In re: JEVIC HOLDING CORP., et al., Debtors OFFICIAL COMMITTEE OF UNSECURED CREDITORS on behalf of the bankruptcy estates of Jevic Holding Corp., et al. v. CIT GROUP/BUSINESS CREDIT INC., in its capacity as Agent; SUN CAPITAL PARTNERS, INC.; SUN CAPITAL PARTNERS IV, LP; SUN CAPITAL PARTNERS MANAGEMENT IV, LLC CASIMIR CZYZEWSKI; MELVIN L. MYERS; JEFFREY OEHLERS; ARTHUR E. PERIGARD and DANIEL C. RICHARDS, on behalf of themselves and all others similarly situated, Appellants
No. 14-1465
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
May 21, 2015
PRECEDENTIAL On Appeal from the United States District Court for the District of Delaware (D.C. Nos. 13-cv-00104 & 1-13-cv-00105) District Judge: Honorable Sue L. Robinson Argued January 14, 2015
HARDIMAN, SCIRICA and BARRY, Circuit Judges
Jack A. Raisner, Esq. (Argued)
Rene S. Roupinian, Esq.
Outten & Golden
3 Park Avenue, 29th Floor
New York, NY 10016
Christopher D. Loizides, Esq.
Loizides, P.A.
1225 King Street, Suite 800
Wilmington, DE 19801
Attorneys for
Domenic E. Pacitti, Esq.
Linda Richenderfer, Esq.
Klehr Harrison Harvey Branzburg
919 Market Street, Suite 1000
Wilmington, DE 19801
Attorneys for Appellee Debtors
Robert J. Feinstein, Esq.
Pachulski Stang Ziehl & Jones
780 Third Avenue, 36th Floor
New York, NY 10017
James E. O‘Neill III, Esq.
Pachulski Stang Ziehl & Jones
919 North Market Street
P.O. Box 8705, 17th Floor
Wilmington, DE 19801
Attorneys for Appellee Official Committee of Unsecured Creditors
Christopher Landau, Esq. (Argued)
James P. Gillespie, Esq.
Jason R. Parish, Esq.
Kirkland & Ellis
655 15th Street, N.W., Suite 1200
Washington, DC 20005
Danielle R. Sassoon, Esq.
Kirkland & Ellis
601 Lexington Avenue
New York, NY 10022
Curtis S. Miller, Esq.
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
Attorneys for Appellee Sun Capital Partners IV, LP, Sun Capital Partners, Inc., Sun Capital Partners Management IV, LLC.
Tyler P. Brown, Esq.
Shannon E. Daily, Esq.
Hunton & Williams
951 East Byrd Street
13th Floor, East Tower, Riverfront Plaza
Richmond, VA 23219
Richard P. Norton, Esq.
Hunton & Williams
200 Park Avenue, 52nd Floor
New York, NY 10166
Attorneys for Appellee CIT Group Business Credit Inc.
Ramona D. Elliott, Esq.
P. Matthew Sutko, Esq.
Wendy L. Cox, Esq. (Argued)
United States Department of Justice
441 G Street, N.W., Suite 6150
Washington, DC 20530
Attorneys for Amicus Curiae
OPINION OF THE COURT
HARDIMAN, Circuit Judge
This appeal raises a novel question of bankruptcy law: may a case arising under Chapter 11 ever be resolved in a “structured dismissal” that deviates from the Bankruptcy Code‘s priority system? We hold that, in a rare case, it may.
I
A
Jevic Transportation, Inc. was a trucking company headquartered in New Jersey. In 2006, after Jevic‘s business began to decline, a subsidiary of the private equity firm Sun Capital Partners acquired the company in a leveraged buyout financed by a group of lenders led by CIT Group. The buyout entailed the extension of an $85 million revolving credit facility by CIT to Jevic, which Jevic could access as long as it maintained at least $5 million in assets and collateral. The company continued to struggle in the two years that followed, however, and had to reach a forbearance agreement with CIT—which included a $2 million guarantee by Sun—to prevent CIT from foreclosing on the assets securing the loans. By May 2008, with the company‘s performance stagnant and the expiration of the forbearance agreement looming, Jevic‘s board of directors authorized a bankruptcy filing. The company ceased substantially all of
The next day, Jevic filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware. At that point, Jevic owed about $53 million to its first-priority senior secured creditors (CIT and Sun) and over $20 million to its tax and general unsecured creditors. In June 2008, an Official Committee of Unsecured Creditors (Committee) was appointed to represent the unsecured creditors. This appeal stems from two lawsuits that were filed in the Bankruptcy Court during those proceedings. First, a group of Jevic‘s terminated truck drivers (Drivers) filed a class action against Jevic and Sun alleging violations of federal and state Worker Adjustment and Retraining Notification (WARN) Acts, under which Jevic was required to provide 60 days’ written notice to its employees before laying them off. See
Almost three years after the Committee sued CIT and Sun for fraudulent conveyance, the Bankruptcy Court granted in part and denied in part CIT‘s motion to dismiss the case. The Court held that the Committee had adequately pleaded claims of fraudulent transfer and preferential transfer under
In March 2012, representatives of all the major players—the Committee, CIT, Sun, the Drivers, and what was left of Jevic—convened to negotiate a settlement of the Committee‘s fraudulent conveyance suit. By that time, Jevic‘s only remaining assets were $1.7 million in cash (which was subject to Sun‘s lien) and the action against CIT and Sun. All of Jevic‘s tangible assets had been liquidated to repay the lender group led by CIT. According to testimony in the Bankruptcy Court, the Committee determined that a settlement ensuring “a modest distribution to unsecured creditors” was desirable in light of “the risk and the [re]wards of litigation, including the prospect of waiting for perhaps many years before a litigation against Sun and CIT could be resolved” and the lack of estate funds sufficient to finance that litigation. App. 1275.
There was just one problem with the settlement: it left out the Drivers, even though they had an uncontested WARN Act claim against Jevic.2 The Drivers never got the chance to present a damages case in the Bankruptcy Court, but they estimate their claim to have been worth $12,400,000, of which $8,300,000 was a priority wage claim under
B
The Drivers and the United States Trustee objected to the proposed settlement and dismissal mainly because it distributed property of the estate to creditors of lower priority than the Drivers under
The Bankruptcy Court began by recognizing the absence of any “provision in the code for distribution and dismissal contemplated by the settlement motion,” but it noted that similar relief has been granted by other courts. App. 31 (Bankr. Op. 9). Summarizing its assessment, the Court found that “the dire circumstances that are present in this case warrant the relief requested here by the Debtor, the Committee and the secured lenders.” Id. The Court went on to make findings establishing those dire circumstances. It found that there was “no realistic prospect” of a meaningful distribution to anyone but the secured creditors unless the settlement were approved because the traditional routes out of Chapter 11 bankruptcy were impracticable. App. 32 (Bankr. Op. 10). First, there was “no prospect” of a confirmable Chapter 11 plan of reorganization or liquidation being filed. Id. Second, conversion to liquidation under Chapter 7 of the Bankruptcy Code would have been unavailing for any party because a Chapter 7 trustee would not have had sufficient funds “to operate, investigate or litigate” (since all the cash left in the estate was encumbered) and the secured creditors had “stated unequivocally and credibly that they would not do this deal in a Chapter 7.” Id.
The Bankruptcy Court then rejected the objectors’ argument that the settlement could not be approved because it distributed estate assets in violation of the Code‘s “absolute priority rule.” After noting that Chapter 11 plans must comply with the Code‘s priority scheme, the Court held that settlements need not do so. The Court also disagreed with the Drivers’ fiduciary duty argument, dismissing the notion that the Committee‘s fiduciary duty to the estate gave each creditor veto power over any proposed settlement. The Drivers were never barred from participating in the settlement negotiations, the Court observed, and their omission from the settlement distribution would not prejudice them because their claims against the Jevic estate were “effectively worthless” since the estate lacked any unencumbered funds. App. 36 (Bankr. Op. 14).
Finally, the Bankruptcy Court applied the multifactor test of In re Martin, 91 F.3d 389 (3d Cir. 1996), for evaluating settlements under
C
The Drivers appealed to the United States District Court for the District of Delaware and filed a motion in the Bankruptcy Court to stay its order pending appeal. The Bankruptcy Court denied the stay request, and the Drivers did not renew their request for a stay before the District Court. The parties began implementing the settlement months later, distributing over one thousand checks to priority tax creditors and general unsecured creditors.
The District Court subsequently affirmed the Bankruptcy Court‘s approval of the settlement and dismissal of the case. The Court began by noting that the Drivers “largely do not contest the bankruptcy court‘s factual findings.” Jevic Holding Corp., 2014 WL 268613, at *2 (D. Del. Jan. 24, 2014). In analyzing those factual findings, the District Court held, the Bankruptcy Court had correctly applied the Martin factors and determined that the proposed settlement was “fair and equitable.” Id. at *2–3. The Court also rejected the Drivers’ fiduciary duty and absolute priority rule arguments for the same reasons explained by the bankruptcy judge. Id. at *3. And even if the Bankruptcy Court had erred by approving the settlement and dismissing the case, the District Court held in the alternative that the appeal was equitably moot because the settlement had been “substantially consummated as all the funds have been distributed.” Id. at *4. The Drivers filed this timely appeal, with the United States Trustee supporting them as amicus curiae.
II
The Bankruptcy Court had jurisdiction under
“Because the District Court sat below as an appellate court, this Court conducts the same review of the Bankruptcy Court‘s order as did the District Court.” In re Telegroup, Inc., 281 F.3d 133, 136 (3d Cir. 2002). We review questions of law de novo, findings of fact for clear error, and exercises of discretion for abuse thereof. In re Goody‘s Family Clothing Inc., 610 F.3d 812, 816 (3d Cir. 2010).
III
To the extent that the Bankruptcy Court had discretion to approve the structured dismissal at issue, the Drivers tacitly concede that the Court did not abuse that discretion in approving a settlement of the Committee‘s action against CIT and Sun and dismissing Jevic‘s Chapter 11 case.
Nor do the Drivers dispute that the Bankruptcy Court generally followed the law with respect to dismissal. A bankruptcy court may dismiss a Chapter 11 case “for cause,” and one form of cause contemplated by the Bankruptcy Code is “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation[.]”
Instead of challenging the Bankruptcy Court‘s discretionary judgments as to the propriety of a settlement and dismissal, the Drivers and the United States Trustee argue that the Bankruptcy Court did not have the discretion it purported to exercise. Specifically, they claim bankruptcy courts have no legal authority to approve structured dismissals, at least to the extent they deviate from the priority system of the Bankruptcy Code in distributing estate assets. We disagree and hold that bankruptcy courts may, in rare instances like this one, approve structured dismissals that do not strictly adhere to the Bankruptcy Code‘s priority scheme.
A
We begin by considering whether structured dismissals are ever permissible under the Bankruptcy Code. The Drivers submit that “Chapter 11 provides debtors only three exits from bankruptcy“: confirmation of a plan of reorganization, conversion to Chapter 7 liquidation, or plain dismissal with no strings attached. Drivers’ Br. 18. They argue that there is no statutory authority for structured dismissals and that “[t]he Bankruptcy Court admitted as much.” Id. at 44. They cite a provision of the Code and accompanying legislative history indicating that Congress understood the ordinary effect of dismissal to be reversion to the status quo ante. Id. at 45 (citing
Quoting Justice Scalia‘s oft-repeated quip “Congress . . . does not, one might say, hide elephants in mouseholes,” Whitman v. Am. Trucking Ass‘ns, 531 U.S. 457, 468 (2001), the Drivers forcefully argue that Congress would have spoken more clearly if it had intended to leave open an end run around the procedures that govern plan confirmation and conversion to Chapter 7, Drivers’ Br. 22. According to the Drivers, the position of the District Court, the Bankruptcy Court, and Appellees overestimates the breadth of bankruptcy courts’ settlement-approval power under Rule 9019, “render[ing] plan confirmation superfluous” and paving the way for illegitimate sub rosa plans engineered by creditors with overwhelming bargaining power. Id.; see also id. at 24–25. Neither “dire circumstances” nor the bankruptcy courts’ general power to carry out the provisions of the Code under
But even if we accept all that as true, the Drivers have proved only that the Code forbids structured dismissals when they are used to circumvent the plan confirmation process or conversion to Chapter 7. Here, the Drivers mount no real challenge to the Bankruptcy Court‘s findings that there was no prospect of a confirmable plan in this case and that conversion to Chapter 7 was a bridge to nowhere. So this appeal does not require us to decide whether structured dismissals are permissible when a confirmable plan is in the offing or conversion to Chapter 7 might be
B
Having determined that bankruptcy courts have the power, in appropriate circumstances, to approve structured dismissals, we now consider whether settlements in that context may ever skip a class of objecting creditors in favor of more junior creditors. See In re Buffet Partners, L.P., 2014 WL 3735804, at *4 (Bankr. N.D. Tex. July 28, 2014) (approving a structured dismissal while “emphasiz[ing] that not one party with an economic stake in the case has objected to the dismissal in this manner“). The Drivers’ primary argument in this regard is that even if structured dismissals are permissible, they cannot be approved if they distribute estate assets in derogation of the priority scheme of
The Drivers’ argument is not without force. Although we are skeptical that
Two of our sister courts have grappled with whether the priority scheme of
Criticizing the Fifth Circuit’s rule in AWECO, the Second Circuit adopted a more flexible approach in In re Iridium Operating LLC, 478 F.3d 452 (2007). There, the unsecured creditors’ committee sought to settle a suit it had brought on the estate’s behalf against a group of secured lenders; the proposed settlement split the estate’s cash between the lenders and a litigation trust set up to fund a different debtor action against Motorola, a priority administrative creditor. Id. at 456, 459–60. Motorola objected to the settlement on the ground that the distribution violated the Code’s priority system by skipping Motorola and distributing funds to lower-priority creditors. Id. at 456. Rejecting the approach taken by the Fifth Circuit in AWECO as “too rigid,” the Second Circuit held that the absolute priority rule “is not necessarily implicated” when “a settlement is presented for court approval apart from a reorganization plan[.]” Id. at 463–64. The Court held that “whether a particular settlement’s distribution scheme complies with the Code’s priority scheme must be the most important factor for the bankruptcy court to consider when determining whether a settlement is ‘fair and equitable’ under
Applying its holding to the facts of the case, the Second Circuit noted that the settlement at issue deviated from the Code priorities in two respects: first, by skipping Motorola in distributing estate assets to the litigation fund created to finance the unsecured creditors committee’s suit against Motorola; and second, by skipping Motorola again in providing that any money remaining in the fund after the litigation concluded would go straight to the unsecured creditors. 478 F.3d at 459, 465–66. The Court indicated that the first deviation was acceptable even though it skipped Motorola:
It is clear from the record why the Settlement distributes money from the Estate to the [litigation vehicle]. The alternative to settling with the Lenders—pursuing
the challenge to the Lenders’ liens—presented too much risk for the Estate, including the administrative creditors. If the Estate lost against the Lenders (after years of litigation and paying legal fees), the Estate would be devastated, all its cash and remaining assets liquidated, and the Lenders would still possess a lien over the Motorola Estate Action. Similarly, administrative creditors would not be paid if the Estate was unsuccessful against the Lenders. Further, as noted at the Settlement hearing, having a well-funded litigation trust was preferable to attempting to procure contingent fee-based representation.
Id. at 465–66. But because the record did not adequately explain the second deviation, the Court remanded the case to allow the bankruptcy court to consider that issue. Id. at 466 (“[N]o reason has been offered to explain why any balance left in the litigation trust could not or should not be distributed pursuant to the rule of priorities.“).
We agree with the Second Circuit’s approach in Iridium—which, we note, the Drivers and the United States Trustee cite throughout their briefs and never quarrel with. See Drivers’ Br. 27, 36; Reply Br. 11–13; Trustee Br. 21. As in other areas of the law, settlements are favored in bankruptcy. In re Nutraquest, 434 F.3d 639, 644 (3d Cir. 2006). “Indeed, it is an unusual case in which there is not some litigation that is settled between the representative of the estate and an adverse party.” Martin, 91 F.3d at 393. Given the “dynamic status of some pre-plan bankruptcy settlements,” Iridium, 478 F.3d at 464, it would make sense for the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure to leave bankruptcy courts more flexibility in approving settlements than in confirming plans of reorganization. For instance, if a settlement is proposed during the early stages of a Chapter 11 bankruptcy, the “nature and extent of the [e]state and the claims against it” may be unresolved. Id. at 464. The inquiry outlined in Iridium better accounts for these concerns, we think, than does the per se rule of AWECO.
At the same time, we agree with the Second Circuit’s statement that compliance with the Code priorities will usually be dispositive of whether a proposed settlement is fair and equitable. Id. at 455. Settlements that skip objecting creditors in distributing estate assets raise justifiable concerns about collusion among debtors, creditors, and their attorneys and other professionals. See id. at 464. Although Appellees have persuaded us to hold that the Code and the Rules do not extend the absolute priority rule to settlements in bankruptcy, we think that the policy underlying that rule—ensuring the evenhanded and predictable treatment of creditors—applies in the settlement context. As the Drivers note, nothing in the Code or the Rules obliges a creditor to cut a deal in order to receive a distribution of estate assets to which he is entitled. Drivers’ Br. 42–43. If the “fair and equitable” standard is to have any teeth, it must mean that bankruptcy courts cannot approve settlements and structured dismissals devised by certain creditors in order to increase their shares of the estate at the expense of other creditors. We therefore hold that bankruptcy courts may approve settlements that deviate from the priority scheme of
C
We admit that it is a close call, but in view of the foregoing, we conclude
Our dissenting colleague’s contrary view rests on the counterfactual premise that the parties could have reached an agreeable settlement that conformed to the Code priorities. He would have us make a finding of fact to that effect and order the Bankruptcy Court to redesign the settlement to comply with
* * *
Counsel for the United States Trustee told the Bankruptcy Court that it is immaterial whether there is a viable alternative to a structured dismissal that does not comply with the Bankruptcy Code’s priority scheme. “[W]e have to accept the fact that we are sometimes going to get a really ugly result, an economically ugly result, but it’s an economically ugly result that is dictated by the provisions of the code,” he said. App. 1327. We doubt that our national bankruptcy policy is quite so nihilistic and distrustful of bankruptcy judges. Rather, we believe the Code permits a structured dismissal, even one that
SCIRICA, Circuit Judge
I concur in parts of the Court’s analysis in this difficult case, but I respectfully dissent from the decision to affirm. Rejection of the settlement was called for under the Bankruptcy Code and, by approving the settlement, the bankruptcy court’s order undermined the Code’s essential priority scheme. Accordingly, I would vacate the bankruptcy court’s order and remand for further proceedings, described below.
At the outset, I should state that this is not a case where equitable mootness applies. We recently made clear in In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013), that this doctrine applies only where there is a confirmed plan of reorganization. I would also adopt the Second Circuit’s standard from In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007), and hold that settlements presented outside of plan confirmations must, absent extraordinary circumstances, comply with the Code’s priority scheme.
Where I depart from the majority opinion, however, is in holding this appeal presents an extraordinary case where departure from the general rule is warranted. The bankruptcy court believed that because no confirmable Chapter 11 plan was possible, and because the only alternative to the settlement was a Chapter 7 liquidation in which the WARN Plaintiffs would have received no recovery, compliance with the Code’s priority scheme was not required. For two reasons, however, I respectfully dissent.
First, it is not clear to me that the only alternative to the settlement was a Chapter 7 liquidation. An alternative settlement might have been reached in Chapter 11, and might have included the WARN Plaintiffs. The reason that such a settlement was not reached was that one of the defendants being released (Sun) did not want to fund the WARN Plaintiffs in their ongoing litigation against it. As Sun’s counsel explained at the settlement hearing, “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.” Sun therefore insisted that, as a condition to participating in the fraudulent conveyance action settlement, the WARN Plaintiffs would have to drop their WARN claims. Accordingly, to the extent that the only alternative to the settlement was a Chapter 7 liquidation, that reality was, at least in part, a product of appellees’ own making.
More fundamentally, I find the settlement at odds with the goals of the Bankruptcy Code. One of the Code’s core goals is to maximize the value of the bankruptcy estate, see Toibb v. Radloff, 501 U.S. 157, 163 (1991), and it is the duty of a bankruptcy trustee or debtor-in-possession to work toward that goal, including by prosecuting estate causes of action,1 see Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 352 (1985); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 573 (3d Cir. 2003). The reason creditors’ committees may bring fraudulent conveyance actions on behalf of the estate is that such committees are likely to maximize estate value; “[t]he possibility of a derivative suit by a creditors’ committee provides a critical safeguard against lax pursuit of avoidance actions [by a debtor-in-possession].” Cybergenics, 330 F.3d at 573. The settlement of estate causes of action can, and often does, play a crucial role in maximizing estate value, as settlements may save the estate the time, expense, and uncertainties associated with litigation. See Protective Comm. for Ind. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (“In administering reorganization proceedings in an economical and practical manner it will often be wise to arrange the settlement of claims as to which there are substantial and reasonable doubts.“); In re A&C Props., 784 F.2d 1377, 1380-81 (9th Cir. 1986) (“The purpose of a compromise agreement is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims.“). Thus, to the extent that a settlement’s departure from the Code’s priority scheme was necessary to maximize the estate’s overall value, I would not object.
But here, it is difficult to see how the settlement is directed at estate-value maximization. Rather, the settlement deviates from the Code’s priority scheme so as to maximize the recovery that certain creditors receive, some of whom (the unsecured creditors) would not have been entitled to recover anything in advance of the WARN Plaintiffs had the estate property been liquidated and distributed in Chapter 7 proceedings or under a Chapter 11 “cramdown.” There is, of course, a substantial difference between the estate itself and specific estate constituents. The estate is a distinct legal entity, and, in general, its assets may not be distributed to creditors except in accordance with the strictures of the Bankruptcy Code.2
In this sense, then, the settlement and structured dismissal raise the same concern as transactions invalidated under the sub rosa plan doctrine. In In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983), the Court of Appeals for the Fifth Circuit rejected an asset sale that “had the practical effect of dictating some of the terms of any future reorganization plan.” Id. at 940. The sale was impermissible because the transaction “short circuit[ed] the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with a sale of assets.” Id. “When a proposed transaction specifies terms for adopting a reorganization plan, ‘the parties and the district court must scale the hurdles erected in Chapter 11.’” In re Cont’l Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986) (quoting Braniff, 700 F.2d at 940). Although the combination of the settlement and structured dismissal here does not, strictly speaking, constitute a sub rosa plan — the hallmark of such a plan is that it dictates the terms of a reorganization plan, and the settlement here does not do so — the broader concerns underlying the sub rosa doctrine are at play. The settlement reallocated assets of the estate in a way that would not have been possible without the authority conferred upon the creditors’ committee by Chapter 11 and effectively terminated the Chapter 11 case, but it failed to observe Chapter 11’s “safeguards of disclosure, voting, acceptance, and confirmation.” In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1982); see also In re Biolitec Inc., No. 13-11157, 2014 WL 7205395, at *8 (Bankr. D.N.J. Dec. 17, 2014) (rejecting settlement and structured dismissal that assigned rights and interests but did not allow parties to vote on settlement’s provisions in part because it “resemble[d] an impermissible sub rosa plan“). This settlement then appears to constitute an impermissible end-run around the carefully designed routes by which a debtor may emerge from Chapter 11 proceedings.
Critical to this analysis is the fact that the money paid by the secured creditors in the settlement was property of the estate. A cause of action held by the debtor is property of the estate, see Bd. of Trs. of Teamsters Local 863 v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002), and “proceeds . . . of or from property of the estate” are considered estate property as well,
The majority likens the deviation in this case to the first deviation in Iridium, in which the settlement would initially distribute funds to the litigation trust instead of the Motorola administrative creditors. For two reasons, however, I find this analogy unavailing. First, it is not clear to me that the Second Circuit saw the settlement’s initial distribution of funds to the litigation trust as a deviation from the Code’s priority scheme at all. As the Second Circuit explained, if the litigation was successful, the majority of the proceeds from that litigation would actually flow back to the estate, then to be distributed in accordance with the Code’s priority scheme. 459 F.3d at 462.4 Second, the critical (and, in my view, determinative) characteristic of the settlement in this case is that it skips over an entire class of creditors. That is precisely what the second “deviation” in Iridium did, and the Second Circuit remanded to the bankruptcy court for further consideration of that aspect of the settlement.
In fact, the second “deviation” in Iridium deviated from the priority scheme in a more minor way than the settlement at issue here. In Iridium, the settlement would have deviated from the priority scheme only in the event that Motorola, an administrative creditor and a defendant in various litigation matters brought by the creditors’ committee, had prevailed in the litigation or if its administrative claims had exceeded its liability in the litigation. Iridium, 478 F.3d at 465. The Second Circuit thus characterized this aspect of the settlement as a mere “possible deviation” in “one regard,” but nevertheless remanded for the bankruptcy court to assess the “possible” deviation’s justification. Id. at 466. Here, of course, it is clear that the settlement deviates from the priority scheme, as it provides no compensation for an entire class of priority creditors, while providing $1.7 million to the general unsecured creditors.
Finally, I do not question the factual findings made by the bankruptcy court. That court found that there was “no realistic prospect” of a meaningful distribution to Jevic’s unsecured creditors apart from the settlement under review. But whether there was a realistic prospect of distribution to the unsecured creditors in the absence of this settlement is not relevant to my concerns. What matters is whether the settlement’s deviation from the priority scheme was necessary to maximize the value of the estate. There is a difference between the estate and certain creditors of the estate, and there has been no suggestion that the deviation maximized the value of the estate itself.
The able bankruptcy court here was faced with an unpalatable set of alternatives. But I do not believe the situation it faced was entirely sui generis. It is not unusual for a debtor to enter bankruptcy with liens on all of its assets, nor is it unusual for a debtor to enter Chapter 11 proceedings — the flexibility of which enabled appellees to craft this settlement in the first place — with the goal of liquidating, rather than rehabilitating, the debtor.5
I recognize that if the settlement were unwound, this case would likely be converted to a Chapter 7 liquidation in which the secured creditors would be the only creditors to recover. Accordingly, I would not unwind the settlement entirely. Instead, I would permit the secured creditors to retain the releases for which they bargained and would not disturb any of the proceeds received by the administrative creditors either. But I would also require the bankruptcy court to determine the WARN Plaintiffs’ damages under the New Jersey WARN Act, as well as the proportion of those damages that qualifies for the wage priority.6 I would then have the court order any proceeds that were distributed to creditors with a priority lower than that of the WARN Plaintiffs disgorged, and apply those proceeds to the WARN Plaintiffs’ wage priority claim. To the extent that funds are left over, I would have the court redistribute them to the remaining creditors in accordance with the Code’s priority scheme.
Notes
App. 1363; accord Appellees’ Br. 26. This is the only reason that appears in the record for why the settlement did not provide for either direct payment to the Drivers or the assignment of Sun‘s lien on Jevic‘s remaining cash to the estate rather than to a liquidating trust earmarked for everybody but the Drivers. Here, by contrast, none of the settlement proceeds flowed to the estate.[I]t doesn‘t take testimony for Your Honor . . . to figure out, 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 somebody who is suing you who otherwise doesn‘t have funds and is doing it on a contingent fee basis.