Supreme Court Agrees to Hear Case Questioning Order Creditors Were Paid in Bankruptcy Deal

By Peg Brickley 

The Supreme Court on Tuesday agreed to review a bankruptcy deal that wrapped up the affairs of a New Jersey trucking company but left truck drivers unpaid.

The Justice Department argues Jevic Holding Corp.'s settlement ran afoul of the bankruptcy code's so-called priority scheme, which determines the order that creditors are paid.

In Jevic's case, unsecured creditors received some money, but workers terminated without notice didn't receive payments required under federal law in abrupt mass layoffs. Justice Department lawyers asked the Supreme Court to overturn the ruling on the grounds it flouts bankruptcy principles that bar troubled companies from picking and choosing among their creditors.

Jevic Holding, which was based in Delanco, N.J., filed for chapter 11 bankruptcy protection in May 2008, about two years after private-equity firm Sun Capital Partners's debt-fueled acquisition of the company. By the end of the proceeding, secured lender CIT Group Inc., which had refinanced the Sun deal debt, had a lock on all the assets.

The official committee of Jevic's unsecured creditors sued Sun Capital and CIT, accusing them of burdening the trucking company with too much debt and of allowing it to operate with too little capital. The suit made some headway, but there was no money in the chapter 11 coffers to continue to chase the deep-pocketed defendants.

Sun and CIT denied the allegations.

Unsecured creditors that brought the lawsuit then negotiated a "structured settlement" of Jevic's bankruptcy, which shielded Sun and CIT from claims for damages due to Jevic's collapse. Under the pact, unsecured creditors received some money, but truck drivers who were supposed to receive benefit payments didn't. Those truck-driver claims ranked higher on the bankruptcy code's priority ladder than the claims of unsecured creditors, such as suppliers.

The deal was an approach to a problem common in chapter 11, when companies don't have the cash to fund a chapter 11 plan, and secured lenders hold all the cards.

A bankruptcy judge signed off on Jevic's settlement over the objection of the unpaid truck drivers, and the decision was upheld by two reviewing courts.

The question of what to do about bankruptcy rules that get in the way of a settlement has divided courts of appeal across the country, with some courts rejecting settlements that don't comply with the scheme set out by Congress for who gets paid first.

Two of the busiest -- the Delaware bankruptcy court, which handled the Jevic case, and the New York court -- have taken positions that allow settlements that skip over claims that Congress said are entitled to priority in payment. Those courts get a large share of corporate bankruptcies, so a Supreme Court decision on the case could set a significant precedent, Justice Department lawyers noted.

Advocates of structured settlements say they can reduce costs and encourage settlements. Critics disagree. Structured settlements will make "it more difficult and expensive, if not impossible, for small creditors, such as employees with unpaid wages and customers with unrefunded deposits, to recover from corporate debtors in bankruptcy," lawyers for the National Employment Law Project and National Consumers League wrote in a brief urging the high court to take up the case.

The case also has implications for tax authorities. While the case deals specifically with benefit claims by truck drivers, the practice also applies to tax claims that could be targeted by sophisticated creditors anxious to deal their way around the rules, Justice Department lawyers told the Supreme Court in their brief arguing for review.

(END) Dow Jones Newswires

June 28, 2016 16:06 ET (20:06 GMT)

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