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Supreme Court: Absolute Priority Rule Applies Absolutely

March 23, 2017 - Yesterday, in In re Jevic, a case of enormous importance to the loan market, the U.S. Supreme Court ruled 6-2 that non-consensual “structured dismissals” that distribute estate assets in violation of the “absolute priority rule” are not permitted under the bankruptcy code.  The decision underscores the importance of the absolute priority rule as a bedrock principle of U.S. bankruptcy, a principle that is at the heart of secured lending.

The LSTA filed an amicus brief in this case supporting the prevailing side.  This is the third bankruptcy case that has gone to the Supreme Court case in which we’ve intervened and the third time the side we’ve supported has prevailed.  The amicus briefs in all three cases, Radlax (2012; the ability to credit bid), Caulkett (2014; the sanctity of underwater second liens) and, now, Jevic (2016; structured dismissals that violate the absolute priority rule) were filed to protect the rights of secured creditors in different contexts and each of the three cases have had, or are expected to have, meaningful positive consequences.

In In re Jevic, the Court ruled that the bankruptcy code prohibits “structured dismissals” that permit non-consensual distributions of estate assets that do not accord with the “absolute priority rule” of the Bankruptcy Code.  The Court, explained that a structured dismissal, which is a “hybrid dismissal and confirmation order . . . that . . . typically dismisses the case while, among other things, approving certain distributions to creditors…” cannot, simply because it takes neither the form of a Chapter 11 plan or a Chapter 7 liquidation, do that which cannot be done in those forums, i.e., sidestep the absolute priority rule which requires that non-consenting creditors be paid in order of their priority.

Importantly, the Court’s ruling was narrow.  At the same time that they prohibited non-complying structured dismissals, the Court specifically affirmed the ability of bankruptcy courts to be flexible in granting “first day orders” and other relief in Chapter 11 cases that is designed to further the goal of reaching a workable, consensual restructuring.

We will publish an in-depth analysis of the decision and its implications for the loan market in on our website early next week.  For those who are interested in an immediate deeper dive, Mayer Brown’s review and analysis of the case is available here

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