The US Supreme Court [official website] on Wednesday heard oral arguments [day call, PDF] in Czyzewski v. Jevic Holding Corporation [SCOTUSblog materials], a case that will determine whether the “structured dismissal” settlement plan for Chapter 11 bankruptcy proceedings is permissible despite violating the statutory priority scheme. Under the code, there are three resolution options for Chapter 11 bankruptcy: a reorganization plan, conversion to Chapter 7 bankruptcy where assets would be liquidated, or a straight dismissal that is intended to place parties in their pre-bankruptcy positions. However, the lower court in this case authorized something called a structured dismissal. In this case, former employees of Jevic had a multi-million dollar employment-law claim [SCOTUSblog report] against the company, and under bankruptcy $8.3-million of the claim has priority over certain tax claims and general unsecured claims. The Official Committee of Unsecured Creditors [information, PDF], on behalf of the bankruptcy estate, filed a fraudulent-transfer claim against the holders of Jevic’s secured debt, but the claim was to be settled. As part of the agreement, Jevic and the Official Committee would receive $3.7-million in exchange for dropping the fraudulent-transfer claims, some of which would pay priority tax obligations and then a pro rata share to all unsecured creditors not including the former employees. The employees, constraining their argument [transcript, PDF] to the specific issue they were bringing, asked the court to reverse this structured dismissal on the grounds that it paid creditors outside of the statutory priority scheme by paying unsecured creditors whose claims are junior to the employees’ claim. The employees also argue that this plan should not be allowed because, in addition to not paying them, it eliminates the fraudulent-transfer claims that could have been continued by the employees under a straight dismissal. While a lawyer for the US argued for categorical prohibition of structured dismissals, Jevic’s attorney argued that the settlement should be upheld because it was a rare occasion where nobody was made worse off, but everyone except the employees were better.

The Court granted certiorari [JURIST report] for the case in June, and a decision is expected by June 2017. Also in June the Court ruled [JURIST report] in Puerto Rico v. Franklin California Tax-Free Trust that Section 903(1) of the Bankruptcy Code preempts Puerto Rico’s Recovery Act. In May the court ruled [JURIST report] in Husky International Electronics, Inc. v. Ritz that “actual fraud,” as it relates to the discharge of debt under the bankruptcy code, may be committed by purposeful concealment and does not require overt misrepresentation. In June 2015 the court ruled in Baker Botts v. ASARCO that law firms representing those undergoing bankruptcy proceedings cannot recoup fees [JURIST report] incurred when defending the fees they originally charged their client.