Official Committee of Unsecured Creditors ex rel. Bankr. Estates of Jevic Holding Corp. v. CIT Grp./Business Credit Inc. (In re Jevic Holding Corp.)

• Decision Date: 21 May 2015
• Docket Number: No. 14–1465.,14–1465.
• Citation: 787 F.3d 173
• Parties: 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.
• Court: U.S. Court of Appeals — Third Circuit

787 F.3d 173

In re JEVIC HOLDING CORP., et al., DebtorsOfficial 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, LLCCasimir 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, Third Circuit.

Argued Jan. 14, 2015.

Filed: May 21, 2015.

Amended: Aug. 18, 2015.

Jack A. Raisner, Esq. (Argued), Rene S. Roupinian, Esq., Outten & Golden, New York, N.Y., Christopher D. Loizides, Esq., Loizides, P.A., Wilmington, DE, Attorneys for Appellants.

Domenic E. Pacitti, Esq., Linda Richenderfer, Esq., Klehr Harrison Harvey Branzburg, Wilmington, DE, Attorneys for Appellee Debtors.

Robert J. Feinstein, Esq., Pachulski Stang Ziehl & Jones, New York, N.Y., James E. O'Neill III, Esq., Pachulski Stang Ziehl & Jones, Wilmington, DE, Attorneys for Appellee Official Committee of Unsecured Creditors.

Christopher Landau, Esq. (Argued), James P. Gillespie, Esq., Jason R. Parish, Esq., Kirkland & Ellis, Washington, DC, Danielle R. Sassoon, Esq., Kirkland & Ellis, New York, N.Y., Curtis S. Miller, Esq., Morris, Nichols, Arsht & Tunnell, Wilmington, DE, 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, Richmond, VA, Richard P. Norton, Esq., Hunton & Williams, New York, N.Y., 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, Washington, DC, Attorneys for Amicus Curiae.

Before: HARDIMAN, SCIRICA and BARRY, Circuit Judges.

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 its operations, and its employees received notice of their impending terminations on May 19, 2008.

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 29 U.S.C. § 2102 ; N.J. Stat. Ann. § 34:21–2. Meanwhile, the Committee brought a fraudulent conveyance action against CIT and Sun on the estate's behalf, alleging that Sun, with CIT's assistance, “acquired Jevic with virtually none of its own money based on baseless projections of almost immediate growth and increasing profitability.” App. 770 (Second Am. Compl. ¶ 1). The Committee claimed that the ill-advised leveraged buyout had hastened Jevic's bankruptcy by saddling it with debts that it couldn't service and described Jevic's demise as “the foreseeable end of a reckless course of action in which Sun and CIT bore no risk but all other constituents did.” App. 794 (Second Am. Compl. ¶ 128).

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 11 U.S.C. §§ 548 and 547. Noting the “great potential for abuse” in leveraged buyouts, the Court concluded that the Committee had sufficiently alleged that CIT had played a critical role in facilitating a series of transactions that recklessly reduced Jevic's equity, increased its debt, and shifted the risk of loss to its other creditors. In re Jevic Holding Corp., 2011 WL 4345204, at *10 (Bankr.D.Del. Sept. 15, 2011) (quoting Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1073 (3d Cir.1992) ). The Court dismissed without prejudice the Committee's claims for fraudulent transfer under 11 U.S.C. § 544, for equitable subordination of CIT's claims against the estate, and for aiding and abetting Jevic's officers and directors in breaching their fiduciary duties, because the Committee's allegations in support of these claims were too sparse and vague.

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.

In the end, the Committee, Jevic, CIT, and Sun reached a settlement agreement that accomplished four things. First, those parties would exchange releases of their claims against each other and the fraudulent conveyance action would be dismissed with prejudice. Second, CIT would pay $2 million into an account earmarked to pay Jevic's and the Committee's legal fees and other administrative expenses. Third, Sun would assign its lien on Jevic's remaining $1.7 million to a trust, which would pay tax and administrative creditors first and then the general unsecured creditors on a pro rata basis.¹ Lastly, Jevic's Chapter 11 case would be dismissed. The parties' settlement thus contemplated a structured dismissal, a disposition that winds up the bankruptcy with certain conditions attached instead of simply dismissing the case and restoring the status quo ante. See In re Strategic Labor, Inc., 467 B.R. 11, 17 n. 10 (Bankr.D.Mass.2012) (“Unlike the old-fashioned one sentence dismissal orders—‘this case is hereby dismissed’—structured dismissal orders often include some or all of the following additional provisions: ‘releases (some more limited than others), protocols for reconciling and paying claims, “gifting” of funds to unsecured creditors [, etc.]’ ” (citation omitted)).

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 11 U.S.C. § 507(a)(4). See Drivers' Br. 6 & n. 3; In re Powermate Holding Corp., 394 B.R. 765, 773 (Bankr.D.Del.2008) (“Courts have consistently held that WARN Act damages are within ‘the nature of wages' for which § 507(a)(4) provides.”). The record is not explicit as to why the settlement did not provide for any payment to the Drivers even though they held claims of higher priority than the tax and trade creditors' claims.³ It seems that the Drivers and the other parties were unable to agree on a settlement of the WARN Act claim, and Sun was unwilling to pay the Drivers as long as the WARN Act lawsuit continued because Sun was a defendant in those proceedings and did not want to fund litigation against itself.⁴ The settling parties also accept the Drivers' contention that it was “the paramount interest of the Committee to negotiate a deal under which the [Drivers] were excluded” because a settlement that paid the Drivers' priority claim would have left the Committee's constituents with nothing. Appellees' Br. 26 (quoting Drivers' Br. 28).

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 § 507 of the Bankruptcy Code. The Trustee also objected on the ground that the Code does not permit structured dismissals, while the Drivers further argued that the Committee breached its fiduciary duty to the estate by “agreeing to a settlement that, effectively, freezes out the [Drivers].” App. 30–31 (Bankr. Op. 8–9). The Bankruptcy Court rejected these objections in an oral...