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Supreme Court to Decide Whether Bankruptcy Court Can Skip Over Wage & Employee Benefits Claims in Favor of Lower-Ranked Unsecured Creditors

State and federal labor laws ensure that employees are fairly compensated for their work. When companies become insolvent, similar protections give wages and benefits a higher priority in bankruptcy over other creditors' claims. But does a bankruptcy judge have the power to switch that order?

This question is now before the U.S. Supreme Court as it decides whether 1,800 truck drivers who were laid off without warning when Jevic Transportation filed for bankruptcy were unlawfully denied priority for payment of unpaid WARN Act wages and employee benefits. Outten & Golden represents the drivers, and how the Court rules could have a dramatic impact on workers' rights.

Employee Compensation Laws Outside of Bankruptcy

For many years, Congress and state legislatures have sought to protect workers through various statutes and regulations.

For example, the federal Fair Labor Standards Act (FLSA) entitles non-exempt workers to minimum wages and overtime pay for the hours they spend in service to their employers. Similarly, the Worker Adjustment and Retraining Notification (WARN) Act requires qualifying employers to provide employees with 60 days' notice of mass layoffs, during which time they must continue to compensate workers.

These laws are intended to prevent wage abuse and wage theft that threaten the financial well-being of employees and their families, making sure that employers don't take advantage of workers to boost the bottom line.

Employee Rights Under Bankruptcy

When individuals and organizations are no longer solvent, the U.S. Bankruptcy Code provides an orderly means for these debtors to distribute assets and pay creditors. Frequently, there are not enough assets to pay all the creditors in full, so the Code establishes a framework to determine the priority by which creditors' claims are paid.

Higher-priority claims and secured creditors are generally among the first to be paid, while lower-priority, unsecured debt is paid by any remaining assets. Unpaid wages and employee benefits are considered a higher priority. Moreover, the Code requires they be paid in full before the remainder is shared among the lower-priority creditors who may receive only pennies on the dollar. This safeguards workers by helping them actually receive their wages under laws such as the FLSA and the WARN Act.

Prioritizing employee compensation in bankruptcy is mutually beneficial. As the U.S. Supreme Court wrote in a 1959 decision, Congress established these priorities "to alleviate in some degree the hardship that unemployment usually brings to workers and their families" when a business files for bankruptcy, especially when employees have no other sources of income. At the same time, giving priority to wages offers workers an incentive to not "abandon a failing business for fear of not being paid," which would, in turn, jeopardize the potential for other creditors to be paid, a point raised by Congress in 1977 during consideration of an amendment to the Bankruptcy Code.

The Jevic Case

New Jersey-based trucking company Jevic Transportation experienced a series of financial difficulties, resulting in a leveraged buyout by private equity firm Sun Capital Partners in 2006. Jevic attempted to refinance its debt with CIT Group but defaulted on the loan by the end of 2007.

On May 19, 2008, Jevic notified its employees that they would be terminated, a day before filing for Chapter 11 bankruptcy protection. A group of 1,800 truck drivers brought a class action lawsuit against Jevic and Sun alleging violations of the federal WARN Act and New Jersey state WARN Act. The drivers were credited with estimated damages under the New Jersey law totaled $12.4 million, $8.3 million of which constituted a priority wage claim under the Bankruptcy Code.

A committee of unsecured creditors - whose claims were lower in priority than the truckers' wage claims - filed a separate suit on behalf of the Jevic estate against Jevic, Sun, and CIT, arguing that the leveraged buyout was a fraudulent transfer. In June 2012, the parties to that lawsuit agreed to settle the fraudulent transfer claims and terminate the bankruptcy proceeding by seeking approval of a "structured dismissal" from the bankruptcy court.

By design, the proposed structured dismissal paid money to the junior creditors but skipped over the truckers' wage claim, even though the wage claim had priority over the lower-priority claims of the general unsecured creditors. The Jevic truck drivers objected to the settlement because it contravened the priority structure expressly stated in the U.S. Bankruptcy Code.

The Supreme Court Will Decide

After unsuccessful appeals in federal district court and the Third Circuit Court of Appeals, the class of Jevic drivers took their case to the U.S. Supreme Court, which heard oral arguments on December 7, 2016, to resolve the issue in this case and address a split of opinion between other Circuit Courts.

It is impossible to predict the outcome at this time, but certain indications during the proceedings offer promise to the Jevic drivers and future workers who seek the compensation they deserve from bankruptcy employers. Various justices voiced concerns from the bench over the statutory basis for allowing a structured dismissal that alters the priority rules and promotes possible collusion between certain senior and junior creditors that unjustly disadvantaged creditors such as the truckers.

The WARN attorneys at Outten & Golden are proud to represent our clients in this important case and will report the Supreme Court's decision when it is ultimately announced.

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