Bankruptcy and unpaid wage claimants reach the Supreme Court

Updated 12/07/2016: See Czyzewski v. Jevic: Supreme Court argument review

Unsecured creditors got all the goodies in a bankruptcy even though laid-off truck drivers had a higher priority under the U.S. Bankruptcy Code. Why is that? Jevic Transportation filed a Chapter 11 (reorganization) bankruptcy petition. Jevic had already laid off its truck drivers, and the drivers filed a class-action complaint against Jevic claiming violation of the Worker Adjustment and Retraining Notification (WARN) Act by failing to give the drivers 60 days written notice prior to a mass layoff.

Jevic owed about $53 million to its lenders, who held a first-priority lien on most of the company’s assets. And the drivers' claim was worth about $12.4 million – including an $8.3 million wage claim that had priority under the bankruptcy code. Yet Jevic had only $1.7 million in cash to distribute to its creditors, and a creditor had a lien on that. Have you noticed that even if the drivers had been given their priority there would not be anything left to pay them?

So the official unsecured creditors’ committee and the secured lender negotiated a settlement under which the lender set aside some money to distribute to unsecured creditors. This "structured dismissal" did not follow the bankruptcy priorities, which would have preferred the wage claims.

All of this was OK according to the 3rd Circuit [opinion here], even though other courts have disagreed. The US Supreme Court granted certiorari in Czyzewski v. Jevic Holding Corporation (certiorari granted 06/28/2016). [Briefing here] Arguments will be scheduled for the Fall of 2016.

The official question presented in the certiorari petition:

Whether a bankruptcy court may authorize the distribution of settlement proceeds in a manner that violates the statutory priority scheme.