While providing numerous advantages to the companies that choose to invoke it, chapter 11 also imposes significant and sometimes burdensome public reporting obligations on them – hence the metaphor of the opened kimono. Because of the debtor’s reporting obligations, creditors and other parties with an interest in the chapter 11 case (such as potential purchasers of assets and claims investors) gain access to a vast amount of financial, operational, and other information that would often not be available outside of bankruptcy. This article describes information about a debtor that typically becomes available at outset of a chapter 11 case.
On the date that a chapter 11 case is begun (the “Petition Date”), the debtor must file two important documents: the chapter 11 petition itself (the “Petition”) and the list of the debtor’s 20 largest unsecured creditors. All filings in chapter 11 cases are publicly available, unless a filing party is able to convince a court to file one of more documents under seal (very difficult to do). Within 14 days after the Petition Date, the debtor must file two additional documents: its Schedules of Assets and Liabilities (the “Schedules”) and its Statement of Financial Affairs (the “SOFA”). In large chapter 11 cases, the debtor will often file a “First Day Declaration” that contains additional information about the debtor, its business affairs, and the events leading to the filing of the case. These five documents provide different types of useful information, which are reviewed below.
The filing of a Petition formally initiates the chapter 11 case. Once the Petition is filed the debtor is officially “in bankruptcy.” Aside from identifying the debtor and the location of its principal assets, the Petition must disclose the “type” of debtor and the nature of the debtor’s business. The “type” of debtor refers to the debtor’s form of organization, be it an individual, corporation, partnership, limited liability company, or some other form. The nature of the debtor’s business may be specified in various ways, including single asset real estate, health care business, railroad, stockbroker, commodity broker, clearing bank, or “other.” In real estate cases, whether the debtor indicates it is a “single asset real estate” debtor (a defined term under the Bankruptcy Code) is highly significant because such a designation gives rise to heightened requirements for the debtor that are designed to speed those cases to resolution. In the Petition, every debtor must also state its estimated number of creditors, estimated value of assets, and estimated amount of liabilities. With this initial information, creditors and parties in interest can determine how “big” of a chapter 11 case they are dealing with.
Concurrently with filing the Petition, a debtor must file its list of 20 largest unsecured creditors. Note that this list will usually not disclose the identity of the secured creditors who often play a major role in a chapter 11 case. The list of 20 largest unsecured creditors can help an unsecured creditor determine how important it is in the larger scheme of the chapter 11 case. In large cases with high amounts of unsecured debt, inclusion in the list of 20 largest unsecured creditors may portend a chance to participate in a statutory committee of unsecured creditors (a “Committee”), which is appointed to represent the interests of all unsecured creditors. Service on a Committee can provide an unsecured creditor with information and influence not available to other unsecured creditors. By disclosing the identities of other unsecured creditors with large claims, the list of 20 largest unsecured creditors can identify a creditor’s potential allies and enemies in the chapter 11 case.
The Schedules are arguably the most important and informative disclosure made by a chapter 11 debtor. Chapter 11 Debtors are required to file their Schedules and SOFA within 14 days after the Petition Date. The Schedules provide a snapshot of all of the debtor’s assets and obligations as of the Petition Date. The Schedules are broken down into 8 separate documents listed as Schedule A through Schedule H.[i]
In Schedule A, the debtor must disclose all of its real property. For each piece of real property owned by the debtor, the following information must be provided: (1) a description of the property and its location; (2) the nature of the debtor’s interest in the property; (3) whether the debtor owns the property individually or jointly; (4) the current value of the property; and (5) the amount of any secured claims (i.e., the value of mortgage liens or other liens) on the property. Schedule A can help an interested party predict outcomes from a real property-intensive chapter 11 case. A chapter 11 debtor has a better chance of keeping real property when the debtor holds significant equity in the property – i.e., the value of the property over and above the amount of the secured claim. Property that is clearly underwater is less likely to be retained by the Debtor, and may, for example, be sold at the insistence of the secured party (therefore presenting a buying opportunity to interested parties).
Schedule B requires disclosure of all of a debtor’s personal property of any kind, including the value of such property. This list should capture all of the debtor’s assets other than real property, including cash, bank account balances, insurance policies, stocks, bonds, interests in partnerships and other entities, inventory, and accounts receivable. Schedule B also requires disclosure of all contingent or unliquidated claims of the debtor, meaning that if the debtor believes it has any valuable litigation claims against third parties, the debtor must disclose such claims and their estimated value on Schedule B. A party in interest may thus discern a debtor’s litigation strategy or at least how important to the debtor litigation recoveries will be by reviewing Schedule B.
Schedule C lists property of the debtor that is included Schedule A and Schedule B, but that is exempt from inclusion in the bankruptcy estate under state or federal law.
Schedule D lists the claims of all creditors with a security interest in any property of the debtor, both real and personal (Schedule D therefore repeats some information from Schedule A). Schedule D also sets forth the amount of the secured claim and whether any portion of the claim is unsecured (i.e., the extent to which the collateral is worth less than the debt). Finally, in Schedule D the debtor must disclose whether any of the secured claims listed are contingent, unliquidated, or disputed. A secured creditor whose claim is identified as disputed can expect a challenge during the chapter 11 case to the validity, priority, or extent of its lien, or some other dispute regarding the validity, amount, or enforceability of the claim.
Schedules E and F preset the claims of all of the debtor’s unsecured creditors. Schedule E identifies priority claims (which must ordinarily be paid in full before other unsecured claims) and their holders — tax claims or claims held by other governmental units, plus employee claims for wages, salaries, and commissions. Schedule F lists the claims of all of the debtor’s other unsecured creditors. Unlike the list of 20 largest unsecured creditors, Schedule F lists each creditor holding a non-priority unsecured claim, no matter how small, and also the amount of the claim. Like Schedule D, Schedules E and F require the debtor, with respect to each claim, to indicate whether such claims is contingent, unliquidated, or disputed by the debtor (and therefore subject to challenge on those bases).
Schedule G lists all executory contracts and unexpired leases to which the debtor is a party. These would be contracts and leases under which the debtor owes money or something else of value, but under which the non-debtor party also owes the debtor some kind of material performance (such as delivery of goods or services, tenancy of real property, or the right to use intellectual property). Finally, Schedule H lists all “co-debtors” of the debtor, meaning any individual or entity that is jointly obligated on a debt of the debtor.
The Schedules are a snapshot of all of a debtor’s assets and obligations as of the Petition Date, while the SOFA summarizes the debtor’s financial performance in the years and months leading up to that snapshot. In the SOFA, the debtor is required to reveal its gross income for the two years prior to the Petition Date. This information must be broken out by year, with the income from operation of the debtor’s business segregated from income from all other sources.
The debtor must also disclose certain payments made to creditors in the 90 days prior to the Petition Date and, if the transferee is an insider, within one year prior to the Petition Date. The debtor must also disclose any other significant transfers made outside the ordinary course of business in the two years prior to the Petition Date. These disclosures include the property transferred (usually cash by amount) and date(s) of transfer, the name of the transferee, and the consideration received by the debtor in exchange for the transfer. These disclosure requirements are designed to identify any possibly preferential or fraudulent transfers by the debtor, to enable an appropriate party to sue transferees to bring the value transferred back into the debtor’s estate. The debtor must also list any lawsuits, garnishments, executions, attachments, and other administrative proceedings to which the debtor was a party in the year prior to the Petition Date and describe any property that has been lost as a result of these proceedings or to foreclosure. Finally, the debtor must disclose its partners, officers, directors, and shareholders, both current and former.
While it is not mandatory for a debtor to file a First Day Declaration, in large chapter 11 cases First Day Declarations have become common practice. The purpose of a First Day Declaration is to provide evidence to the bankruptcy court to support the various emergency motions and requests filed on the first day of a large chapter 11 case. In support of its request for emergency relief on extremely short notice to creditors and parties in interest, the debtor will typically file a global declaration by its CEO, CFO, or other appropriate high-level officer or employee explaining the need for emergency relief. While there is no standard form of First Day Declaration, First Day Declarations usually provide key information about the debtor’s business, recent financial performance, and the events leading to the filing of the chapter 11 case. Some First Day Declarations even disclose the debtor’s intentions, goals, and proposed timeline for emerging from chapter 11, often including a general outline of the plan of reorganization that the debtor will eventually propose. Where a First Day Declaration is filed, it is required reading for anyone with a potential stake in the outcome of the case.
[i] In individual Chapter 11 cases the debtor must also file two additional schedules – Schedules I and J.
Editor’s Note: For a great discussion on options available to struggling businesses, we recommend this webinar.
Gary Marsh focuses on general commercial litigation and bankruptcy, workouts and debtor/creditor law. He represents creditors and debtors in Chapter 11 reorganization proceedings, out of court restructurings and debtor/creditor tigation. He also represents court appointed receivers, examiners and trustees. Mr. Marsh has extensive experience in representing creditors in and out of bankruptcy court in enforcing their…
David Gordon focuses his practice on bankruptcy and creditors rights litigation and has experience representing secured and unsecured creditors, trustees, examiners, equity committees, and other parties-in-interest in Chapter 11 reorganization proceedings. David also has significant non-bankruptcy litigation experience in both state and federal courts. David regularly represents lenders in foreclosure confirmation proceedings, complaints for appointment…
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