Transparency in the Bankruptcy Process Part II
This week we welcome Vladimir Jelisavcic of Cherokee Acquisition to weigh in on transparency in the bankruptcy process with a special emphasis on the plight of trade creditors.
Here’s what we asked our Contributors:
Both creditors and debtors bemoan the increased transparency that comes from participating in the Chapter 11 process. Debtors often fear disclosure of financial information, business plans or cost cutting details that could put them at a competitive disadvantage and/or impact internal morale. Creditors, on the other hand, often fear disclosing their trading details could alert competitors to their strategy in the case. The ABI Commission noted in its Final Report that “none of [Chapter 11’s] required disclosures provide . . . parties in interest with financial data that could assist the parties in valuing the debtor’s business or assets.” What do you think? Would enhanced disclosures of business information (such as those required by the recently updated Monthly Operating Reports or SEC reporting during bankruptcy) provide much-needed information? Or, result in a chilling effect on Chapter 11 filings? Would requiring creditors to disclose their trading positions make it more difficult for creditors to participate in the process? Or, is transparency necessary for the legitimacy of the process? What’s your view? What other changes would you want to see?necessary for the legitimacy of the process? What’s your view? What other changes would you want to see?
Vladimir Jelisavcic, Cherokee Acquisition
Trade creditors are severely disadvantaged by the lack of transparency and disclosures made during the bankruptcy process.
This is a systemic problem that may give debtors and small minorities of large investors too much power over the process of negotiating and confirming plans of reorganization. Debtors’ bankruptcy advisors exploit this disengagement by minimizing communication with trade creditors. They mail out solicitation packages to which creditors have only twenty days to respond. This makes it nearly impossible for trade creditors to engage in the voting process and most simply don’t vote.
In a bankruptcy case, voting on a plan is a right that all impaired creditors have. The two-pronged voting threshold of two-thirds of the dollar amount and one-half of the number of claims is intended to give trade creditors a powerful voice in the plan process. But, in reality, they are almost always relegated to the back of the bus.
Trade creditor disengagement is partially due to bankruptcy being a highly technical process that is difficult for non-experts to understand. Even well-meaning attorneys representing official creditors committee often do not understand how inscrutable the bankruptcy process appears from the perspective of a trade creditor. Imagine that you are the CFO of a small company. You may have filed a proof of claim yourself without the assistance of bankruptcy counsel. Without advance notice, you receive a paper copy of a court-approved solicitation package written in legalese. The easiest thing to do is to ignore it. You may even mistakenly believe that a vote to “Reject” might result in a diminished recovery.
In the LATAM Airlines case, trade creditors received an incomprehensible solicitation package with too little time to respond. Unsurprisingly, only 152 claims voted to “Reject” (35%) out of 431 claims voted. This disenfranchises an important class of creditors. Had adequate disclosure occurred, I believe LATAM would have been forced to come back to the negotiating table and offer improved recoveries for the benefit of all trade creditors.
What can be done to change this? The easiest approach may be to have better and more frequent communication with creditors. The Life Partners bankruptcy is an example of a case very effective outreach. In that case (NDTX, Ft. Worth), Munsch Hart Kopf & Harr P.C. represented the Official Creditors Committee. Munsch Hart conducted numerous and frequent conference calls that were open to all unsecured creditors. These calls served to inform creditors and significantly improved creditor engagement. When Life Partners’ creditors received their ballots they were much better prepared to understand and exercise their rights. I strongly recommend a similar approach be taken to inform and empower trade creditors in future bankruptcy cases.