Nature of the Case
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Facts
In Chapter 11 an estate is created comprising all property of the debtor. A fiduciary is installed to manage the estate in the interest of the creditors. Often the debtor’s existing management team acts as “debtor in possession.” It may operate the business, and perform certain bankruptcy-related functions, such as seeking to recover for the estate preferential or fraudulent transfers made to other persons. An “automatic stay” of all collection proceedings against the debtor takes effect. This results in three possibilities. A bankruptcy-court-confirmed plan may be approved. The case may be converted to a Chapter 7 for liquidation of the business and a distribution of its remaining assets. A case may be dismissed. A dismissal typically “revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case”-in other words, it aims to return to the prepetition financial status quo. Setting back the clock may not always be possible. The Code permits the bankruptcy court, “for cause,” to alter a Chapter 11 dismissal’s ordinary restorative consequences. A dismissal that does so (or which has other special conditions attached) is often referred to as a “structured dismissal,” defined by the American Bankruptcy Institute as a “hybrid dismissal and confirmation order that typically dismisses the case while, among other things, approving certain distributions to creditors, granting certain third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case.” The Code also sets forth a priority of interests, which ordinarily determines the order in which the bankruptcy court will distribute assets of the estate. Secured creditors are highest on the priority list. Special classes of creditors, such as those who hold certain claims for taxes or wages, come next in a listed order. Then come low-priority creditors, including general unsecured creditors. Equity holders are at the bottom of the priority list. They receive nothing until all previously listed creditors have been paid in full. Chapter 7 must follow the priorities. Chapter 11 may impose a different ordering with the consent of the affected parties. But a bankruptcy court cannot confirm a plan that contains priority-violating distributions over the objection of an impaired creditor class. Sun Capital Partners, acquired Jevic in a “leveraged buyout.” Unsuccessful leveraged buyouts often lead to fraudulent conveyance suits alleging that the purchaser transferred the company’s assets without receiving fair value in return. Jevic filed for Chapter 11 bankruptcy. It owed $53 million to senior secured creditors Sun and CIT and over $20 million to tax and general unsecured creditors. Cyzewski (Ps), a group of former Jevic (D) truckdrivers, filed suit in bankruptcy court against Jevic (D) and Sun. Just before entering bankruptcy, D had halted almost all its operations and had told P that they would be fired. Ps claim that D had violated state and federal Worker Adjustment and Retraining Notification (WARN) Acts-laws that require a company to give workers at least 60 days’ notice before their termination. The Bankruptcy Court granted summary judgment for Ps against D, leaving them a judgment that is worth $12.4 million. Some $8.3 million of that counts as a priority wage claim and is therefore entitled to payment ahead of general unsecured claims against D. The Court authorized a committee representing D’s unsecured creditors to sue Sun and CIT. The Bankruptcy Court and the parties were aware that any proceeds from such a suit would belong not to the unsecured creditors, but to the bankruptcy estate. They alleged that Sun and CIT, in the course of their leveraged buyout, had “hastened D’s bankruptcy by saddling it with debts that it couldn’t service.” The Court held that the committee had adequately pleaded claims of preferential transfer under §547 and of fraudulent transfer under §548. D’s only remaining assets were the fraudulent-conveyance claim itself and $1.7 million in cash, which was subject to a lien held by Sun. The parties reached a settlement. The Bankruptcy Court would dismiss the fraudulent-conveyance action with prejudice; (2) CIT would deposit $2 million into an account earmarked to pay the committee’s legal fees and administrative expenses; (3) Sun would assign its lien on D’s remaining $1.7 million to a trust, which would pay taxes and administrative expenses and distribute the remainder on a pro rata basis to the low-priority general unsecured creditors, but which would not distribute anything to Ps (who, by virtue of their WARN judgment, held an $8.3 million mid-level-priority wage claim against the estate); and (4) that D’s Chapter 11 bankruptcy would be dismissed. Ps and the U.S. Trustee objected to dismissal, arguing that the settlement’s distribution plan violated the Code’s priority scheme because it skipped Ps-who, by virtue of their WARN judgment, had mid-level priority claims against estate assets-and distributed estate money to low-priority general unsecured creditors. The court held that without the settlement and dismissal, there was “no realistic prospect” of a meaningful distribution for anyone other than the secured creditors. There would be no funds to operate, investigate, or litigate were the case converted to a proceeding in Chapter 7. The District Court affirmed. The Third Circuit affirmed. The Supreme Court granted certiorari.
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