Supreme Court Decides For Workers and Against Private Equity in Important Bankruptcy Case, Jevic

The Supreme Court ruling for Czyzewski v. Jevic Holding Corp. is just in, and it’s a rare and important ruling against bankruptcy-court-enabled private equity chicanery. We’ve attached the short and readable ruling at the end of this post.

A ruse that private equity firms have increasingly used when companies they own are about to go bust is to fire workers upon failure of the company, as opposed to giving them a 60 day notice as required by state and federal state and federal Worker Adjustment and Retraining Notification (WARN) Acts. The failure to make the WARN Act mandated payments makes workers creditors to the bankrupt estate, sitting below secured creditors but above unsecured creditors in the order of priority of payment stipulated in the Bankruptcy Code. It also potentially sets up a fraudulent conveyance suit against the former company owners. Fraudulent conveyance occurs when an owners pulls money out of a business even though they knows is it going to go bust. Since the owners are at the very bottom of the bankruptcy priority hierarchy, they have ripped off the creditors to their benefit. It’s not hard to see how this regularly happens with private equity owned firms, since they will often have paid monitoring and other fees to themselves even as the company is on death’s door.1

Needless to say, as private equity expert Eileen Appelbaum pointed out by e-mail, “Many workers have been cheated out of their WARN Act payments when PE-owned companies enter bankruptcy.” In the Jevic case, the Supreme Court ruling reversed Bankruptcy Court and appeals court decisions that would have stiffed the former Jevic employees entirely with respect to their WARN Act payments. The Supreme Court nixed the mechanism by which that happened: by upending the stipulated creditor hierarchy and putting the workers below unsecured creditors, when they should have priority over them instead.

Jevic’s owner was Sun Capital, which has been a particularly aggressive player in pre-bankruptcy strategies. As we noted last year:

Cases based on arguing fraudulent comparatively rare; one of the largest in recent years that involved similar claims, namely fraudulent conveyance and breach of fiduciary duty, was by Mervyns against the consortium of private equity firms that bought it, which included Cerberus and Sun Capital, as well as other parties, was settled in 2012 $166 million.

One reason for the dearth of suits is that parties that were on the short stick of a bankruptcy settlement are already in the hole; many would rather cap their loss and move on rather than potentially increase it with a failed lawsuit. And as the twists and turns of the Mervyn’s case illustrated, even when their conduct is egregious, private equity firms have the means and motivation to turn a court fight into a war of attrition.

And Sun has been pushing the envelope in not a good way on other fronts. In an important case last year, Scott Brass, the court slapped down Sun’s scheme to evade the status of being a “controlled group” (an 80% or greater owner), which meant they were liable for the underfunded pension of a company they drove into the ditch.

With Jarvis, the company did not give workers the required WARN Act payments. That gave them an $8.3 million claim against the estate. The backstory has more twists and turns, but the simple version is that the company and its creditors tried restructuring under Chapter 11. That effort failed. The court then entered into a “structured dismissal,” which it described:

There are three possible conclusions to a Chapter 11 bankruptcy. First, debtor and creditors may negotiate a plan to govern the distribution of the estate’s value. See, e.g., 11 U. S. C. §§1121, 1123, 1129, 1141. Second, the bankruptcy court may convert the case to Chapter 7 for liquidation of the business and distribution of its assets to creditors.§§1112(a), (b), 726. Finally, the bankruptcy court may dismiss the case. §1112(b). A court ordering a dismissal ordinarily attempts to restore the prepetition financial status quo. §349(b)(3). Yet if perfect restoration proves difficult or impossible, the court may, “for cause,” alter the dismissal’s normal restorative consequences, §349(b)— i.e., it may order a “structured dismissal.”

Note that in Chapter 7 bankruptcies (liquidations), the creditor hierarchy is observed strictly. Chapter 11 allows more latitude, but a court cannot approve a plan if a creditor class than has had its rights impaired, meaning is not being paid in accordance to the priority of payment, objects to the deal.

The Court made clear it took a very dim view of lower courts’ upending of the well-established creditor rights:

The importance of the priority system leads us to expect more than simple statutory silence if, and when, Congress were to intend a major departure. See Whitman v. American Trucking Assns., Inc., 531 U. S. 457, 468 (2001) (“Congress . . . does not, one might say,hide elephants in mouseholes”). Put somewhat more directly, we would expect to see some affirmative indication of intent if Congress actually meant to make structured dismissals a backdoor means to achieve the exact kind of nonconsensual priority-violating final distributions that the Code prohibits in Chapter 7 liquidations and Chapter 11 plans.

We can find nothing in the statute that evinces this intent. The Code gives a bankruptcy court the power to “dismiss” a Chapter 11 case. §1112(b). But the word “dismiss” itself says nothing about the power to make nonconsensual priority-violating distributions of estate value. Neither the word “structured,” nor the word “conditions,” nor anything else about distributing estate value to creditors pursuant to a dismissal appears in any relevant part of the Code…

Section 349(b), we concede, also says that a bankruptcy judge may, “for cause, orde[r] otherwise.” But, read in context, this provision appears designed to give courts the flexibility to “make the appropriate orders to protect rights acquired in reliance on the bankruptcy case.” H. R. Rep. No. 95–595, at 338; cf., e.g., Wiese v.
Community Bank of Central Wis., 552 F. 3d 584, 590 (CA7 2009) (upholding, under §349(b), a Bankruptcy Court’s decision not to rein- state a debtor’s claim against a bank that gave up a lien in reliance on the claim being released in the debtor’s reorganization plan). Nothing else in the Code authorizes a court ordering a dismissal to make general end-of-case distributions of estate assets to creditors of the kind that normally take place in a Chapter 7 liquidation or Chapter 11 plan—let alone final distributions that do not help to restore the status quo ante or protect reliance interests acquired in the bankruptcy, and that would be flatly impermissible in a Chapter 7 liquidation or a Chapter 11 plan because they violate priority without the impaired creditors’ consent. That being so, the word “cause” is too weak a reed upon which to rest so weighty a power…

We have found no contrary precedent, either from this Court, or, for that matter, from lower court decisions reflecting common bankruptcy practice.


This would seem to throw a lot of cold water on structured dismissals, since reading between the lines, they may have evolved into bankruptcy courts upon occasion trying Solomonic remedies to avoid Chapter 7 liquidations. The ruling is so fresh that I have yet to see any bankruptcy maven commentary, so it will be instructive to see them weigh in on the implications for structured dismissals and private equity bankruptcy looting, um, strategies.
1 While monitoring fee agreements often provide for the private equity firm’s fee payments to accrue but not be paid on a current basis if profits fall below certain levels, those provisions are commonly at the option of the general partner.

Czyzewski v. Jevic Holding Corp
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    1. Martin from Canada

      Written by Breyer, in which Roberts, Kennedy, Ginsburg, Sotomayor, and Kagan joined.

      Thomas, filed a dissenting opinion, in which was joined by Alito.

      1. philnc

        That dissent is interesting. It doesn’t actually challenge the majority on the merits, but rather finds fault with the process that led to the holding. Basically Thomas is saying the Court should have let the lower court rulings stand because… the area of law is still developing? He also faults the majority for deciding the case on a question not briefed: which should strike any experienced appellate lawyer as odd, given the penchant of appeals courts to sometimes find arguments neither party conceived (demonstrating why they’re on one side of the bench rather than the other).

        1. Darius

          Thomas and Alito were part of the majority that did just that in Citizens United. That decision was too important to big money to be left to the law and procedure. The Roberts majority had to put their ideological thumb on the scale.

      2. DH

        Thomas and Alito are still struggling with the concept that individual people have the rights ascribed to them in the Constitution instead preferring that those rights be superseded by corporations or companies, which are not even mentioned in the Constitution.

        Unfortunately, I think that Neil Gorsuch also believes that corporations have more rights than people.

  1. Rory

    Didn’t someone say back in the 30’s when the Supreme Court stopped invalidating New Deal legislation, “The Supreme Court reads the newspapers”? I think that this otherwise pro-business current court can’t be blind to the level of discontent in the country, and I think that this decision reflects that.

    1. steelhead23

      I would agree. Everything in Washington is political – or corrupt. I am left to wonder whether the ruling requires not just disgorgement of the withheld WARN payments, but interest and legal costs as well. I’d like to see Sun get a good spanking.

    2. JTMcPhee

      I doubt that the Supremes need to read the paper (if there is one that might even inform them on the stresses amongst the peasants outside the Beltway Bubble), given the level of corruption and the current locus of power (and related “popular discontent”) among the People Who Matter. The Eight (soon to be Nine) who sit up there on the bench likely feel completely immune to any possible expressions of “acts as speech” by the rabble.

      It is interesting that there’s majority recourse to the notion of “intent of the legislature” in the opinion. What I learned in law school is that there’s a real Chinese menu of legal precepts and principles, which can be selectively pulled out of the stack to support any old decision the Supremes want to write out. Stuff like “statutes in derogation of the common law must be strictly construed,” but “statutes with a remedial purpose should be broadly construed.” Ya pays your money, and ya takes yer pick…

    3. Yves Smith Post author

      I’m not sure that played a role here. The Court seemed not happy that this sort of upending of the creditor hierarchy created “uncertainty,” so there was arguably a business rationale. The ruling also seemed to find the Appellate Court decision to be strained.

      The Court also bothered including this section. It seems they didn’t like this AT ALL as the apparent “for cause” excuse, although they didn’t flat out say it:

      Sun, CIT, Jevic, and the committee then tried to negotiate a settlement of this “fraudulent-conveyance” lawsuit. By that point, the depleted Jevic estate’s only remaining assets were the fraudulent-conveyance claim itself and $1.7 million in cash, which was subject to a lien held by Sun.

      The parties reached a settlement agreement. It provided (1) that the Bankruptcy Court would dismiss the fraudulent-conveyance action with prejudice; (2) that CIT would deposit $2 million into an account earmarked to pay the committee’s legal fees and administrative expenses; (3) that Sun would assign its lien on Jevic’s remaining $1.7 million to a trust, which would pay taxes and administrative expenses and distribute the remainder on a pro rata basis to the low-priority general unsecured creditors, but which would not distribute anything to petitioners (who, by virtue of their WARN judgment, held an $8.3 million mid- level-priority wage claim against the estate); and (4) that Jevic’s Chapter 11 bankruptcy would be dismissed.

      Apparently Sun insisted on a distribution that would skip petitioners because petitioners’ WARN suit against Sun was still pending and Sun did not want to help finance that litigation. See 787 F. 3d, at 177–178, n. 4 (Sun’s counsel acknowledging before the Bankruptcy Court that “ ‘Sun probably does care where the money goes because you can take judicial notice that there’s a pending WARN action against Sun by the WARN plaintiffs. And if the money goes to the WARN plaintiffs, then you’re funding someone who is suing you who otherwise doesn’t have funds and is doing it on a contingent fee basis’ ”).

  2. Eileen Appelbaum

    Thanks for this great column, and for making clear the significance of the decision. I am very much encouraged by the 6 to 2 majority.

  3. Scrooge McDuck

    A rare win for the little guy. This ruling will throw a major monkey wrench into the PE machine.

  4. hemeantwell

    Good news, a fine write-up, and good comments as well. Another NC contribution to the alternative news movement.

  5. GF

    It appears that the Supreme Court also rulled unanimously against a Gorsuch appeal:

    I hate to credit Kos but this is interesting. Too bad no more senate grilling.

  6. pat b

    this was not a ruling to help workers, this was a ruling to limit “Structured Dismissal”

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