Jevic Holding Corp. v.
787 F.3d 173
3rd Cir.2015Background
- Jevic Transportation filed Chapter 11 after operations ceased in May 2008; secured lenders (CIT and Sun) held virtually all value and Jevic’s estate had ~$1.7M cash (encumbered) plus a fraudulent-conveyance claim against CIT and Sun.
- A Committee of Unsecured Creditors sued CIT and Sun for fraudulent conveyance; litigation was lengthy, risky, and expensive.
- Settling parties (Committee, Jevic, CIT, Sun) agreed to a settlement: releases, $2M for fees, Sun’s lien on the $1.7M assigned to a trust to pay tax/admin creditors and then general unsecured creditors pro rata, dismissal of the fraudulent-conveyance suit, and dismissal of the Chapter 11 case.
- The WARN-class drivers (Drivers) held an uncontested WARN Act claim (including priority wage claims under 11 U.S.C. §507(a)(4)) that was excluded from the settlement distributions.
- Bankruptcy and District Courts approved the structured dismissal under Rule 9019; objectors (Drivers and U.S. Trustee) argued structured dismissals are unauthorized and that the settlement impermissibly skipped higher-priority creditors. The Third Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. May a Chapter 11 case be resolved by a "structured dismissal"? | Drivers: No; Chapter 11 exits are plan confirmation, conversion to Ch.7, or plain dismissal; structured dismissals lack statutory authority and risk sub rosa plans. | Appellees/Bkrtcy: Yes; §349(b) allows courts to alter dismissal effects "for cause," and courts routinely approve structured dismissals when appropriate. | Court: Permissible in rare circumstances where not used to evade plan/convert safeguards and traditional exits are unavailable. |
| 2. May a settlement/distribution in a structured dismissal deviate from statutory priority (skip a class of priority creditors)? | Drivers: No; §507 priorities and absolute-priority principles bar distributions that favor junior creditors over objecting senior creditors. | Appellees: Rule 9019 settlements may depart from strict priorities when specific, credible grounds justify deviation and the settlement serves estate interests. | Court: Settlements can deviate only with "specific and credible grounds"; here that standard was met given dire circumstances and lack of viable alternatives. |
| 3. Did the Bankruptcy Court properly apply Rule 9019 (Martin factors) to approve the settlement? | Drivers: The committee breached fiduciary duty by freezing out Drivers; settlement unfairly favored some creditors. | Appellees: Martin factors (likelihood of success, collection difficulties, complexity/cost, creditors’ interests) favored settlement—better to give some distributions than risk litigation that yields zero. | Court: Bankruptcy Court did not abuse discretion; Martin factors supported settlement given litigation risk, scarce funds, and no realistic confirmable plan. |
| 4. Is the appeal equitably moot because the settlement was substantially consummated? | — (Drivers appealed; District found consummation) | District Court: Settlement substantially consummated; appeal equitably moot. | Third Circuit addressed merits (did not dismiss as equitably moot) and affirmed on the merits. |
Key Cases Cited
- Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) (settlement of estate claims must be "fair and equitable"; guides courts approving compromises)
- In re Martin, 91 F.3d 389 (3d Cir. 1996) (adopts four-factor test for approving settlements under Rule 9019)
- In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007) (permits some priority deviations in settlements when justified; emphasizes need for explanation and strong record)
- Matter of AWECO, Inc., 725 F.2d 293 (5th Cir. 1984) (refuses settlements that transfer estate funds to junior creditors over senior claims; applies a stricter per se priority rule)
- Law v. Siegel, 134 S. Ct. 1188 (2014) (bankruptcy courts’ equitable powers are limited by the Bankruptcy Code)
- Nutraquest, Inc. v. Capital Ventures Int’l, 434 F.3d 639 (3d Cir. 2006) (policy preference toward settlements in bankruptcy)