Czyzewski v. Jevic Holding Corp.

PETITIONER:Casimir Czyzewski, et al.
RESPONDENT:Jevic Holding Corp., et al.
LOCATION: U.S. Bankruptcy Court for the District of Delaware

DOCKET NO.: 15-649
DECIDED BY:
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: US ()
GRANTED: Jun 28, 2016
ARGUED: Dec 07, 2016

ADVOCATES:
Christopher Landau – for respondents
Danielle Spinelli – for petitioners
Sarah E. Harrington – for United States as amicus curiae

Facts of the case

Jevic Transportation, Inc. was a trucking company headquartered in New Jersey that in 2006 was purchased by a subsidiary of Sun Capital Partners. In 2008, Jevic filed for bankruptcy under Chapter 11 of the Bankruptcy Code; at that point, it owed about $53 million to its first-priority senior secured creditors and about $20 million to its tax and general unsecured creditors. Two lawsuits ensued in bankruptcy court: one was the truck drivers suing Jevic for violating federal and state Worker Adjustment and Retraining Notification Acts, which required 60 days’ notice to workers before they were laid off, and the other was a fraudulent conveyance action on behalf of the unsecured creditors. In March 2012, the parties to the fraudulent conveyance action negotiated a structured dismissal settlement that disposed of many of the claims, but left out the drivers. The drivers objected to the settlement because it distributed property to creditors of lower priority than the drivers, according to the priorities established in the Bankruptcy Code. The bankruptcy court rejected the objections and approved the proposed settlement. The federal district court and the U.S. Court of Appeals for the Third Circuit affirmed and held that the bankruptcy court had the discretion to approve a settlement scheme outside of the Chapter 11 proceedings that did not comply with the Bankruptcy Code’s distribution scheme.

Question

Can a bankruptcy court authorize a distribution of settlement proceeds in a manner that does not comply with the Bankruptcy Code’s priority distribution scheme?

John G. Roberts, Jr.:

We’ll hear argument this morning in Case 15-649, Czyzewski v. Jevic Holding Corporation. Ms. Spinelli.

Danielle Spinelli:

Mr. Chief Justice, and may it please the Court: Chapter 11 provides one way to distribute estate assets to creditors on account of their prepetition claims through a confirmed plan that adheres to the code’s priority scheme.

If a Chapter 11 plan can’t be confirmed, the bankruptcy court can convert the case to Chapter 7, which also requires that creditors be paid in order of priority, or it can simply dismiss the case without distributing assets to creditors at all, returning all parties to their prebankruptcy position. No provision of the Bankruptcy Code permits what happened here: an order dismissing a Chapter 11 case that distributed all the estate’s assets to creditors, but deliberately skipped over our clients’ priority claims.

Sonia Sotomayor:

May I ask you: Did the settlement bar you from suing the debtor for the WARN Act claims?

Danielle Spinelli:

No, it did not.

Sonia Sotomayor:

And there was no money left to the debtor.

So did it bar you from suing Sun Life for a fraudulent transfer, which —

Danielle Spinelli:

It did.

Sonia Sotomayor:

It did.

Danielle Spinelli:

It did, Justice Sotomayor, and I think that’s — that’s critical.

What this settlement did is it took away our client’s right to pursue either the debtor or Sun and CIT on account of their undisputed WARN Act claims, which were in the area of $12 million.

Sonia Sotomayor:

All right.

In the court below, I understand that the — that you represented that if this settlement went through, that you would have — I’m sorry — that if — without the settlement, you would really have nothing, because there was no money in the estate. So are you representing that your client intends to sue Sun Life? Because that’s the only way to get money here.

Danielle Spinelli:

Well, let me — let me respond to that, Justice Sotomayor.

There are a few things that could happen if this Court reverses the order below and the case is remanded.

Sonia Sotomayor:

That’s fine.

Tell me which one you’re going to do.

Danielle Spinelli:

Well, that’s really up to the bankruptcy court.

Sonia Sotomayor:

All right.

So what do you — are you going to ask them to do?

Danielle Spinelli:

What we had asked for before, and what may well make the most sense, is conversion to Chapter 7, in which case either the Chapter 7 trustee could pursue the fraudulent-transfer claim —

Sonia Sotomayor:

But there is no money in the estate to do that.

So how will the trustee do that?

Danielle Spinelli:

The trustee would have to retain contingency counsel, and that does happen.

I was involved in a Chapter 7 case where the trustee pursued an avoidance action successfully with contingency counsel. Failing that, if the trustee decided not to do that, after the bankruptcy is over, the fraudulent-transfer claim would revest in the creditors, and our clients could then bring that claim themselves.

Samuel A. Alito, Jr.:

There is a difference — there seems to be a difference between what you have said on this point in your briefs and in your argument this morning and what you told the Third Circuit or what — did you — did your firm represent — appear in the Third Circuit?

Danielle Spinelli:

Not until the rehearing stage.

Samuel A. Alito, Jr.:

Well, in the Third Circuit oral argument, it was said over and over, well, we just want to make sure that the law is filed — is followed. That’s what we are interested in. Isn’t that right?

Danielle Spinelli:

We certainly do want to make sure that the law is followed.

I mean, we —

Samuel A. Alito, Jr.:

If you were pressed as to what practical difference the case meant to you and — and the answer was, we — you know, we want to uphold the law.

Danielle Spinelli:

Justice Alito, I don’t believe that’s the case.

The case does make a practical difference.

It always has made a practical difference. That’s the only reason our clients have been pursuing it.

And the practical difference it makes is that on remand, they will have an opportunity to recover on account of their undisputed WARN Act claims, which, as of now, they’re — they have been deprived of.

Samuel A. Alito, Jr.:

But can you point to anything you said in the Third Circuit, in writing or orally, that — along those lines, that you — that there was some practical course of action that — that you — some tangible thing that you were going to pursue?

Danielle Spinelli:

What we told the Third Circuit is that if this case went back on remand and were converted to Chapter 7, then the fraudulent-transfer action could be pursued.

I believe that’s what — that’s the argument that we made below.

Samuel A. Alito, Jr.:

Can I ask one other — one other thing? Something strange seems to have happened between the petition stage and the briefing stage in the case. The question that you asked us to take was whether a bankruptcy court may authorize the distribution of settlement proceeds in a manner that violates the statutory priority scheme.

And you said there’s a square conflict on that issue, with the Second Circuit and the Third Circuit on one side and the Fifth Circuit on the other side.

Danielle Spinelli:

Correct.

Samuel A. Alito, Jr.:

And we took the case. But then the question that you address in your brief refers to “structured dismissal.” There is nothing about structured dismissal in the question that you asked us to take, and there is no conflict on the question of structured dismissal, is there?

Danielle Spinelli:

And, Justice Alito, we’re not asking this Court to decide the question of whether structured dismissals are valid.

We did not change the substance of the question presented here.

Samuel A. Alito, Jr.:

Now, you’re not asking us to decide the broad question whether there can ever be a structured dismissal.

But you are asking us to decide whether the priorities have to be followed in a structural dismissal, and unless the answer to that question follows from the answer to the question that you presented in your petition, you have changed the question that you have asked us to decide.

Danielle Spinelli:

We did not change the substance of the question presented.

In the petition, we had a paragraph of background explaining that this was done through a structured dismissal.

We then asked the question, does the Bankruptcy Code — may a bankruptcy court authorize the distribution of settlement proceeds in a manner that violates the Code’s priority scheme? In the brief, we condensed that a bit so that we didn’t have the paragraph of background, and we said, may a structured dismissal distribute estate assets in violation of the priority scheme? There is no substantive difference there.

The authorization in this case was done through a structured dismissal. Settlement proceeds are estate assets. The basic question in this case has always been the same: Was the bankruptcy court entitled under the Bankruptcy Code to authorize this distribution of settlement proceeds, which are estate assets, in violation of priority?

Stephen G. Breyer:

Exactly.

So what forbids it? You started out by saying there is nothing in the Code that permits this kind of settlement, which in fact leaves out — if — it gives some money to lower-ranking creditors without giving them to your client. I think you’re right.

I don’t see anything permits it.

The problem: What forbids it?

Danielle Spinelli:

The structure of the Code forbids it, Justice Breyer.

Stephen G. Breyer:

The structure of the Code —

Danielle Spinelli:

If we —

Stephen G. Breyer:

— forbids it.

Danielle Spinelli:

If we — the structure and the text of the Code.

If we take a step back for a moment, the way business bankruptcies work is that the debtor files a petition. That creates an estate, which includes all the debtor’s property, and it also includes causes of action belonging to the estate. That estate is then held in trust, essentially for the benefit of creditors.

Danielle Spinelli:

It is protected against creditors’ claims through the automatic stay. The trustee or debtor-in-possession can dispose of estate assets only in accordance with strict limitations and subject to the bankruptcy court’s supervision.

And at the end of the case, those assets are distributed to creditors through a confirmed Chapter 11 plan, which requires adherence to priority; or, failing that, the case can be converted to Chapter 7, in which case the assets are also distributed in accordance with priority. Those careful, reticulated mechanisms for the distribution of estate assets foreclose any inference that Congress intended to allow courts to disregard them and create a different method for distributing assets that’s not mentioned anywhere in the Code that violates that —

Elena Kagan:

Why do you think —

Danielle Spinelli:

— backbone priority scheme.

Elena Kagan:

Why do you think, though, it isn’t mentioned someplace in the Code? I mean, did Congress just not think that this might happen?

Danielle Spinelli:

No, Justice Kagan.

I think the reason that Chapter 11 doesn’t expressly apply the priority rules to settlements is that settlements are not intended to be a method of distributing estate assets.

I think it’s very important to keep those two things distinct.

On the one hand, we have a settlement of a cause of action belonging to the estate.

The estate relinquishes its rights in return for money, and money goes into the estate.

That is one thing. Separately, there is a distribution of all of the assets in the estate, including the proceeds of the settlement.

And that is done in Chapter 11 through a Chapter 11 plan. So Congress would not have specified that priority applies to settlements, because settlements are not a means for distribution of estate assets.

Ruth Bader Ginsburg:

There can —

Danielle Spinelli:

Only the plan does that.

Ruth Bader Ginsburg:

There can be a dismissal. There are three things.

Two are covered, Chapter 7 and Chapter 11.

But this is a dismissal, which means, as I understand it, you — you return to the preexisting situation.

Danielle Spinelli:

That’s correct.

Ruth Bader Ginsburg:

But — but now you’re saying the — there are assets, and the Court has to do something about the distribution of those assets.

Danielle Spinelli:

Correct — correct, Justice Ginsburg.

The — there are — there are two methods for distributing estate assets contemplated by the corporate provisions of the Bankruptcy Code, either a Chapter 11 plan or the Chapter 7 distribution set out in Section 726, both of which require adherence to priority. A case can also be dismissed.

In that case, there is no distribution of estate assets at all. That’s not contemplated in conjunction with a dismissal. Rather, the parties are returned to their prebankruptcy positions, and the bankruptcy —

Anthony M. Kennedy:

But the — but the Code does say, 349, “unless the Court, for cause, orders otherwise.” Can you tell us how — how that is — what — what was the likely purpose for that? Because —

Danielle Spinelli:

Justice Kennedy, what the —

Anthony M. Kennedy:

— from the very literal standpoint, it does cover what the Respondents’ position is — is — is here.

Why is it inapplicable and why is — does it fall in face of the overall description that you just gave to Justice Ginsburg?

Danielle Spinelli:

Justice Kennedy, what the legislative history tells us is that the “for cause” provision in Section 349(b) was intended to protect parties who took actions in reliance on the bankruptcy. And I think it’s important to look —

Anthony M. Kennedy:

Can you give me an example?

Danielle Spinelli:

I can.

So one case that’s cited in our briefs is In re Wiese, which is a Seventh Circuit case.

Danielle Spinelli:

In that case, there was a plan that had been confirmed that — in which the debtors released their claim against the bank that had lent them money in return for the bank’s releasing its lien on some cash that they had.

That cash was then disbursed and couldn’t be gotten back. The debtors then dismissed their case shortly after the plan was confirmed, and the Seventh Circuit said this was an appropriate case in which to use the “for cause” provision.

Typically, the release that occurred in the plan would be undone, but in order to avoid unfairness to the bank, which had taken — which had taken action in reliance on the plan, the Court was not going to do that.

Instead, it was going to hold the debtors to their release.

Anthony M. Kennedy:

Well — well, if — if fairness is — is the — the — the basis for the for cause order, the Respondent will say, well, this is fair, because most creditors were paid, so whether you — you can hear the arguments.

I mean, we just talk about fairness.

That’s — that’s — that’s different from the careful answer you gave to Justice Ginsburg a — about the prior scheme.

Danielle Spinelli:

Yes, Justice Kennedy. Section 349(b) doesn’t create that kind of gaping hole in the scheme I just described.

It’s important to understand what it actually does.

I think it’s a relatively limited provision. So Section 349 says that — that the default when a bankruptcy case is dismissed is that certain transactions that occurred during the case, such as avoidance actions, get unwound, liens that have been voided are reinstated, and property remaining in the estate is returned to its prebankruptcy owner.

In other words, the bankruptcy is undone as far as possible. The cause exception is an exception to that. So what the cause exception permits a bankruptcy court to do is to maintain the status quo at the time of dismissal when there is good reason to do so.

And the typical good reason would be reliance by a party on something that happened during the bankruptcy case.

But Section —

John G. Roberts, Jr.:

Go ahead.

Danielle Spinelli:

But Section 349(b) doesn’t then permit the court to go beyond that and do something that’s not contemplated in conjunction with a dismissal at all, but doesn’t involve maintaining the status quo, but involves actually distributing assets to creditors in violation of the priority scheme.

John G. Roberts, Jr.:

You — you said that that reading was supported in the legislative history, if I understood you correctly.

What — what is the nature of that legislative history?

Danielle Spinelli:

The legislative history essentially — there’s not a lot of it, but what it essentially says is the bankruptcy courts should use that provision, the cause provision —

John G. Roberts, Jr.:

I mean, I — where is that? In — in the — in the — a Senate Report? What?

Danielle Spinelli:

I apologize, Your Honor.

I believe — we — we cited it in our brief.

And I believe it is in the House — the 1977 House Report.

John G. Roberts, Jr.:

Okay.

Thank you.

Elena Kagan:

May I ask, Ms. Spinelli, just quickly: What’s the scope of the holding that you would like us to issue? I suppose this comes back to Justice Alito’s question of what’s actually on the table.

Danielle Spinelli:

Uh-huh.

Elena Kagan:

All settlements? All structured dismissals? Just this particular kind? And if just this particular kind, how would you characterize it?

Danielle Spinelli:

What we think this Court should hold is that settlement proceeds cannot be distributed in violation of priority.

I mean, a —

Elena Kagan:

So a settlement that is a — a — that — that distributes protest — proceeds.

Danielle Spinelli:

Correct.

But it — to be more specific, the — the order that was entered here, we believe, would — could never be lawful, regardless of the stage of the case at which it was entered. So we are not saying this order would only — this order is only unlawful because it was part of a structured dismissal.

We are saying it’s unlawful because it took estate assets and distributed them in violation of priority.

Samuel A. Alito, Jr.:

You’re saying that — that there can never be a distribution of estate assets except in compliance with the priorities?

Danielle Spinelli:

No.

There is one —

Samuel A. Alito, Jr.:

One which — that’s not what you just said?

Danielle Spinelli:

That — well, let me — let me qualify what I just said, then. There is one express exception in the code — that’s Section 510 — provides that claims can be subordinated to other claims under the principles of equitable subordination, which, as this Court said in Noland, are limited to a creditor’s bad behavior that harms the estate. There are also some practices that occur in bankruptcy court that — whose validity I don’t think this Court needs to reach.

For instance, critical vendor orders are an example.

Courts will sometimes permit, on the first day of a case, a debtor to pay certain vendors on account of their prepetition claims, because doing so is necessary to the debtors maintaining a going concern and reorganizing and coming out the other end a viable business.

That’s based on a doctrine that goes back many, many years before the Bankruptcy Code called the Doctrine of Necessity.

And the reasoning behind that is because a going concern is worth so much more than the debtor’s assets liquidated piecemeal.

That creates the possibility of a greater recovery for creditors higher up the priority chain. What happened here is precisely the opposite.

There was no possibility of reorganization. This was a naked priority violation for its own sake, and whatever one thinks about critical vendor orders, what happened here, taking value from senior creditors and giving it to junior creditors for its own sake, is not permitted. May I reserve? Thank you.

John G. Roberts, Jr.:

Thank you, counsel. Ms. Harrington.

Sarah E. Harrington:

Thank you, Mr. Chief Justice, and may it please the Court: I’d like to start, if I could, with Justice Kagan’s last question, which is: What would we like the Court to hold in this case? We think the Court should hold that a bankruptcy court can never resolve a bankruptcy by ordering the distribution of estate assets in a manner that violates the Code’s detailed priority system without the consent of the impaired priority claimholder.

John G. Roberts, Jr.:

You don’t even have the extraordinary circumstances exception?

Sarah E. Harrington:

No, we don’t — I mean, basically, the extraordinary circumstances exception that the Third Circuit wanted to apply would bring in any case that is administratively insolvent, and that’s a large proportion of business bankruptcies. That kind of exception also gives parties the — the wrong incentive to make essentially self-serving assertions about what they would or would not do if the particular disposition that they desire is not approved.

Stephen G. Breyer:

You’d presumably qualify that with the statutory provision that was just mentioned, and my guess was you want to qualify that as well with the — with this emergency creditor, you know, where you’re going to sink the — the person who has a prepetition was just discussed.

Sarah E. Harrington:

Well, the prepetition distributions that were just discussed, I think that — that does present a separate question that we think —

Stephen G. Breyer:

Yeah.

All right.

All — that’s all I wanted to know.

You don’t want a holding here that is going to knock that out.

Sarah E. Harrington:

Right, but — so I said that a — a court could not resolve a case by ordering the distribution of assets that would violate their priority scheme. Now, in our view, “the priority scheme” is sort of a broad term that includes both equitable subordination law, subordination principles, which are not applicable here, and also includes the ability of the priority claimholder to consent to impairment of its rights. I think it’s important to keep in mind here that the priority claimholders here, Petitioners did not settle.

This is not a case where the people whose rights were impaired agreed to it, and you can’t have — you can’t call a settlement basically the agreement of other parties whose rights were not impaired and who, in fact, benefited from the impairment of the Petitioners’ rights.

Samuel A. Alito, Jr.:

What would be your principal basis for distinguishing the exception that Ms. Spinelli outlined at the end of her argument from what happened here? I thought your argument was that the priority scheme applies to everything that happens in a Chapter 7 and a Chapter 11.

Sarah E. Harrington:

Yes.

So in our view, prepetition distributions in Chapter 11 that violate the priority scheme are not permissible under any circumstances unless there is consent of the impaired priority claimholder.

And so critical vendor orders, if they are done over the objection of the — of the claimholder who skipped, we think those are not permissible. Now, most of the time those sort of first order distributions happen in a plane of reorganization, not in a plane of — in a case of reorganization, not a liquidation case.

Sarah E. Harrington:

They happen with the consent of the senior claimholders, and they are generally premised on a — on a prediction that — that allowing that kind of distribution will ultimately result in every creditor getting more money at the end of the day.

So none of those factors apply here. You didn’t have consent.

This is not an ongoing concern, and there is certainly no finding that everybody is going to get more money at the end of the day.

Samuel A. Alito, Jr.:

Ms. Harrington —

Sonia Sotomayor:

If —

Samuel A. Alito, Jr.:

Yeah, if I could just — go ahead.

Sonia Sotomayor:

Please.

Samuel A. Alito, Jr.:

There is another logically prior question.

And I don’t know what you — what do you think we should do with the question of whether the bankruptcy court has to approve settlements at all?

Sarah E. Harrington:

We think that —

Samuel A. Alito, Jr.:

There is nothing in the Code that says that they have to.

Sarah E. Harrington:

So we think that — that a bankruptcy court does have to approve a settlement that disposes of a claim held by the estate or asserted against the estate.

We don’t think this Court needs to reach that question in this case if it doesn’t want to, because we think it’s very clear that a — what a settlement cannot do is provide for the distribution of estate assets. I think it’s important to remember, State assets don’t belong to the debtor, and they don’t belong to a subset of creditors.

They belong to the estate. And so the Code provides only specific ways that those assets can be distributed.

In Chapter 11, that’s through a plan.

Elena Kagan:

Just to make sure I understand the scope of what you’re saying we should decide: Would that also knock out the thing that was approved in Iridium itself?

Sarah E. Harrington:

Yes, we think it would.

If you limit your holding to the resolution of the case, then it would not, because Iridium did not involve the resolution of the case. We think the principle applies more broadly to prepetition and distributions as well, when you don’t have consent.

But if the course — if the Court prefers not to, it doesn’t need to reach that question in this case.

John G. Roberts, Jr.:

So you don’t agree completely with Judge Scirica’s dissent?

Sarah E. Harrington:

We don’t.

I mean, I would point out, again, that he is a — he is a dissenter in this case, and so he — even he didn’t think that this case would — would qualify, but we — we don’t think there is anything in the — in the Code that would allow parties to override the priority claimholders’ assertion of their rights. Now, it’s important to keep in mind that Chapter 11 is very — is very flexible.

It allows basically any type of plan to be confirmed if all the parties can agree on the terms of a plan.

That was the innovation in Chapter 11 in 1978.

It didn’t exist in the Bankruptcy Act, and I think that sort of clearly expresses Congress’ intent that parties, if they can come to an agreement that deviates from sort of the usual course, then they should do it and that that — that agreement should be memorialized in a plan, not in some other disposition.

Anthony M. Kennedy:

Can you tell me, just as a matter of practice, of practice and experience, do priority creditors in a settlement, structured settlement agreements, often allow junior creditors to — to receive something?

Sarah E. Harrington:

Well, they often do in plans.

In — in our — in our experience, when there is a structured dismissal like the kind at issue here, usually those — the parties turn to that kind of disposition, because they can’t obtain the consent of the parties that they would need to get a plan confirmed.

And so basically what you have is an agreement that is, in essence, an unconfirmable plan. And instead of trying to get that confirmed, they call it a structured dismissal to override the consent of the priority claimholders. And so in those cases, no, but — but — but I think priority claimholders all the time agree to an impairment of their rights, and, in fact, the priority claimholders, other than Petitioners who were paid in this case, agreed to take, you know, some cents on the dollar like the tax claimholders and — and the administrative expenses.

Sonia Sotomayor:

Do you believe that the question presented here did not address the issue before us? Do you see a difference between the question presented that talked about the absolute priority rule as it relates to settlement proceeds and the “structured dismissal” here.

Sarah E. Harrington:

I don’t think so.

I think the — the change in wording was meant to sort of give — give the particular context that — that the question arises in this case.

And if any — if there is any difference, it’s just a narrower sort of set of what the law —

Sonia Sotomayor:

Well, I — I — it goes to a more fundamental question, which is, is there a difference or in our ruling whether we say no settlement proceeds can be distributed in violation of the absolute priority rule from a statement that no dismissal, structured dismissal, can be entered in violation of the absolute priority rule.

Sarah E. Harrington:

I think the —

Sonia Sotomayor:

I do think there is a difference.

Sarah E. Harrington:

Well, I think the — your first formulation is a little bit broader than the second formulation.

And then, like I said, we think the rule would apply also to preplanned — preplanned dispositions of estate assets. If you wanted to limit your holding just to sort of the resolution of a case in a way that is kind of a substitute for a plan, then I think you could just say a structured dismissal can’t authorize the distribution of estate assets. But I’d like to, again, sort of distinguish the settlement of the claim from the distribution of estate assets.

The two things were put together in this case, and they are put together throughout Respondents’ brief.

But they are really separate things.

There’s nothing in the Code that would authorize a debtor or some subset of creditors to distribute estate assets. They don’t get — they don’t have any say in how estate assets are distributed.

The Code and Congress have the say in that.

Ruth Bader Ginsburg:

Well, how can you have a — a settlement if it can’t be carried out? I mean, if you — you’re saying one thing is the settlement, and that’s okay.

And the other thing is the distribution of the assets, but that’s what the settlement provides for.

Sarah E. Harrington:

Well, what the settlement should provide for is basically a liquidation of a claim.

And so if you have a claim by the estate against a third party, here a creditor, you basically reduce that claim to a dollar amount, and those dollars become property of the estate. If you have a settlement of a claim that’s asserted by a creditor against the estate, then it’s the same kind of thing: You sort of liquidate the claim, you reduce it to a dollar amount, and that becomes the claim against the estate held by the creditor.

But nothing in the Code would authorize — and I think it’s a — it would be a violation of the priority system and generally of the system that distributes estate assets to have parties agree on the side of how estate assets should be distributed.

Those estate assets are not the property of the debtor once the bankruptcy starts. They’re not the property of the creditors.

And so you really need to look to the Code provisions to see how estate assets should be distributed.

In —

Samuel A. Alito, Jr.:

What —

Sarah E. Harrington:

Go ahead.

Samuel A. Alito, Jr.:

What is your response to the argument that your argument regarding Section 103(a) makes the provisions that specifically make the priorities applicable in Chapter 7 and Chapter 11 superfluous?

Sarah E. Harrington:

Well, it doesn’t, because if you look at those provisions, and one of them is Section 1129(a)(9), and then it’s Section, I think, 726 in Chapter 7, they don’t just say Section 507 priority scheme applies.

They also specify exceptions, and they specify the manner in which it applies. And so in Section 1129(a)(9), it says, priority claimholders can agree to an impairment of their rights.

That exception is not included in Section 7 — in the — in the Chapter 7 analog.

It also says — tells you what it means to pay a priority claimholder either through cash or through deferred cash payments.

Depending on the type of 507 claim, the — the parties have a right to demand one or the other. And so there is more to it than just saying, oh, Section 507 applies.

It tells you how it applies and in what circumstances.

Samuel A. Alito, Jr.:

So those are just exception provisions?

Sarah E. Harrington:

Exception, but it also sort of tells you what it means to fully — in — in the Chapter 11 context, it tells you what it means to pay a priority claimholder.

And so some priority claimholders, I guess, can demand cash on the date of confirmation; others have to agree in some circumstances to deferred cash payments.

And so there is definitely more content to. In the Chapter 7 context, it also tells you which type of 507 claims are allowed based on when the associated proof of claim was filed.

So those — in both cases, they kind of — they add more substance than the Respondents would have you believe. I’d just like to point out that Congress enacted the priority scheme precisely to prohibit the kind of collusive looking agreements that happened here, where you have high-priority and low-priority creditors kind of squeezing out the middle creditors.

And the Court should not allow parties to make an end run around that prohibition by just scrapping the main settlement or — or structured dismissal on what is really, in essence, an unconfirmable plan. We think that’s what happened here.

The parties — some of the parties reached an agreement. The agreement couldn’t be confirmed as a plan because it abrogated the rights of priority claimholders and they did not consent.

John G. Roberts, Jr.:

Thank you, counsel.

Sarah E. Harrington:

Thank you.

John G. Roberts, Jr.:

Mr. Landau.

Christopher Landau:

Thank you, Mr. Chief Justice, and may it please the Court: Petitioners say that the bankruptcy court here was required to reject the settlement that made all other unsecured creditors better off without making Petitioners any worse off.

Nothing in the Code requires that result. The absolute priority rule, and this is critical, applies in Chapter 11 only to plans —

Sonia Sotomayor:

You took away — you took away a legal right from them.

Christopher Landau:

Well, Your Honor —

Sonia Sotomayor:

They had a legal right to sue Sun Life.

They had a legal right to pursue their other claims.

And the settlement extinguished those rights.

Christopher Landau:

And I think the question — the critical question here is, are we in a — in a place where the disposition of estate assets was required to comply with the absolute priority rule? This is the absolute gist of the case. By its terms — I think this goes back to a question that Justice Kagan asked earlier — the Code speaks to when the absolute priority rule applies in Chapter 11, and it applies to plans.

Whenever you have dispositions of assets before plans, they are subject to judicial review.

The use, sale, and lease of — of assets is subject to judicial review under Section 363(b), but that is a discretionary standard. Now, in applying the discretionary standard, it’s absolutely critical to make sure that there is no evasion of requirements for — for a plan.

And — and the Second Circuit in Iridium and the Third Circuit here recognize that and said, this is the rare case where that’s true.

But I think the —

Sonia Sotomayor:

I don’t know why this is a rare case.

Christopher Landau:

Well, it —

Sonia Sotomayor:

I mean, every structured settlement of this kind is trying to exclude one set of creditors.

Christopher Landau:

No.

It — it’s a —

Sonia Sotomayor:

And this is exactly what this did, and it did it in collusion among the senior and junior creditors to the exclusion of the disfavored creditor.

Christopher Landau:

If, in fact, you were to concede — start saying, well, this is the person who’s wearing the white hat, this is the person who’s wearing the black hat —

Sonia Sotomayor:

I’m not — I’m not —

Christopher Landau:

It can’t —

Sonia Sotomayor:

I’m just trying —

Christopher Landau:

Well — I don’t — yeah.

Sonia Sotomayor:

— to figure out what creates the exception.

Christopher Landau:

The narrow legal issue before this Court is simply: Looking at the Code, does the absolute priority rule as such apply outside the context of plans?

Stephen G. Breyer:

You — you were beginning your first statement — if you remember, you were just about to give us a special reason, which I wanted to hear.

Christopher Landau:

Oh.

Well — well, the — these Petitioners received a substantial distribution of assets on — on — on the first day of the bankruptcy, as — to pay for their prefiling — their prepetition wage-and-benefits claims.

They got millions of dollars; in fact, far more than the settlement.

So this is why — it’s no accident —

Stephen G. Breyer:

I don’t see what this has to do with that.

But my problem is quite simple.

What was — this is not your asset —

Christopher Landau:

That’s correct.

Stephen G. Breyer:

— that’s — this is — this is an asset of the estate?

Christopher Landau:

That’s correct, Your Honor.

Stephen G. Breyer:

All right.

So there is an asset of an estate.

Christopher Landau:

Right.

Stephen G. Breyer:

It’s a claim against a third party.

Christopher Landau:

Yes.

Stephen G. Breyer:

Very well.

Christopher Landau:

Right.

Stephen G. Breyer:

And now there is a person, probably the trustee or a committee, that’s going to pursue that claim.

Christopher Landau:

Correct.

Stephen G. Breyer:

Then the claim is settled.

Christopher Landau:

Correct.

Stephen G. Breyer:

Now, at least on request when you’re in Chapter 11, doesn’t the judge, the bankruptcy judge, have to approve that settlement?

Christopher Landau:

Not the settlement, per se.

Stephen G. Breyer:

No? Why not?

Christopher Landau:

Because there’s no provision in the Code — this is what we explained in our brief — that specific — it’s post-1978.

Christopher Landau:

There used to be — in the pre- 1978 world, there was a prevision that required review of settlements qua settlements. Post-’78, there is a provision, 363(b) —

Stephen G. Breyer:

Ah.

Christopher Landau:

— that requires judicial review of use, sale, or lease of assets.

In this case, they intersect, because this settlement actually not only brought money into the estate, but actually then said —

Stephen G. Breyer:

But suppose they had settled it for a dollar, and one of the creditors says, this is all corrupt.

I’m not saying they did in this case.

But, I mean, wouldn’t — wouldn’t — there’s an asset of the estate.

They bring a lawsuit.

They reach a settlement.

Suppose it’s a totally crooked settlement.

Christopher Landau:

Your Honor, the —

Stephen G. Breyer:

What happens?

Christopher Landau:

Again, this is a Code case, Your Honor.

And there’s no —

Stephen G. Breyer:

I’m not talking about this case.

I just want the background in my mind.

Christopher Landau:

Right.

I think the —

Stephen G. Breyer:

There is no power of the — of the bankruptcy judge to even look at a settlement that the company in bankruptcy has made of an asset; namely, the claim that he has against another party.

Christopher Landau:

There is no provision governing —

Stephen G. Breyer:

Okay.

Christopher Landau:

— settlements qua settlements. What there is a provision — and I want to make this very clear, Your Honor, because I’m not sure this was as clear in our brief as it should have been, and I apologize if it wasn’t. The fact that there’s no provision for approving settlements qua settlements doesn’t mean — which there had been under the old regime — doesn’t mean that when you have a settlement that actually disposes of estate assets, like this settlement did, that that disposition of estate assets is not subject to the traditional Rule 363(b) review by the Court of any use, sale, or lease.

Stephen G. Breyer:

Oh.

Fine.

Okay.

It’s the same —

Christopher Landau:

They’re in the same — yeah.

Stephen G. Breyer:

Thank you.

Christopher Landau:

I just wanted to make it clear.

Stephen G. Breyer:

In that place, once we are in that place —

Christopher Landau:

Yes.

Stephen G. Breyer:

— what we have is a settlement, not corrupt, not crooked, perfectly fine and honest and so forth, but what it does is it takes Congress’s 1, 2, 3, 4, 5, and it says, what we’d like to do is 5, 4, 3, 2, 1.

Christopher Landau:

Correct.

Stephen G. Breyer:

Now, what that seems to do is it seems to be quite contrary to the order of — of battle or the order of distribution that Congress has said should apply to the assets of the estate —

Christopher Landau:

And —

Stephen G. Breyer:

— of which this is one.

Christopher Landau:

And you are absolutely right. And — and as the Second Circuit said in — in Iridium, and as the Third Circuit said in this case, that is the most important concern in the 363(b) discretionary analysis, to make sure that there is no evasion of that scheme.

Stephen G. Breyer:

Well, so — right.

Now, you provide a case.

Congress has said 1, 2, 3, 4, 5 for estate asset.

Christopher Landau:

Right.

Stephen G. Breyer:

You have an estate asset, and you want to do — I exaggerate — 5, 4, 3, 2, 1.

Christopher Landau:

Right.

Well —

Stephen G. Breyer:

So where does the bankruptcy trustee or any court get the power to say that a group of people can, in fact, reverse the order in which these assets will be distributed?

Christopher Landau:

This is —

Stephen G. Breyer:

That is — that is what is bothering me, and presumably the government, and certainly the workers here, who are — who are upset about it.

Christopher Landau:

Correct.

Well, Your Honor, and I think the — the — the clear answer to that is, as a general rule, they can’t.

But this case explains exactly why Iridium said there may be some rare exceptions, because once you are in this more discretionary 363(b) land, the — the priority scheme is going to be the most important. This case is a great example, Your Honor, because in this case we have findings that there could be no confirmable Chapter 11 plan because the estate was administratively insolvent. So the Code system that you just described, the waterfall of priorities, would not apply in Chapter 11 because there was no way to go to a Chapter 11 plan.

Anthony M. Kennedy:

But — but I’m sure it often happens that there can be no confirmable plan because the creditors — priority creditors are not going to concede.

So that happens all the time when you go through Chapter 7.

Christopher Landau:

Right.

And that —

Anthony M. Kennedy:

And that’s not a rare — so this is not a rare case.

Christopher Landau:

But I’m — this is only the first prong, Your Honor.

Then the Court also analyzed, well, the alternative, then, is conversion to Chapter 7, and we have findings there, too, that any conversion to a Chapter 7 liquidation, in fact, the estate asset — there would be no settlement there, because at that point, once you’ve gone through the expense and delay of converting to Chapter 7, it wouldn’t make sense to settle.

That’s — there’s many reasons that you might want to — be willing to settle at the beginning of the case, but —

Anthony M. Kennedy:

But — but this seems — but the essence of the case is not really an objection to approval of the settlement; it’s the objection of the distribution of the assets.

Christopher Landau:

Absolutely.

Christopher Landau:

And that’s — I think that’s so critical, Your Honor, and — and their objection would actually completely come back to bite them because there is no legal difference between a distribution of assets on the first day where they recovered $6 million in this case in their prepetition wage and benefit claims. That’s why, to go back to Justice Alito’s question earlier, it was not a slip of the pen that led them to change their question presented from the question — from the petition to the merits brief.

They know perfectly well that a rule that the absolute priority rule applies to every distribution of assets would have creamed the workers in this case and would in future cases, because such workers are often the beneficiaries of these first day orders that pay — that pay wage and benefit claims, that pay critical vendor orders. Once you’re talking about a world, as they seem to be suggesting, that all preplan distributions of assets are subject to the absolute priority rule — that’s not in the Code.

That’s the gist — that’s the crux of the dispute here.

That was a circuit split that this Court granted cert to — to resolve.

John G. Roberts, Jr.:

I thought they — I thought they had a priority at the initial stage that required them to be paid the $6 million that you’re talking about.

Christopher Landau:

They were not.

There were people above them in the chain.

There were administrative creditors.

There were secure — they did not have the top priority at that point, and that was not subject to the priority system.

Ruth Bader Ginsburg:

But they had the priority ahead of the unsecured general creditors that did get $1.7 million.

What they are saying is that under the priorities, that belonged to us, not creditors who were lower down.

Christopher Landau:

Correct.

And I think that there was — that there was a finding here that, in fact, the alternative to this settlement was not a settlement where they actually would have — was not a Chapter 11 plan because they would have recovered nothing in a Chapter 11 plan because there could have been no Chapter 11 plan.

It was not confirmable. And in conversion to Chapter 7, they wouldn’t have gotten anything either, because all the money would have gone to the secured creditor.

Stephen G. Breyer:

But that’s — I see that point, which you’ve made several times, is a very good point.

I — clarify a basic misunderstanding on my part.

What’s a structured settlement?

Christopher Landau:

Well, I think a structured settlement is — it’s not a legal term.

It’s something they’ve come up with in this case.

Stephen G. Breyer:

Why not just call it a settlement?

Christopher Landau:

I think you could.

And I think in that —

Stephen G. Breyer:

Let’s call it a settlement.

Christopher Landau:

Perfect.

Stephen G. Breyer:

So now a company finds, very surprisingly, that there, underneath the building, is Jean LaFitte’s gold treasure. (Laughter.)

See? But there is somebody down there who has it.

He says, give it to me; it’s ours.

He says, I’ll give it to you, but I want you to use it to pay my friend who happens to be my cousin, who is the 19th ranked creditor.

Christopher Landau:

Right.

Stephen G. Breyer:

And as long as you give the majority to him, okay, then you can give the rest to the others. All right.

Stephen G. Breyer:

Now, that would seem to be a possibility at least from your argument in this case.

Christopher Landau:

Your Honor, I think what you are saying or the — the point that you’re getting to can be resolved through the traditional 363(b) analysis, which allows for play in the joints, unlike their unyielding and absolute — absolute priority rule. Under you’re hypothetical, Your Honor, there would be money there.

And in that case, it looks like that would be an evasion of — there could be a plan there.

Stephen G. Breyer:

By the way, if you want me to, I will make up my hypothetical so that giving half the gold to this person is just as wonderful as you would like, and I will also change the hypothetical around, if you could do or I could do, so that not giving the money to this person would be just terrible.

Christopher Landau:

Right.

Stephen G. Breyer:

The Earth will come to an end.

So the question is, do you think Congress gave to the trustee or to you or to somebody else the power to deviate with Jean LaFitte’s gold or with these particular — this particular set of money or any other set of money?

Christopher Landau:

I think —

Stephen G. Breyer:

It seems to me a dangerous principle to get into, but if you can tell me or that normally happens, I’m open to —

Christopher Landau:

Well, it — it — it doesn’t normally happen.

I think that is the lesson of Iridium and this case.

The Third Circuit said as a general matter, if — if the creditors were to come together and say, you know, we really just don’t like this one creditor, even though that person has a high priority. We’re going to structure this so that that person gets disfavored. Well, under the 363(b) analysis, if that person would have actually have had an alternative where they recovered something —

Elena Kagan:

Let me ask you —

Christopher Landau:

— that would be a problem.

Elena Kagan:

— Mr. Ernest, sort of a similar question.

You — here’s two different kinds of bankruptcy schemes.

One scheme just says every time you distribute assets, you have to follow the following order: one, two, three, four, five.

Christopher Landau:

Right.

Elena Kagan:

That’s — and that’s it. You just have to follow that order.

Christopher Landau:

Correct.

Elena Kagan:

That’s one Bankruptcy Code. Here’s another Bankruptcy Code: It says presumptively, you have to follow one, two, three, four, five, but if there is a Pareto-superior solution, in other words, a solution in which some people are made off and nobody — in which some people are — get better outcomes and nobody gets a worse outcome —

Christopher Landau:

Yep.

Elena Kagan:

— if there is such a solution, you can go with that.

And that might be a completely sensible bankruptcy provision —

Christopher Landau:

Right.

Elena Kagan:

— for Congress to have enacted.

Christopher Landau:

Right.

Elena Kagan:

The question is whether Congress did enact it and what you can point to in the Bankruptcy Code that suggests that the continual statement that it’s just one, two, three, four, five is subject to a kind of equitable exception for Pareto-superior outcomes.

Christopher Landau:

Yes.

I can — I can exactly answer that question.

Christopher Landau:

The line that Congress drew in the Code is the absolute priority rule with its — with its specific one, two, three, four, five that apply as a matter of law and is unyielding, applies to plans.

When you are not in the world of plans, you are in the world of 363(b), which has play in the joints.

And so the Pareto optimality that you just said, Your Honor, is something that is appropriate in a 363(b) analysis. Now, as the Second Circuit pointed out in Iridium and the Third Circuit pointed out here, a critical consideration in that discretionary analysis is to make sure it is not being done for the purpose of evading what would otherwise be something that could proceed to the stage where Congress made the absolute priority rule applicable.

Sonia Sotomayor:

But I don’t understand how you get to an extraordinary circumstance in that — in this situation.

It seems to me that wanting to exclude the claims of one or more creditors is the ordinary situation.

Every junior creditor wants money. They’re happy to exclude anybody they can —

Christopher Landau:

Right.

Sonia Sotomayor:

— or anybody who will concede to doing it.

Christopher Landau:

Right.

Sonia Sotomayor:

So how do you protect the excluded creditor from being preyed on by one of the other creditors? We already know the junior creditors have a self-interest.

Christopher Landau:

Absolutely, Your Honor.

Sonia Sotomayor:

The senior creditors have —

Christopher Landau:

Yes.

Sonia Sotomayor:

It happens to be one of the biggest senior creditors here is the one who was insisting upon excluding the junior creditor.

Christopher Landau:

Yes.

Sonia Sotomayor:

So where do we go? How do we defined “extraordinary”?

Christopher Landau:

In that 363(b) world, Your Honor, that governs the use, sale and lease of assets, when a court looks at that, a court can say, is the creditor who is claiming that he or she or it is being unfairly squeezed out, in your hypothetical, can show that there is some mechanism under which that person would otherwise, absent the settlement or the disposition of assets that is — is contemplated at issue before the Court, would actually make off better. The critical problem here is that there were findings — there was a hearing in the bankruptcy court on this.

It went up to the district court in review and then to the Third Circuit.

And there were findings. The findings were — and these were critical — that there could have been no proceeding to a Chapter 11 confirmation.

So the idea that this would have proceeded to a place where the — the person squeezed out in your hypothetical would have actually recovered something in Chapter 11 —

Elena Kagan:

But, Mr. Landau —

Christopher Landau:

— is counterfactual.

Elena Kagan:

I mean, you might be right or you might be wrong about that.

Let’s just assume that you are right, that — that this is one of these extraordinary circumstances in which some people can be made better off and nobody will be made worse off. Still the question is, where is the authorization for that in the Bankruptcy Code? Because that’s like a big principle.

I mean — and I think we would have known about it if that’s the way bankruptcy proceedings were supposed to go.

And — and you suggest while it’s in this “for cause” language, but this “for cause” language, I mean, this is a pretty specific provision that we’re talking about. What it says is that when you can’t reach a plan and the case has to be dismissed, this is attached to a provision that says everything has to be rolled back.

Christopher Landau:

Right.

Elena Kagan:

And — and this says, well, not — you know, maybe, if there is a good reason, not everything has to be —

Christopher Landau:

Right.

Elena Kagan:

— rolled back to exactly the way it was. But that’s a really different kind of provision than saying, in courts, you get to decide or — or — or parties, really, you get to decide, and then courts get to — get to approve an outcome of a bankruptcy proceeding that does not follow the usual priority rules just because these particular parties, not all of them, but these particular parties think it will make some people better off without making other peoples worse off.

Christopher Landau:

Well, the key point is 363(b). That is the general provision that requires bankruptcy courts to review the use, sale, or lease of assets. When you have — what — what they are objecting to here in this settlement is the fact not only that it brings money in, but that it actually then distributes money to different people in a way that they say doesn’t comply with the absolute priority rule.

So it’s the 363(b) discretion.

That is the standard about best interests of the estate.

It’s been phrased various ways; that — that’s really a judicial gloss in the language of the statute, and that’s probably — you know, the absolute contours of 363(b) are not really within the question presented here. The question presented here really is: Are we in a world where there is any discretion at all, versus a world where the absolute priority rule applies by its terms?

Stephen G. Breyer:

Well, this 363(b) — is there — I mean, this — you would — they say — you’re just saying they did it the wrong way when they reached the settlement; then this — the — the Petitioners here should have gone to the bankruptcy judge and said, Judge, you know, there is an odd thing about this settlement.

They’re not only paying in $3 million or whatever, but they want to tell you how to distribute it.

Christopher Landau:

And they —

Stephen G. Breyer:

And they want to tell you how to distribute it, and we want you to distribute it according to the rules, and not according to what they say. That’s what you say they should have done.

Christopher Landau:

Well, that’s what they did do, and exactly what they —

Stephen G. Breyer:

Well, if that’s what they did do, what’s the problem?

Christopher Landau:

Yes — no, but they —

Stephen G. Breyer:

And then you’re saying they have discretion there.

Christopher Landau:

Yes.

Stephen G. Breyer:

So the question is: Do they have discretion —

Christopher Landau:

Yes.

Stephen G. Breyer:

— to depart from — okay. I got it.

Christopher Landau:

And — and they say —

Stephen G. Breyer:

Do they have discretion depart from the — do they have discretion to depart from the priorities as set by Congress?

Christopher Landau:

Exactly.

What I’m saying is that the — you know —

Stephen G. Breyer:

Over the objection of one of the creditors.

Christopher Landau:

The basic dispute before this Court in this case is —

Stephen G. Breyer:

Okay.

That’s helpful.

Christopher Landau:

— does the absolute priority rule apply to distributions of plan assets — of — of estate assets, excuse me — before a plan? They say yes, it does.

We say no, it doesn’t. It — you — distribution of estate assets, whether it’s on the first day through a first-day order, a critical vendor order, is all subject —

Stephen G. Breyer:

Oh, well, once — then I’m back with Justice Kagan.

I’m pretty worried about that provision.

Christopher Landau:

Well — but —

Stephen G. Breyer:

And the reason I’m worried about it is — and you’ll be worried about it, all you have to do is represent some client or represent some — a bank, for example, that thinks it has secured — thinks it has a secured interest in something, and lo and behold, there is a $40 billion settlement, and they make it conditional that the money go to the widows and orphans —

Christopher Landau:

Okay, but — but —

Stephen G. Breyer:

— so we reverse it here, and then the —

Christopher Landau:

But, Your Honor, just to be clear.

Stephen G. Breyer:

Yeah.

Christopher Landau:

Discretion doesn’t mean win. And — and I think the Second Circuit in Iridium and the Third Circuit in this case were very, very clear that the most important consideration for a court to look at in — in assessing a distribution of assets that doesn’t comfort with the priority rule is: Is there a compelling reason why it doesn’t? We —

John G. Roberts, Jr.:

But that’s, I think, where the — the — the issue comes down.

I mean, the reasonableness of your position is directly related to how extraordinary the extraordinary circumstances have to be. I mean, you’re — you’re — you’re suggesting that the main criteria in approving under 363(b) is pretty much what the priorities are under — under Chapter 11.

Christopher Landau:

Right.

John G. Roberts, Jr.:

Now, if there is a very close requirement there, then, you know, what you’re asking for is not that extraordinary.

Christopher Landau:

It isn’t — I just —

John G. Roberts, Jr.:

If, however — well, if, however, that — it — it’s — that priority simply informs the exercise of discretion by the judge under 363(b) and is not as tight a requirement, well, then, it’s — you know, then it is pretty extraordinary. And — and it — it makes a difference. Under — under the — the Chapter 11 regime, people’s leverage in negotiating the plan depends to some extent on their priorities.

Under the — the — the settlement regime, it’s, you know, the — the leverage is reshuffled, and it’s more or less who can gang up on who but who else.

Christopher Landau:

Right.

But Congress drew a line —

John G. Roberts, Jr.:

I’m sorry.

Could you answer my concerns?

Christopher Landau:

Just — Congress drew a line that the absolute priority rule as such applies to plans.

When you’re talking about distributions of assets other than plans, you’re in that discretionary regime. That — the question presented to this Court by the petition is the dispute between AWECO on the one and Iridium on the other, which is, is it — is it the absolute priority rule that governs preplan distributions, or is it this discretionary regime? One can, in other cases, work on the — the — and so you can resolve this case by simply saying they are wrong to say the absolute priority rule applies outside the context of plan. The extent to which you get into the exercise of discretion is something that they didn’t present in the question presented.

They didn’t say the Third Circuit erred —

John G. Roberts, Jr.:

Right, but if we are concerned about —

Christopher Landau:

— in applying the discretionary Iridium standard.

John G. Roberts, Jr.:

If — if we are concerned about how extraordinary the extraordinary circumstances are — in other words, your position looks more reasonable the tighter the extraordinariness requirement is — what — what type of language would you require — I mean, you’re saying, oh, well, just say you can do this and then it will work out over time how extraordinary it is. But what would you say if you want — if you felt an obligation to tighten the extraordinary requirement?

Christopher Landau:

I don’t think I could improve on the language that the Second Circuit used in Iridium and the Third Circuit used here, saying that it is the — the most important consideration is conformity with the absolute priority rule.

So that if there is a confirmable plan that is — is — that — that where the person complaining that they were cut out would actually get something in the absolute prior — through the application of the absolute priority rule, that would be almost implausible to think that it could ever be approved. The — the fundamental problem —

Elena Kagan:

But then doesn’t that run into — this is what Ms. Harrington ended her remarks by saying, is that you’re just saying the plans that the Bankruptcy Code declare not confirmable are, in fact, going to be confirmed through this alternative procedure?

Christopher Landau:

No, Your Honor.

Again, the — now we are talking about the means for terminating Chapter 11 plans, which is a little bit different than the question presented, which is all about the distribution of assets.

But just — just to be clear, so Section 1112 of the Code says that if a — if Chapter 11 plan can’t be confirmed, you have two alternatives. You either go to Chapter 7 conversion or to dismissal. Chapter — there are specific findings here that Chapter 7 conversion made no sense because the — the trustee would — the — the estate did not have the money to pursue the claim on its own and nobody would bring this case on a contingency basis. Now, the — the — the Petitioners here were participating at that hearing in the bankruptcy court where this was done.

They didn’t raise their hands and say, hey, we’d be willing to pursue this on a contingency basis, which is why it’s somewhat farfetched, to say the least, that they’re now suggesting that theoretically well, they — they were deprived of this opportunity to pursue this claim outside of bankruptcy.

They were given the opportunity to pursue the claim on behalf of the estate in bankruptcy, and nobody wanted to do that.

Sonia Sotomayor:

Mr. Landau, is there a difference, in your mind, because there might be in mine, between a settlement that settles an individual claim, the emergency creditor claim that your — that your opponent spoke about, where there is not a total distribution of the assets of the company, from a plan that’s really just an alternative plan, because that’s what this structured settlement was? In my mind, something that would be an extraordinary circumstance —

Christopher Landau:

Right.

Sonia Sotomayor:

— would be something that did something like the first thing, and not necessarily the second.

Christopher Landau:

I think Your Honor is making a very important point, which is, the application of the 363(b) discretion may well vary depending on the circumstances of the case and, just — and your first hypothetical, maybe — you know that — that — that is — now we are talking about, you know, the way that that 363(b) analysis applies, and it may apply differently —

Sonia Sotomayor:

So would you tell —

Christopher Landau:

— on the first day of the bankruptcy versus the last day of the bankruptcy.

Sonia Sotomayor:

— me why Sun Life — Sun Life cared? If it got its settlement — i.e., it was going to pay $2 million and get all the claims against it released — what was its reason for not wanting the proceeds to be distributed according to the absolute priority rule?

Christopher Landau:

It wanted a global settlement of all claims and they got that with all other creditors.

The — the — the creditors — the Petitioners here refused to settle their WARN claims that their — those are their claims outside the context of this claim get settled, for less than a hundred cents on the dollar.

So they were — they were holdouts, essentially, refusing to join the global settlement of everything.

Sonia Sotomayor:

Well, I’m — I’m sorry. Does this mean that the junior creditors wouldn’t have agreed to this settlement because the senior creditors could have? What did the senior creditors, who were in line — in line care about how much was left over to junior creditors, including Sun Life?

Christopher Landau:

Well, I think that the point is that Sun would not have entered into the settlement at all unless — which — which benefited all the creditors, including the junior creditors —

Sonia Sotomayor:

But why?

Christopher Landau:

Why —

Sonia Sotomayor:

Why does it care?

Christopher Landau:

Why does Sun? Well, for —

Sonia Sotomayor:

Why does Sun Life care?

Christopher Landau:

In the absence of a global settlement of this WARN claim outside of the — against Sun, Sun didn’t want to have a settlement that — that funded the litigation against it.

Now, it —

Sonia Sotomayor:

No, the settlement would have been the one that occurred.

Christopher Landau:

No, because it —

Sonia Sotomayor:

If it —

Christopher Landau:

There’s two different claims. The claim that was settled was the estate’s fraudulent conveyance claim.

These particular Petitioners had a separate WARN claim against Sun and the debtor.

And it was — in the context of settling the fraudulent conveyance claim against the estate, Sun only wanted to have a global settlement to put this whole litigation behind it.

And they said, we’re not going to settle the fraudulent conveyance claim in a way that funds the prepetition —

Sonia Sotomayor:

So do you think they can still sue you for those fraudulent conveyance claims?

Christopher Landau:

Not for the fraudulent —

Sonia Sotomayor:

Not you; Sun Life.

Christopher Landau:

Not — they can certainly sue the — the — they can certainly pursue their WARN claims, and they did.

Christopher Landau:

That was their choice not to participate in the settlement —

Sonia Sotomayor:

The fraudulent-transfer claim?

Christopher Landau:

No.

The fraudulent-transfer claim was ended.

But I think the key point, there are findings here that the fraudulent-transfer claim was essentially worthless to them, because there was no money to pursue it, and —

Sonia Sotomayor:

You don’t understand. My basic question was —

Christopher Landau:

Okay.

Sonia Sotomayor:

— what did Sun Life care if the fraudulent conveyance claim was going to be resolved and released?

Christopher Landau:

Because —

Sonia Sotomayor:

Why did it care to exclude these truck drivers from receiving whatever they demanded?

Christopher Landau:

Because that would have funded the truck drivers to pursue their separate WARN claims against us.

So we didn’t want them —

Sonia Sotomayor:

But that eventually — you had already —

Christopher Landau:

No.

Sonia Sotomayor:

Sun Life had already won that.

Christopher Landau:

No.

We only won later. That — it’s — it’s the timing of that, I think, Your Honor, that really gets to the point. I think the fundamental point here is we’re really talking about a rule where they’re saying the absolute priority rule in flexibly and invariably applies even before a plan. Our position, on the other hand, is that the use/sale of assets at any point before the plan is governed by 363(b)

There are — that’s a discretionary regime.

And as the Second Circuit said in Iridium and the Third Circuit said here, it is absolutely critical to look at making sure that it’s not an evasion of the plan. But — but — but the question that this Court was asked to resolve is, is it the — the rigid and unyielding absolute priority rule or the 363(b)? And the Code answers this question.

And — and so I think in this case that the —

Stephen G. Breyer:

What the Code in 363(b) says is the trustee can sell a suit.

Okay? That’s what it says.

It says nothing about —

Christopher Landau:

Yes, but —

Stephen G. Breyer:

It says nothing about what the terms are.

It says nothing about what the settlement is.

And the question for us, I guess, is, in those words, which make no reference to it —

Christopher Landau:

But —

Stephen G. Breyer:

— can you settle it on terms that will, in fact, take these assets that belong to the company and distribute them in a way that is contrary to 1, 2, 3, 4, 5?

Christopher Landau:

But — but the distribution is a use of the estate assets, Your Honor.

Christopher Landau:

So again, it goes to, can you — what are the constraints on using the estate assets? And I — I really encourage you to look at the very tight way in which the Second Circuit in Iridium said, we want to be super careful in this.

To say we want to be super careful is not to say — is just to say that the Fifth Circuit overstated it by saying you can never do it.

In other words, the Fifth Circuit has an absolute bright-line rule.

We don’t care how Pareto-optimal —

Stephen G. Breyer:

Right.

Christopher Landau:

— this is. And I think the basic point was made by the bankruptcy court here.

The Bankruptcy Code is not a suicide pact.

So if, in fact, you have a situation where the settlement or — and the distribution proposed makes others better without making these folks worse off, there is nothing in the Code that prohibits that.

John G. Roberts, Jr.:

Thank you, counsel.

Christopher Landau:

Thank you.

John G. Roberts, Jr.:

Two minutes, Ms. Spinelli.

Danielle Spinelli:

Respondents’ position fails because Section 363(b) is not a means of distributing estate assets.

The — the 363(b) discretion that Mr. Landau referred to is discretion to approve a settlement or a sale of an estate asset, not to distribute the settlement or sale proceeds in violation of priority. Assets are distributed under Chapter 11 through a Chapter 11 plan.

That’s it.

And our fundamental point here is that those assets cannot be distributed on account of prepetition claims in violation of priority. To the extent there is a potential exception for the Doctrine of Necessity, that’s hotly disputed. Courts disagree about whether that exception exists. And that’s not an issue this Court needs to resolve because the Doctrine of Necessity, by its nature, is designed for situations in which a payment to prepetition creditors is necessary to the reorganization of the debtor.

There is no dispute that that wasn’t the case here.

And as for our first-day order paying the wages of the drivers, that was consented to, and no one is saying that you’re not allowed to consent to a priority violation. The only point we are making about structured dismissals is that there is no superpower associated with structured dismissals that provides for an exception to that general rule that one cannot distribute estate property on account of prepetition claims in violation of priority. Respondents’ rule would wreak havoc on the basic process of bankruptcy.

If debtors could distribute estate property to creditors at any time without regard to the priority scheme before a plan, there wouldn’t be much left of the scheme.

Debtors could simply reach a deal with junior creditors and distribute property leaving inadequate resources to pay senior creditors.

John G. Roberts, Jr.:

Thank you, counsel. The case is submitted.