CZYZEWSKI V. JEVIC HOLDING CORP. : CASE SUMMARY

The Supreme Court held in Czyzewski v. Jevic Holding Corp. 580 U.S. 451 (2017) that a bankruptcy court may not approve a structured dismissal that provides for a final distribution of estate assets in violation of the Bankruptcy Code’s priority rules without the consent of the affected creditors.

FACTS OF THE CASE

Jevic Holding Corporation operated a trucking business that ceased operations and filed for Chapter 11 bankruptcy protection. Shortly before the bankruptcy filing, the company terminated a large number of employees. These former employees brought claims under federal and state labor laws seeking damages arising from the terminations.

During the bankruptcy proceedings, two significant lawsuits were pending. One involved a fraudulent conveyance claim against entities connected with a leveraged buyout of Jevic. Another involved claims asserted by the terminated employees, whose wage-related claims enjoyed priority status under the Bankruptcy Code.

Eventually, the parties negotiated a settlement of the fraudulent conveyance litigation. The settlement provided for a distribution of funds to general unsecured creditors and to certain litigation expenses but excluded the terminated employees, despite the fact that their claims had a higher priority than those of some creditors receiving distributions. To implement the settlement, the parties proposed a structured dismissal of the Chapter 11 case rather than confirmation of a reorganization plan.

The affected employees objected, arguing that the proposed distribution violated the Bankruptcy Code’s priority rules because lower-priority creditors would receive payments while higher-priority wage claimants received nothing.

ISSUE BEFORE THE SUPREME COURT

The key issue before the Supreme Court was whether a bankruptcy court may approve a structured dismissal of a Chapter 11 case that distributes estate assets in a manner deviating from the Bankruptcy Code’s priority scheme without the consent of the adversely affected priority creditors.

FINDINGS OF THE SUPREME COURT

Justice Breyer, writing for the majority, emphasized that the Bankruptcy Code establishes a carefully designed system of priorities governing the distribution of estate assets. These priority rules represent a fundamental feature of federal bankruptcy law and reflect Congress’s judgment regarding the order in which creditors should be paid.

The Court acknowledged that the Bankruptcy Code expressly permits certain deviations from ordinary priorities in specific contexts, such as ordinary-course business operations, interim distributions, or settlements that do not constitute final distributions. However, the Court found no statutory authorization for a final distribution through a structured dismissal that deliberately skips over higher-priority creditors in favor of lower-priority claimants.

The Court rejected the argument that bankruptcy courts possess broad equitable authority to approve such arrangements whenever they appear practical or beneficial. While structured dismissals may be permissible in appropriate circumstances, they cannot be used as a mechanism to evade the Code’s priority structure.

The Court expressed concern that permitting such distributions would undermine predictability in bankruptcy proceedings and weaken the protections that Congress afforded to priority creditors. Allowing courts to disregard statutory priorities simply because a settlement appears convenient could fundamentally alter the balance established by the Bankruptcy Code.

SIGNIFICANCE OF THE JUDGMENT

The decision is one of the most important modern Supreme Court rulings on creditor priorities in Chapter 11 cases. It reinforced the principle that bankruptcy distributions must generally follow the hierarchy established by Congress and that courts cannot approve creative settlements that circumvent those priorities. The judgment significantly limited the flexibility of structured dismissals as a means of resolving Chapter 11 cases. Although structured dismissals remain available, they cannot be used to accomplish what would be impermissible in a confirmed plan of reorganization.

The ruling also strengthened protections for priority creditors, including employees with wage claims, by ensuring that their statutory rights cannot be disregarded through settlement arrangements negotiated by other parties.

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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.