I wrote here in December about some philosophically weighty litigation, the Jevic Holding case.
Now the Supreme Court of the United States has weighed in, so it is time for an update. This is a 6 to 2 judgment, with an opinion for the court by Justice Breyer, and a dissent written by Justice Thomas, for himself and Alito.
The gist of the case is the conflict in bankruptcy law between the absolute priority rule (APR) and a practice known as the structured dismissal.
The bankruptcy court in this case issued a structured dismissal even though it meant stiffing the possessors of a judgment debt, which would normally have priority over some of the debts the structure does pay. That debt came about due to a class action of 1,800 truck drivers over Jevic's violations of the Worker Adjustment and Retraining Notification Act (WARN).
Jevic was a New Jersey based trucking company, the object of a leveraged buy-out by Sun Partners in 2006. The 'leveraging' thing was excessive, as it often was in those go-go days before the global financial crisis. When the crisis hit, Jevic went into bankruptcy court.
Why were the WARN judgment creditors stuffed? The bankruptcy court found (in the words of a SCOTUSblog discussion I've cited here before) "that no good alternative existed. No Chapter 11 plan could be confirmed given the estate’s inability to satisfy outstanding administrative and priority claims (i.e., the estate was 'administratively insolvent'), and, in a Chapter 7 liquidation, no one other than the senior secured creditors would receive anything, because the fraudulent-transfer action would have to be abandoned for lack of resources to prosecute. In short, the courts concluded, the workers were no worse off in the structured dismissal, and other constituents were all measurably better off."
So perhaps we ought to allow courts to create ad hoc exceptions where every alternative is worse? Is that the pragmatic meta-rule? Well, maybe. But at oral argument the Supreme Justices pressed the attorneys involved as to how they would frame such an exception in ways that wouldn't prove very slippery ahead. They did not find the answers persuasive. The policy problem with allowing any exceptions is that the legal uncertainty created by making the absolute priority rule non-absolute will lead, as Justice Breyer says in his opinion for the court, to "similar claims being made in many, not just a few, cases."
In a 1973 case, the court discussed how the APR came about from “concern with ‘the ability of a few insiders, whether representatives of management or major creditors, to use the reorganization process to gain an unfair advantage’” Breyer quotes that case, which itself was quoting a legislative-history document, and he believes it necessary for that reason to preserve the APR here.
The more formalist way to put it is that APR is in place because markets require settled expectations, and that the APR is to be modified only by explicit legislative sayso, or perhaps (Breyer seems to allow) by some common-law exception that might contain its own alternative expectation-settling red lines. Neither was evident here.
Thomas, in dissent, didn't argue in favor of the lower court's position. He essentially argued that the third circuit isn't enough. If I understand him, he is saying that the court granted cert in this matter under the erroneous impression that the circuits were split. Then it discovered they were not split, that the third circuit was the only one yet to weigh in on the matter. In that situation, he says, the petition should be dismissed, "experience shows that we would greatly benefit from the opinions of additional courts of appeal."