CLIENT ALERT: Recent Bankruptcy Court Opinion in Jevic Raises New Concern for Creditors’ Committees in Cash Collateral and Financing Orders
On May 5, 2021, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) issued its opinion in Official Comm. Of Unsecured Creditors ex rel. Bankr. Estates of Jevic Holding Corp. v. Cit Group/Business Credit Inc. (In re Jevic Holding Corp.), No. 08-51903, 2021 WL 1812665 (Bankr. D. Del. 2021), holding that the terms of a Chapter 11 DIP Order prevented a Chapter 7 Trustee from pursuing claims formerly held by a committee of unsecured creditors against a group of lenders.
The claims at issue centered around Sun Capital Partners Inc.’s (“Sun Capital”) 2006 acquisition of Jevic Holding Corp. (“Jevic”) through a leveraged buyout (the “LBO”). The Bank of Montreal financed the LBO, and CIT Group Inc. (“CIT”) served as agent to the lender. Under this agreement (the “Financing Agreement”), CIT provided Jevic with an $85 million Revolver and a $16.2 million Term Loan. Id. at *1. Just months after the LBO closed, CIT declared a default under the Financing Agreement, and Jevic faced liquidity issues. In response, CIT, Jevic, and Sun Capital negotiated an amendment to the Financing Agreement and an eventual forbearance agreement, under which Sun Capital contributed $2 million into Jevic and issued a guaranty for the benefit of the lenders. Id. at *1-2.
On May 20, 2008, Jevic, along with two of its affiliates, filed Chapter 11 bankruptcy petitions with the Bankruptcy Court, and the Official Committee of Unsecured Creditors (the “Committee”) was appointed shortly thereafter. Under the DIP Order, which the Bankruptcy Court entered on June 20, 2008, Jevic waived its right to assert any claims against the lenders. The Committee, however, preserved its right to assert claims for fraudulent conveyance on behalf of the estate against Sun Capital and the lenders. Notably, the DIP Order provided that the stipulations and admissions in the Order were “binding upon the Debtors and any successor thereto (including without limitation any Chapter 7 or Chapter 11 trustee appointed or elected for any of the Debtors) in all circumstances.” Id. at *2.
On December 31, 2008, the Committee filed an adversary proceeding against CIT, as agent for itself and the other lenders (the “Lender Group”), asserting various claims stemming from the LBO and the subsequent refinancing. In January 2009, the Committee amended its complaint to join Sun Capital as a defendant. In ruling on a motion to dismiss filed by CIT, the Bankruptcy Court denied dismissal of the claims brought under Bankruptcy Code §§ 547, 548, and 550, but dismissed the Committee’s remaining claims. Subsequently, the Committee filed the Second Amended Complaint and Objection to Claims. In response, the Bankruptcy Court ordered a mediation, where the Debtors, the Committee, Sun Capital, and CIT negotiated and entered into a settlement agreement. The Bankruptcy Court approved the settlement agreement over the objection of certain former Jevic employees who asserted priority claims under the WARN Act (the “WARN Plaintiffs”). The Warn Plaintiffs timely appealed the Bankruptcy Court’s approval of the settlement agreement. Id. at *2-3.
After years of appeals, the WARN Plaintiffs’ appeal reached the United States Supreme Court. The Supreme Court reversed the Third Circuit’s affirmance of the approval order, finding that “[a] distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the Code establishes for final distributions of estate value in business bankruptcies.” As such, the approval order was vacated, and the matter was remanded to the Third Circuit and eventually back to the Bankruptcy Court. Id. at *3.
Once remanded, the case was ultimately converted from a Chapter 11 to a Chapter 7, and shortly thereafter, the Bankruptcy Court appointed George L. Miller as the Chapter 7 Trustee. Following his appointment, the Trustee filed a motion to substitute, by which he sought to substitute himself for the recently dissolved Committee as plaintiff in the adversary proceeding against CIT and Sun Capital. CIT and Sun Capital each objected, and the Bankruptcy Court heard oral argument on February 22, 2021. Id. at *3-4.
The Trustee argued that he was the “real party in interest,” and that his interest in recovering assets for the estate was perfectly aligned with those of the Committee that initially filed the adversary proceeding. Id. at *4. Conversely, CIT and Sun Capital argued that the Trustee succeeded only the Debtors—not the Committee. Thus, they argued, the Trustee cannot be substituted because the Debtors waived their right to assert claims against the Lender Group in the DIP Order. Id. at 4-5. The Trustee responded that the Motion to Substitute was not reliant on the Committee’s interests because the adversary proceedings belong to the Debtors’ estate, and thus, vested in the Trustee when the case converted to Chapter 7. The Trustee further argued that the Committee qualified as a party in interest, thereby making the Trustee a party in interest, and protecting his rights to assert challenges pursuant to the DIP Order. Id. at *5-6. Thus, the Bankruptcy Court was left to decide whether, despite the waiver provision contained in the DIP Order, the Trustee was entitled to assert the causes of action against CIT and Sun Capital formerly held by the Committee.
The Bankruptcy Court sided with CIT and Sun Capital, ruling that the Trustee could only bring causes of action formerly held by the Debtors and not by the Committee. Because, in the DIP Order, the Debtors waived their right to assert claims against the Lender Group, the Trustee likewise had no right to assert such claims. Moreover, although the Committee did not waive its right to assert claims against the Lender Group, those claims did not pass on to the Trustee. Thus, the Trustee had no standing to pursue those claims. Id. at *7-8.
Further, the Bankruptcy Court ruled that Sun Capital held subrogee status, and therefore, the release of actions against the lenders warranted a dismissal of the action against Sun Capital, even though Sun Capital was neither a prepetition lender nor DIP lender. Id. at *9. The Trustee argued that the stipulations and waivers contained in the DIP Order only applied to “the Prepetition Agent and/or the Prepetition Lenders.” Id. at *8. Thus, the Trustee asserted, Sun Capital was not protected by such stipulations and waivers. The Bankruptcy Court, however, disagreed with the Trustee, finding that Sun Capital’s guaranty in favor of the lenders, contained in the forbearance agreement, afforded Sun Capital with subrogation rights. As such, the Bankruptcy Court deemed Sun Capital a prepetition lender under the DIP Order. Moreover, as a prepetition lender, Sun Capital was entitled to benefit from the same release provisions as the lenders, thereby necessitating the dismissal of the claim against Sun Capital. Id. at *9. Accordingly, the Bankruptcy Court denied the Trustee’s Motion to Substitute, and ruled that the Trustee could not pursue the claims in the adversary proceeding. Id. at *11.
This ruling from the Bankruptcy Court is significant in that has potentially stripped unsecured creditors of the ability to carry causes of action through a Chapter 7 conversion via the Chapter 7 Trustee. Given this development, unsecured creditors’ committees must be vigilant in objecting to and negotiating DIP and cash collateral orders to avoid this result as lenders will be using it to further insulate themselves from liability. While the exact language of such orders varies from case to case and a careful review of the relevant language will be necessary to ensure challenge actions brought by a committee against lenders can be effectively transferred to a Chapter 7 trustee following conversion, the addition of language along the lines of the below may avoid the loss of such claims upon conversion in future cases:
Notwithstanding anything to the contrary herein, if the Official Committee of Unsecured Creditors brings a Challenge Action and the cases are converted to one under Chapter 7 prior to a final, non-appealable judgment in or other final, non-appealable resolution of the Challenge Action, the Debtors’ stipulations, admissions, and waivers in paragraph __ herein shall not be binding upon a Chapter 7 trustee.