Czyzewski v. Jevic Holding Corp.

When distributing an estate’s assets under a structured dismissal of the Bankruptcy Code Chapter 11, the bankruptcy court cannot deviate from basic priority rules that apply under the Code without consent of the affected creditors.

Respondent filed for Chapter 11 bankruptcy. The Bankruptcy Court dismissed the bankruptcy and ordered a distribution of the estate’s assets. In doing so, the court gave money to high-priority secured creditors and to low-priority unsecured creditors, but skipped Petitioners and other mid-priority creditors. Chapter 11 of the Bankruptcy Code allows debtors and creditors to negotiate a plan to divide the estate’s value. If the parties do not agree on a plan, then the bankruptcy court may dismiss the case and the Code provides for a restoration of the pre-petition status quo. However, sometimes a perfect restoration of the status quo may be difficult or impossible. In that case, the Code permits the bankruptcy court to alter a Chapter 11 dismissal’s ordinary consequences for cause. This type of dismissal is called a structured dismissal. The Code also provides a basic system of priority, which governs the order that the bankruptcy court will distribute assets of the estate. However, the Code does not provide what priority rules apply in a structured dismissal. The Supreme Court held that the bankruptcy court must follow ordinary priority rules in a structured dismissal. The Bankruptcy Court did not follow ordinary priority rules when it skipped Petitioners who had mid-level priority claims. The Supreme Court explained that there is nothing in the Code which evidences an intent to make priority rules different in a structured dismissal. The Code’s rules seek to protect procedural safeguards. REVERSED and REMANDED.