Supreme Court Cites Professor Frederick Tung in Bankruptcy Case

Tung’s paper is cited to reinforce the absolute priority rule in bankruptcy proceedings in Justice Stephen Breyer’s majority opinion to Czyzewski v. Jevic Holding Corp.

Professor Frederick Tung
Professor Frederick Tung

In the United States Supreme Court’s majority opinion in the recently decided Czyzewski v. Jevic Holding Corp., Justice Stephen Breyer cited a paper co-authored by Professor Frederick Tung, associate dean for academic affairs and Howard Zhang Faculty Research Scholar. The paper, published in the Virginia Law Review, is titled “Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain.”

Argued on December 7, 2016, Czyzewski v. Jevic Holding Corp seeks to determine whether, in a Chapter 11 bankruptcy case, a bankruptcy court may approve a structured dismissal that does not follow established priority rules over the objections of affected creditors.

Chapter 11 bankruptcy may be resolved by confirming a reorganization plan, converting to a Chapter 7 liquidation, or dismissing the case altogether. However, under a structured dismissal, the bankruptcy court dictates the order of distribution of assets. The result is similar to a confirmed plan, but is not subject to confirmation rules—including the absolute priority rule—which determines the order in which creditors are paid.

The case was brought by truck drivers who were terminated after Jevic Holding Corp. declared bankruptcy following a failed leveraged buyout. The drivers filed an employment-law claim, which under the terms of a Chapter 11 bankruptcy, should have entitled them to a settlement of up to $8.3 million after higher priority claims were settled.

Over the objections of the truck drivers, the bankruptcy court approved Jevic’s structured dismissal, which provided settlements to the company’s first priority creditors as well as its tax and general unsecured creditors, but skipped the truck drivers, who under a confirmed reorganization plan should have been paid before the unsecured debt. The US Court of Appeals for the 3rd Circuit affirmed the settlement on the basis that no good alternative existed.

On March 22, the US Supreme Court ruled six-to-two in favor of the truck drivers. The majority opinion holds that “bankruptcy courts may not approve structured dismissals that provide for distributions that do not follow ordinary priority rules without the consent of affected creditors.”

Professor Tung’s paper was written with Mark J. Roe, David Berg Professor of Corporate Law at Harvard Law School and published in the Virginia Law Review in 2013. In it, Tung and Roe examine how circumventing the priority rule interacts with finance theory. They argue that this trend should lead us to “reconceptualize bankruptcy not as a simple, or even a complex, creditors’ bargain, but as a dynamic process with priority contests fought in a three-ring arena of transactional innovation, doctrinal change, and legislative trumps.” Over time, they note, the processes and negotiations required to break, reestablish, or adapt bankruptcy priority creates “significant pathologies and inefficiencies.”

Justice Breyer cites Tung’s paper to reinforce the fundamental nature of the priority system, noting Tung’s argument that “the first principle of bankruptcy is that ‘distribution conforms to predetermined statutory and contractual priorities,’ and that priority is ‘quite appropriately, bankruptcy’s most important and famous rule.’ ”

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