Supreme Court Bankruptcy Case Could Change Former Employees’ Priority in Bankruptcy

Bankruptcy Lawyer Bryan W. Stone answers the question: “What is a bankruptcy discharge ?”


Early this month the U.S. Supreme Court heard arguments on a case that The New York Times reported has the bankruptcy world “on edge” because it could upend the standard practice that ranks lenders, employees and other creditors in order of priority when they try to recover what they are owed after a company files for bankruptcy.

Truck-driver-Charlotte-Bankruptcy-Lawyer-300x200In current practice, employees who lose their jobs when their employer files for bankruptcy are supposed to receive priority over other unsecured creditors the employer owes money.

For the former employees of New Jersey-based Jevic Transportation, a trucking company, this is exactly the opposite of what transpired. When Jevic filed for bankruptcy protection in 2008, it put 1,785 truck drivers and staff members out of work. Even further, the company had given these employees no warning of the mass layoff as required by federal and state law.


Leveraged buyouts

A little background to the buildup surrounding Jevic’s bankruptcy: In a 2006 leveraged buyout, private equity firm Sun Capital Partners bought Jevic out. A leveraged buyout occurs when Company A acquires Company B using a substantial amount of borrowed money; the assets from either or both companies are frequently used as collateral for the acquisition loans. The leveraged buyout setup allows a company to make large acquisitions without having to commit very much capital, but it has notorious drawbacks: there is usually a ratio of at least 90 percent debt to 10 percent equity, so the bonds issued in the buyout are not typically of investment grade and are frequently referred to as “junk bonds.”

If the purchasing company leverages too much debt in the buyout, keeping up with interest payments can become impossible, pushing the acquired company into bankruptcy. Speaking of which…


Employee woes

The employees sued for wages under the laws requiring notice of mass layoffs, anticipating an eventual recovery of what they were owed. The employees and other Jevic creditors also filed suit against Sun Capital, the firm mentioned above that bought Jevic out in 2006, and CIT Group, Jevic’s main lender. The employees alleged that the leveraged buyout had fraudulently pushed the transportation company into bankruptcy.

But then came another unpleasant surprise:  Sun Capital and CIT settled with Jevic’s other unsecured creditors in the fraud case. In exchange for $3.7 million towards what they were owed, including attorneys’ fees, the creditors agreed to drop their claim. The truck drivers were not part of this settlement and were left with nothing.

As the employee’s case has wound its way up to the Supreme Court, the truck drivers have struggled to make ends meet. Some cashed in their retirement plans while scrambling for lesser-paying work. One driver could not find replacement insurance that would cover his terminal cancer treatments, dying three (3) months later.


Case implications

State tax authorities, workers’ groups and academics have been watching the case’s development intently. The lower courts’ approval of the settlement that excluded the drivers upends decades of congressional legislation that governs the way a business’s funds are distributed in bankruptcy.

For example, secured lenders whose debts are secured by the company’s assets are paid first. Next are the attorneys and other professionals who work on the bankruptcy; then come the so-called junior creditors, beginning with the employees who worked for the company and are owed wages. Those who had holdings in the company’s shares (equity) are generally reimbursed last.

Advocates for the truck drivers have strongly cautioned the courts that allowing such an unprecedented change in this pecking order could easily lead to cases where the parties with more power in a bankruptcy gang up to push out the weaker ones—like workers, as here, or the Internal Revenue Service.

If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.





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