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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Trustee Rights and Obligations When Debtor's Ch. 11 Case Converts to Ch. 7

By Rudolph J. Di Massa Jr. and Drew S. McGehrin
August 01, 2021

As a continuation of the ongoing disputes that began with a challenged "structured dismissal" in the Jevic Holdings Corp. bankruptcy case, the U.S. Bankruptcy Court for the District of Delaware recently rendered a decision addressing the rights and obligations of a trustee who has been appointed after a debtor's Chapter 11 case converts to one under Chapter 7 of the Bankruptcy Code. In this latest decision, Official Committee of Unsecured Creditors v. CIT Group/Business Credit (In re Jevic Holdings), No. 08-11066, 08-51903 2021 Bankr. LEXIS 1203 (Bankr D. Del. May 5, 2021), the court held that a Chapter 7 trustee was bound by the pre-conversion actions of the debtors, and that the trustee would not be permitted to step into the shoes of the then-dissolved official committee of unsecured creditors to pursue certain causes of action.

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Factual Background

Jevic Transportation, a New Jersey trucking company, was acquired by Sun Capital Partners through a leveraged buyout in 2006. Sun Capital financed the buyout with funds advanced by a group of lenders led by CIT. By May 2008, Jevic's financial situation had worsened significantly, and Jevic's board ultimately authorized a bankruptcy filing by Jevic and its affiliated companies. At that point, the company halted almost all operations and, on May 19, 2008, it notified its employees of their imminent termination. The next day, Jevic and its affiliates filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. At the time of filing, Jevic owed $53 million to senior secured creditors Sun Capital and CIT, and over $20 million to general unsecured creditors and taxing authorities.

Shortly after this filing, the bankruptcy court gave its approval of the debtors' post-petition financing agreement under which CIT served as the agent for itself and other lenders. Pursuant to the terms of the post-petition financing order, the debtors waived their right to challenge the lenders' liens and claims or to assert any claims against the lender, subject to the rights of other parties-in-interest to assert timely claims within a 75-day challenge period. The financing order also included express language that its terms 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."

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