Can Investors and Creditors Conspire to Leap-Frog Your WARN Act Claims in Bankruptcy?

Frederick Perillo

The Third Circuit Court of Appeals says yes.  But, the Supreme Court may yet rescue workers from a bankruptcy scam known as a “structured settlement.”

When Congress enacted the Bankruptcy Code, one of the underlying principles was the equality of treatment for creditors.  If there’s not enough money to go around, creditors share and share alike what is left.

There are a few exceptions to this rule.  Notably, a secured lender (that is, one who loaned money on the condition that it get collateral, like a mortgage) has first crack at the assets of the bankrupt.  The other noteworthy exception is the worker’s wage priority:  Workers who have earned wages, vacation pay, etc., in the last six months before the bankruptcy are entitled to receive up to $12,475 ahead of general creditors (this number is inflation-adjusted, which is the reason for the odd amount).  And damages for a plant closing without notice—so-called “WARN Act” liability—is definitely wages entitled to this priority under the Code.

So, you can imagine the shock of the truck drivers fired by Jevic, a trucking firm in New Jersey that went bankrupt in May 2008, when they learned that the bankruptcy court approved a deal between a senior lender and a committee of creditors that would take the few remaining assets of Jevic, give them all to the creditors who had lower-priority claims than the drivers, and leave the drivers with nothing.  The court then approved dismissing the bankruptcy case.

Sun Capital, a private equity firm, acquired Jevic about two years before its bankruptcy through a highly over-leveraged debt transaction.  When the company filed for bankruptcy, most its assets went to pay its secured lender, leaving it only about $1.7 million.  It fired its workers without notice and without pay.

The drivers sued both Jevic and its owner, Sun, under the WARN Act, which generally provides that large employers like Jevic must give 60 days’ notice of closing, or pay the workers the money they would have earned if notice had been given.  The other creditors sued Sun and its lender, CIT Group, alleging that the leveraged acquisition of Jevic amounted to fraud.

The creditors then entered into a “structured settlement” with Sun and CIT whereby Sun and CIT would add $2 million to Jevic’s assets (therefore, a total of $3.7 million), and put the money in a trust for the creditors—excluding the drivers. The bankruptcy court would then dismiss the bankruptcy case, and the creditors would divvy up the money in the trust.  One important part of the deal was that Jevic’s and the committee’s lawyers would be paid.

The drivers—who won their case against Jevic that they were wrongfully fired without notice, and who have higher priority claims than the general creditors—got nothing.

The bankruptcy court approved this scheme, as did the United States District Court, and now, finally, the Third Circuit Court of Appeals.  The appellate court noted that structured settlements should be “rare.”  The reality is that the appellate court has road-mapped how creditors and lenders can conspire to by-pass the wage priority Congress wrote into the Code to protect workers in practically every instance.

This case, Czyzewski v. Jevic Holding Corp., has now been accepted by the Supreme Court of the United States for review.  There may be hope yet for Jevic’s drivers and workers in similar straits in other bankruptcy cases.