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U.S. Supreme Court Rejects Structured Bankruptcy Dismissals

Dow Jones & Company, Inc.

The U.S. Supreme Court on Wednesday rejected an increasingly popular bankruptcy-court tactic, structured dismissals of bankruptcy cases by way of settlements that override payment priority rules.

The ruling came in the closely watched case of Jevic Transportation, a New Jersey trucking company that shut down suddenly, throwing thousands of drivers out of work, and filed for bankruptcy in 2008.

Jevic's chapter 11 bankruptcy ran out of money and ended with a court-approved deal that meant some cash for junior creditors, but nothing for drivers that had priority claims.

Instead of a chapter 11 plan, Jevic wrapped up its affairs with a settlement and dismissed its bankruptcy case. A six-justice majority of the high court on Wednesday found that ran afoul of rules set out by Congress.

"Bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors," said Justice Stephen Breyer, writing for the majority.

Unpaid wages, taxes and other categories of debt have been given priority in bankruptcy by Congress, and are required to be paid before other debts. Jevic's structured dismissal overran those rules, over the protests of the unpaid truckers.

Wednesday's ruling overturned the Jevic dismissal, on the grounds that beleaguered companies cannot do in a settlement what they couldn't do in chapter 11 or chapter 7, ignore the payment priority scheme set out by Congress.

As long as priority creditors don't consent to the deal, such settlements can't be approved, the high court said.

Jevic's deal didn't save the company as a business or promote the possibility a chapter 11 exit plan could be confirmed, a six-justice majority of the high court noted.