SCOTUS: Employees win structured dismissal bankruptcy case

In a sweeping decision, the US Supreme Court held that bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors. Czyzewski v. Jevic Holding Corporation (US Supreme Ct 03/22/2017) (6-2) [Opinion text].

In this case an official unsecured creditors’ committee and a secured lender negotiated a settlement under which the lender set aside some money to distribute to unsecured creditors – and totally cut out former employees who had priority claims under the Bankruptcy Code. This "structured dismissal" did not follow the bankruptcy priorities, which would have preferred the drivers' wage claims.

The Supreme Court would have none of that. And not merely in cases involving special priorities for employees. In sweeping terms, the Court rejected the notion that there could be "rare cases" in which courts could find "sufficient reasons" to disregard priorities. The Court identified potentially serious consequences that could flow from such an exception: departure from the protections granted particular classes of creditors, changes in the bargaining power of different classes of creditors even in bankruptcies that do not end in structured dismissals, risks of collusion, and increased difficulty in achieving settlements. "[W]e conclude that Congress did not authorize a “rare case” exception."

All bankruptcy lawyers will need to pay close attention to this case.

For recent decisions and pending employment law cases, see US Supreme Court Watch.]