September 2, 2016 - September 2, 2016 – The LSTA filed an amicus brief with the Supreme Court of the United States in In re Jevic urging the court to overturn the use of structured dismissals that violate the absolute priority rule, a foundational tenant of the bankruptcy code.  This case will determine whether Chapter 11 of the Bankruptcy Code permits a bankruptcy court to approve a settlement where proceeds are distributed in disregard of the priorities established in the code without the consent of the adversely affected creditors.  In the brief, the LSTA explains the significant impact this case will have on the lending markets due to an erosion of predictability and an increase in risk and emphatically asserts that structured dismissals should be impermissible. 

This case was filed by truck drivers who were fired in violation of the federal WARN Act, entitling them to priority claims over other unsecured creditors under section 507 of the Bankruptcy Code. Over the objection of petitioners, the Delaware Bankruptcy judge approved a structured dismissal that skipped over the drivers’ priority claim but allowed more junior creditors to be paid while they got nothing.  The 3rd Circuit Court of Appeals affirmed, ruling that in “dire circumstances” a case arising under Chapter 11 may be resolved by a structured dismissal, even if it deviates from the absolute priority rule. 

The LSTA vehemently disagrees with the conclusion of the 3rd Circuit and based on the belief that predictability, certainty and reliability are hallmarks of well-functioning lending markets.  Lenders and borrowers bargain intensely over the terms, conditions and extent of their priority.  It has never been the place of the bankruptcy system to facilitate the reshuffling of those priorities with regard to the assets of a debtor’s estate.  By skipping over the priority claimants – providing a recovery for general unsecured creditors but not for the priority claims held by the truck drivers – the dismissal order in this case turned the priority scheme on its head. 

Moreover, the costs of tolerating non-consensual priority-skipping settlements are considerable.  Instead of well-anchored negotiations about the value of the claims of the various parties based on authoritative judicial determination of their value and negotiated priorities, negotiations could, as in this case, be based solely on the leverage of threats to disenfranchise even well-founded claims through a structured dismissal.   

By permitting unexplained departures from pre-bankruptcy priorities – i.e., departures that are neither transparent nor predictable – priority-skipping dismissals directly contradict the expectations of loan market participants, impose risks that cannot be properly priced, and could cause material disruption to the markets.  The LSTA therefore urges the Supreme Court to reverse the 3rd Circuit’s decision. 

The LSTA was represented by Professor Ronald Mann of Columbia Law School.

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