolute priority — for instance, cramdown, the bests interest test, and bad faith — will be imported into the structured dismissal context as well.

(By David Beylik, Harvard Law School, J.D. 2018.)


The roundtable has posted previously on Jevic, including a report of the case by Melissa Jacoby & Jonathan Lipson. For opposing views on the case leading up to oral argument, see Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. For other Roundtable posts related to priority, see Casey & Morrison, “Beyond Options”; Baird, “Priority Matters”; and Roe & Tung, “Breaking Bankruptcy Priority,” an article that the Jevic opinion referenced.

United States: In GM, Second Circuit Takes a Wrong Turn on Its Treatment of Unknown Claims

posted in: 363 Sale | 0

By Debra A. Dandeneau (Baker & McKenzie)

Elliott v. General Motors LLC (In re Motors Liquidation Co.), 829 F.3d 135 (2d Cir. 2016), addresses General Motors’ attempt to sell substantially all of its assets to “New GM” free and clear of certain claims of vehicle owners under the Bankruptcy Code.

“New GM” acquired GM’s assets in a bankruptcy court-approved sale. New GM assumed liability for claims arising from any accidents occurring after the closing date and for any express vehicle warranties. Three classes of vehicle purchasers were not covered:

– prepetition purchasers with prepetition injuries from the “ignition switch defect,”

– prepetition purchasers with economic damages as a result of defects not covered by an express warranty, and

– postpetition purchasers of used GM vehicles who claimed economic damages as a result of defects.

The Second Circuit held that a debtor may sell free and clear of successor liability claims, but independent claims against New GM were not covered by the “free and clear” sale.

The court applied a variation of the “relationship test,” which requires prepetition conduct by the debtor plus some minimum contact or relationship with the claimant, to determine whether the purchasers held “claims.” Both pre-closing accident claims and economic loss claims by prepetition purchasers constituted “claims,” but postpetition purchasers of used vehicles did not have “claims.”

To determine whether the holders of prepetition claims received sufficient notice, the Second Circuit focused on GM’s knowledge of the claims instead of its knowledge of the identity of the creditors.

The full client alert is available here.

Three Ages of Bankruptcy

posted in: Workouts and Pre-Packs | 0

By Mark J. Roe (Harvard Law School)

During the past century, three decisionmaking systems have arisen to accomplish a bankruptcy restructuring — judicial administration, a deal among the firm’s dominant players, and a sale of the firm’s operations in their entirety. Each is embedded in the Bankruptcy Code today, with all having been in play for more than a century and with each having had its heyday — its dominant age. The shifts, rises, and falls among decisionmaking systems have previously been explained by successful evolution in bankruptcy thinking, by the happenstance of the interests and views of lawyers that designed bankruptcy changes, and by the interests of those who influenced decisionmakers. Here I argue that these broad changes also stem from baseline market capacities, which shifted greatly over the past century; I build the case for shifts underlying market conditions being a major explanation for the shifts in decisionmaking modes. Keeping these three alternative decisionmaking types clearly in mind not only leads to better understanding of what bankruptcy can and cannot do, but also facilitates stronger policy decisions today here and in the world’s differing bankruptcy systems, as some tasks are best left to the market, others are best handled by the courts, and still others can be left to the inside parties to resolve.

The full article is available here.

Bankruptcy Sales

posted in: Cramdown and Priority | 0

By Melissa B. Jacoby (University of North Carolina – Chapel Hill) and Edward J. Janger (Brooklyn Law School)

Bankruptcy courts have become fora for the sale of entire firms as going concerns, as well as for the liquidation of assets piecemeal. This book chapter teases out the advantages and disadvantages of conducting such sales under federal bankruptcy law as compared to state law. We first describe the forms that bankruptcy sales can take, and the contexts in which they occur. Next, we explore the concept of “bankruptcy created value,” identifying the ways in which the federal bankruptcy process can create value over and above what can be realized through compulsory state processes. We then identify several procedural and governance-based concerns about all-asset sales. We suggest that our recent proposal, the Ice Cube Bond, might address concerns about sales of substantially all assets by withholding a portion of the sale proceeds. To recover the withheld funds, claimants would have to establish that the sale did not harm the bankruptcy estate and that they would be legally entitled to the funds under the normal bankruptcy priority rules or pursuant to an agreement reached after the sale. To conclude, we explore the related issues of credit bidding and the permissible scope of sale orders that declare assets to be “free and clear” of various kinds of claims and property interests.

The full chapter may be found here.

This draft chapter has been accepted for publication by Edward Elgar Publishing in the forthcoming Corporate Bankruptcy Handbook, edited by Barry Adler, due to be published in 2017.

Successor Liability in § 363 Sales

By Michael L. Cook of Schulte, Roth & Zabel LLP

Bankruptcy Code §363(f)(1) empowers a bankruptcy court to order a debtor’s assets sold “free and clear of any interest in such property.” Courts in the business bankruptcy context have been wrestling with successor liability, i.e., whether an asset buyer can be held liable for the debtor-seller’s liabilities. In 2009, the Second Circuit affirmed a bankruptcy court order barring creditors of the selling debtor from pursuing the asset buyer “for product defects in vehicles produced by” the debtor. In re Chrysler LLC, 576 F.3d 108, 123-24 (2d Cir. 2009), vacated as moot, 558 U.S. 1087 (2009) (held, successor liability claims are interests covered by a sale order under Code § 363(f)(1)).

Most recently, on July 13, 2016, the Second Circuit held that the bankruptcy court’s asset sale order in the General Motors reorganization case limiting specific pre-bankruptcy product liability claims required prior “actual or direct mail notice” to claimants when the debtor “knew or reasonably should have known about the claims.” In re Motors Liquidation Co., 2016 U.S. App. LEXIS 12848, *46-47 (2d Cir. July 13, 2016). Although the substance of the sale order may have been enforceable otherwise, “mere publication notice” to known or knowable claimants was insufficient. Had the complaining product liability claimants received adequate notice, reasoned the court, they “could have had some negotiating leverage [regarding the terms of any sale order] . . . and [a meaningful] opportunity to participate in the proceedings.” Id. at *61. The court noted a “trend…toward a more expansive reading of ‘interests in property’ which encompasses other obligations that may flow from ownership of the property.” Id., at 124, citing In re Trans World Airlines, Inc., 322 F. 3d 283, 285-90 (3d Cir. 2003).

The full memo is available here.