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In the recent case Czyzewski v. Jevic Holding Corp (Jevic), the Supreme Court ruled that bankruptcy courts do not have the legal power to approve the structured dismissal of a Chapter 11 bankruptcy case “that provides for distributions that do not follow ordinary priority rules without the affected creditors’ consent.” In the Daily Journal article “When Courts Can Approve Structured Dismissals,” David Kupetz analyzed the Jevic ruling and discussed the interaction between the priority rules of the Bankruptcy Code and dismissal of a Chapter 11 case.
The Supreme Court emphasized that the Bankruptcy Code’s priority system is a “fundamental underpinning of business bankruptcy law,” and found that allowing structured dismissals to circumvent this system would nullify protections Congress has granted certain classes of creditors (e.g., employee wage claims), increase the risk of collusion, and make settlements more difficult to achieve. Finding no significant bankruptcy-related justification for violating priority rules through structured dismissal, the Court rejected the 3rd Circuit’s limited approval of nonconsensual priority-violating structured dismissals in “rare cases.”
The Supreme Court declined to express any view regarding the legality of structured dismissals in general. Implicitly, the court acknowledged them to be appropriate where creditors consent. Further, it is standard practice to violate ordinary priority rules during the course of Chapter 11 cases with, for example, “first-day” wage orders, “critical vendor” orders, and “roll-ups” in debtor in possession financing. The court recognized that such out-of-priority distributions, however, are found necessary to enable successful reorganization and benefit even disfavored creditors. In contrast, the priority-violating distribution under the Jevic structured dismissal is a final disposition that did not make the disfavored creditors better off.