U.S. Supreme Court Will Weigh-In on Bankruptcy Settlement Issue: A Choice Between Rigidity and Flexibility

Flexibility is essential

By: Donald L. Swanson

On June 28, 2016, the United States Supreme Court grants certiorari, in the case of In re Jevic Holding Corp. from the Third Circuit Court of Appeals, to resolve this narrow issue:

“Whether a pre-plan settlement in a Chapter 11 bankruptcy may provide for payment to general unsecured creditors when priority claims remain unpaid.”

Circuit Split

Standards for granting certiorari are identified in Rule 10 of the Rules of the Supreme Court of the United States.  The standard that appellant cites in the In re Jevic case is a split of authority:

“a United States court of appeals has entered a decision in conflict with the decision of another United States court of appeals on the same important matter” [Rule 10(a)].

The Second and Third Circuits are on one side of the issue (the In re Jevic case is from the Third Circuit), and the Fifth Circuit is on the other side.

A Narrow-But-Important Distinction

This split in circuit court decisions is a narrow distinction on whether certain types of settlements can be approved by a bankruptcy court:

(i) one view (Fifth Circuit) is rigid—such settlements cannot be approved . . . ever; and

(ii) the other (Second and Third Circuits) is flexible—such settlements can be approved . . . but only in rare and exceptional circumstances.

The difference is between never and rarely.

Flexibility is essential

This difference seems exceedingly narrow.  But the appellant, in its Petition for Certiorari, asserts that the issue is “one of the most important unresolved questions in business bankruptcy law.”  Reasons for this assertion include the following.

–The appealed decision “opens the door to similar schemes to evade the Code’s priority rules.”  The Petition adds:

“Indeed, bankruptcy law is replete with examples of remedies initially approved only as ‘exceptional,’ but that ultimately become commonplace.”

–A decision from the Third Circuit on bankruptcy law is important because the Third Circuit “hears an outsized number of bankruptcy cases”:

–Since Delaware is in the Third Circuit and is ”the most common state in which to incorporate,” the bankruptcy court in Delaware hears (and the Third Circuit reviews) many large and complex cases.  For example:

“almost half of bankruptcy cases involving at least $50 million in assets and liabilities commenced nationwide between November 2013 and March 2015 were filed in Delaware.”

Some Irony

Ironically, the Second Circuit (which agrees with the Third Circuit on the In re Jevic issue) covers the Southern District of New York.  Like Delaware, the S.D.N.Y. Bankrupcy Court is a destination-court for mega-case filings.  So . . . between these two circuit courts, the vast majority of all mega-cases filings are (unless the Supreme Court reverses) obliged to follow the In re Jevic ruling.

Editorial Note:

From a mediation perspective, you’ve gotta’ be rooting for the Supreme Court to affirm the Third Circuit’s In re Jevic ruling.  Rigid rules limiting settlement possibilities are rarely a good thing.


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