Just before it headed into its summer break, the U.S. Supreme Court agreed to hear a case that could have ramifications for corporate bankruptcy strategies in the future. In particular, it involves "structured dismissals." This is where a company that has filed for Chapter 11 pays off certain creditors rather than others, even though they have been assigned the same priority by the bankruptcy court for recovering their claims, and then the Chapter 11 filing is dismissed by the court.
Truckers Weren't Paid in Wake of Dismissal
The case at hand involves a trucking company, Jevic Holding Corp. Drivers for the company who were terminated when the company filed for bankruptcy had filed a lawsuit against Jevic. However, they say, the company paid others, including attorneys who worked on the bankruptcy case, ahead of them.
A bankruptcy judge in Delaware let the company drop its petition for Chapter 11 rather than go through a liquidation in which a trustee would have been assigned to oversee payouts to creditors. These payments would have had to comply with what's called the "absolute priority" rule in the Bankruptcy Code that says senior creditors must be paid in full and then any remaining funds are distributed among other creditors.
Those Challenging Structured Dismissals Say They Challenge Intent of Bankruptcy Code
One bankruptcy attorney asserted that if structured dismissals are allowed to continue, the primary intention of the Bankruptcy Code, to fairly distribute assets to creditors in a bankruptcy, would be jeopardized.
The truck drivers contended that had the bankruptcy been allowed to move forward, they would have been entitled to an equal share of the assets paid to other creditors in the structured settlement. They weren't alone in challenging the way the bankruptcy was handled. They were joined by bankruptcy scholars, consumer advocacy groups and 19 states. The concern is that these structured settlements allow companies to avoid paying creditors, including states to whom they owe taxes.
Obviously, anyone who files for bankruptcy, whether personal or business, needs to follow the law. However, in areas like this where the law has been repeatedly challenged, that may be a bit complicated. It's essential to have guidance from a bankruptcy attorney in your state with experience in your particular type of bankruptcy filing.
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