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District Court Affirms Bankruptcy Court’s Approval of a Settlement and Structured Dismissal in the Face of an Absolute Priority Challenge

Czyzewski v. Jevic Holding Corp. (In re Jevic Holding Corp.), No. 13-104 (SLR), 2014 WL 268613 (D. Del. Jan. 24, 2014)

On January 24, 2014, Judge Sue L. Robinson affirmed a Bankruptcy Court order approving a settlement and structured dismissal of the chapter 11 cases of Jevic Holding Corp. and its affiliated debtors (the “Debtors“) in the face of a challenge by certain appellants asserting WARN claims that such settlement, among other things, violated the absolute priority rule of section 1129 of the Bankruptcy Code.  The settlement, reached among the Debtors, the unsecured creditors committee, and the Debtors’ primary secured creditors, resulted in the payment of $2 million to the estates for the satisfaction of unpaid chapter 11 administrative expense claims, the assignment by one of the secured lenders of its lien on $1.7 million (the only remaining asset of the Debtors’ estates) to a trust established for the benefit of certain unsecured and priority tax claimants, an exchange of releases and the dismissal of an adversary proceeding commenced by the unsecured creditors committee against the lenders, and finally, the dismissal of the chapter 11 proceedings.  None of the settlement proceeds were to be paid to the appellants.

In rendering its decision, the District Court found that the Bankruptcy Court properly evaluated the settlement in light of the governing standard set forth by the Third Circuit in Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996), and properly held that it was “fair and equitable” given the circumstances of the cases.  Additionally, the appellants’ absolute priority challenge rang hollow with the District Court given that the settlement was not a plan of reorganization, no prospect for a confirmable plan existed, and the settlement funds constituted collateral of the Debtors’ secured creditor.  In light of the foregoing, the Court found that the absolute priority rule did not apply.  Finally, even if the Court did not determine the foregoing, the appeal was held to be equitably moot as the settlement had been consummated and all funds distributed. The appellants had the opportunity to participate in the settlement negotiations and to try and halt the settlement implementation.  The appellants did not make a meaningful attempt to do either, and as a result, could not unwind the settlement.