Can a Bankruptcy Court “Leap Frog” Workers’ Priorities When It Dismisses a Case?

Frederick Perillo

The Supreme Court held today that a bankruptcy court cannot approve a settlement as part of a “structured dismissal” of a case if the settlement “leap frogs” over workers’ priority claims. The decision in Czyzewski v. Jevic Holding Corp. is an important victory for workers in bankruptcy cases.

Sun Capital purchased Jevic as part of a leveraged buyout. It pledged 100% of its assets to CIT, Sun’s lender. Jevic also owed $20 million to its creditors. CIT, as a secured lender, was the highest priority creditor.

Just before filing bankruptcy, Jevic fired its workforce without notice, triggering WARN Act (i.e., plant closing) claims to the tune of $8.3 million. The workers also filed claims against Sun, but these were dismissed. WARN Act claims have a higher priority than general creditor claims, but a lower priority than secured claims.

Because all of Jevic’s assets were tied up by CIT’s secured claim, there was no possibility of a successful reorganization plan. Jevic would either have to liquidate, or its case would have to be dismissed.

Sun, CIT and the other creditors, minus the workers, entered into a settlement whereby they agreed to pay all of the assets of the company to CIT and the creditors – leapfrogging the workers’ higher priority claims, and leaving no money for the workers at all. The bankruptcy case would then be dismissed.

The Supreme Court now rules that this type of dismissal is not allowed by the Bankruptcy Code. A dismissal cannot do an end-run around the priority scheme in the Code, which grants workers a higher priority than general creditors.