Supreme Court Rules That Bankruptcy Courts Must Follow Priority of Payment Rules Established by Congress in the Bankruptcy Code

The United States Trustee Program (USTP) within the Department of Justice (DOJ) was established as the “watchdog” of the bankruptcy system. Among our duties is to ensure that all parties follow the rules set out by Congress in the Bankruptcy Code. The recent United States Supreme Court decision in Czyzewski v. Jevic Holding Corp., et al., No. 15-649 (U.S. Mar. 22, 2017), helps illustrate why those rules are so important.

Here are the facts about Jevic. After many years of continuous operation, Jevic Transportation ran into severe financial difficulty and fired all of its employees. The next day, the company filed for bankruptcy in an effort to sell its operations. Ultimately, the company decided to dismiss the case, but struck a deal with its lenders and investors to pay money only to certain creditors in exchange for the dismissal of all creditors’ fraudulent conveyance claims. The truck drivers (who were also creditors) did not agree to the deal because it provided that their wage claims would be “skipped over” while other creditors of the company were paid. Over the objection of the truck drivers, the bankruptcy court approved the “structured dismissal” deal.

But here is the problem. Congress established a priority order of payments to creditors in the Bankruptcy Code, and neither courts nor parties can substitute their judgment for that of Congress — at least not without the affirmative consent of the party with the priority claim. In Jevic, the law entitled the truck drivers, as priority wage claimants, to be paid before other creditors. So the United States Trustee participated and argued on the side of the employees. After the USTP/DOJ and truck drivers lost in the lower courts, the DOJ filed a brief in the Supreme Court that supported the truck drivers.

On March 22, the Supreme Court ruled 6-2 (the dissenting Justices disagreed on whether the case should have been heard and not on the merits of the majority opinion) that bankruptcy judges cannot dismiss a case by providing for a final distribution of a bankrupt company’s assets unless either the money is paid in accordance with the priority order set by Congress or the holder of a priority claim expressly consents to treatment that is less favorable than the treatment mandated by Congress. The Supreme Court said “[t]he Code’s priority system constitutes a basic underpinning of business bankruptcy law,” meaning that the truck drivers were entitled to be paid wage claims ahead of lower priority general unsecured claims.[1]

Bankruptcy can be a very lengthy, expensive, and frustrating experience. Unlike almost all other court disputes, there are multiple parties in a bankruptcy case, and some parties have more leverage than others. But Congress has written a comprehensive set of rules to ensure predictability and fairness. Our judicial system depends on consistent application of the law as written by Congress. When the rules are clear and consistently applied by the courts, then the system works fairly for all. In the long run, that benefits all stakeholders – debtors, creditors, and the American public. In Jevic, the Supreme Court agreed.