The Secret Life of Priority: Corporate Reorganization after Jevic

Abstract

Academics have long debated whether the order of bankruptcy distributions should be “absolute” or “relative.” Should courts have the flexibility to scramble priority to serve some greater good? The Supreme Court’s recent decision in Czyzewski v. Jevic Holding Corp. (In re Jevic) holds that the answer is “no:” Priority is absolute absent the consent of priority creditors.

“Consent” is not self-defining, however, and is largely ignored in debates about priority. This is a problem because consent is hard to pinpoint in corporate reorganizations, a type of aggregate litigation that can involve hundreds or thousands of creditors and shareholders. Although the Jevic majority does not define consent, its reasoning reflects a Court concerned about process values that proxy for it: stakeholder participation, outcome predictability, and procedural integrity. Jevic thus reveals a secret: “priority” is not only about the order in which a corporate debtor pays its creditors, but also about the process by which it does so.

I make three main points. First, I explain why “consent” is indeterminate in this context, inviting inspection of process quality. Second, I assess Jevic’s process-value framework. Implementing these values is not costless, so the Court’s commitment to them suggests that efficiency — the mantra of many scholars — is not the only or necessarily the most important value in reorganization. Third, I argue that these values conflict with the power that senior secured creditors have gained in recent years to control corporate reorganizations. Many worry that this power is the leading problem in corporate bankruptcy, producing needless expropriation and error. I conclude by sketching opportunities that Jevic creates for scholars and practitioners who share these concerns.

Keywords: Jevic, chapter 11, bankruptcy, reorganization, corporate reorganization, secured credit, debtor in possession financing, structured dismissals, 363 sales, process, legal process, aggregate litigation

JEL Classification: K22