THE TOOLBOX: Transparency and Reporting Requirements in Bankruptcy Cases

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By Judge D. Michael Lynn, U.S. Bankruptcy Court for the Northern District of Texas

  D. Michael Lynn has served as United States Bankruptcy Judge for the Northern District of Texas in Fort Worth since 2001. During his tenure on the bench, he has presided over such large Chapter 11 cases as Texas Rangers Baseball Partners, Mirant Corporation, and Pilgrim’s Pride Corporation, as well as thousands of consumer cases. Prior to his appointment to the bench, he spent 29 years practicing bankruptcy law, specializing in corporate reorganizations. Judge Lynn was a Visiting Professor of Law at Southern Methodist University’s Dedman School of Law for 15 years and now serves as Adjunct Professor of Law at Texas Wesleyan University, where he teaches courses in corporate reorganization law, legal drafting, and legal ethics. He has served as a contributing author for Collier on Bankruptcy and the Collier Bankruptcy Practice Guide and as co-author of The Collier Handbook for Trustees and Debtors in Possession, and has spoken frequently at continuing legal education events. He can be reached at  

This month, I’ll talk a bit about how parties to a bankruptcy case hear what they need to know. In representing a client in a bankruptcy case—as in most endeavors—a key to success is possessing, digesting and using information. Unlike most other endeavors, though, in the bankruptcy system transparency is an important element. Indeed, the Bankruptcy Code and rules are structured to ensure that anyone with a stake in the bankruptcy proceeding will have ready access to all the information he or she needs to defend and advance a position.

To begin with, except for acts that can be anticipated,1 virtually anything that a party to a bankruptcy case seeks to do that would affect the estate or the rights of others may be done only after notice and an opportunity for affected parties to be heard. Just as a party to an adversary proceeding must set out requests for relief in pleadings directed to the other parties, so, too, to act beyond the limits expressly permitted by the Code, an estate representative must inform other interested parties of what it wishes to do through pleadings that are (usually) publicly available. Not only will other parties then have a chance to contest the relief sought in a hearing, but they will also have available to them discovery options substantially similar to those available to ordinary litigants. See Fed. R. Bankr. P. 7026, 2028-7037 (applicable in contested matters pursuant to Fed. R. Bankr. P. 9014(c), and 9016. Should a party wish to explore further a request for relief made by motion (or application in rare cases), these ordinary discovery tools are available.

But ordinary discovery tools are not all the ways parties can gather information in a bankruptcy case. The debtor—the party at the center of the case—must appear and be subjected to questioning at the creditors’ meeting held pursuant to Section 341 of the Code. The Section 341 meeting—which may be continued from time to time—offers creditors, the trustee, and other parties in interest a substantial degree of freedom to ask questions and request documentary information.

An estate representative is specifically charged with the duty of furnishing “information concerning the estate and the estate’s administration” upon request of a party in interest. See Section 704(a)(7),2 incorporated in other chapters by Section 1106(a)(1), 1202(b)(1), 12033 and 1302(b)(1). Further in Chapter 11 (and Chapter 9), the trustee (or debtor in possession—or debtor in Chapter 9) is directed to meet with any committee appointed under Section 1102 “to transact such business as may be necessary and proper.” Section 1102(d). Almost certainly the business of that meeting will include arrangements to provide information to the committee.

The party acting at the commencement of a case for the estate—typically the debtor—of course is obligated under Section 521(a)(1)(B) and Federal Rule of Bankruptcy Procedure 1007(b) to file schedules and a statement of financial affairs.4 These documents lay out for creditors and other parties in interest information that will assist in identifying the assets and liabilities of the estate as well as the debtor’s recent financial history. While the court may direct that the debtor not file schedules and a statement of financial affairs, should the court do so, it would normally require that the debtor file other documents that would provide equivalent information.

The schedules and statement of financial affairs are not necessarily well suited to giving a picture of a large enterprise, but they will form an adequate starting point for investigation. The accounting data maintained by a large enterprise will serve to supplement the schedules and statement of financial affairs, and use of both sources will allow a trustee, creditors, and other parties in interest to develop a complete picture of the estate and the debtor’s recent financial history.

In addition to the schedules and statement of financial affairs, any debtor (or trustee) engaged in business must file periodic (usually monthly) reports. See Section 704(a)(8), incorporated into other chapters by Sections 1106(a)(1), 12035 and 1304(c). These reports will typically inform interested parties of profits or losses generated by business operations and the status of the estate. Put another way, the reports together with the schedules and statement of financial affairs, the latter representing the situation at commencement of the case, allow creditors and other parties in interest to track progress, assess the benefit of continued operations, and obtain at least an idea of what would be the result of liquidation at any given point in time.

In addition to monthly reports required by the Code, in most cases involving an operating business, there will be ongoing financing, usually provided by the debtor’s prepetition lender. The debtor’s lender will usually require separate reporting that will include prospective budgeting as well as detailed accounting of current operations. In a Chapter 11 case it is likely that committees will have access to reports to the lender even if they are not filed with the court. Moreover, the reports will be discoverable and thus probably available to any party with a serious interest in keeping informed.

Of course a debtor—at least one of any size—is likely to have internal reporting requirements. While some internally generated data may be too sensitive to share generally, at least if confidentiality can be preserved, principal parties such as a lead lender and committees are likely to have access to reports relied on by management.

Another means of collecting information is through a status conference. Under Section 105(d)(1) the court may call and preside over “such status conferences as are necessary to further the expeditious and economical resolution of the case.” The informal nature of a status conference will assist parties not only in the exchange (or agreement to exchange) information but also will facilitate scheduling and will illuminate issues requiring consideration by the court and the parties.

In Chapters 9 and 11 a plan proponent is also required to file a disclosure statement. See Sections 1125 and 901. This is one more example of Congress’s determination that bankruptcy cases in general, and particularly reorganizations, should be transparent.

Besides the many mechanisms for collecting information already discussed, there is the useful tool provided by Federal Rule of Bankruptcy Procedure 2004. Rule 2004 allows a party to ask the court to direct “the examination of any entity.” By using the word “entity” the rule makes clear the even governmental units are subject to examination under Rule 2004.

As for the scope of a Rule 2004 examination, though Rule 2004(b), using the limiting language, “[t]he examination … may relate only …,” suggests a narrow scope,6 in fact, like the examination of the debtor at the creditors’ meeting, an examination under Rule 2004 is likely to cover the waterfront, to be, as is often said, a fishing expedition. See In re Lufkin, 255 B.R. 204, 208 (Bankr. E.D. Tenn. 2000) (stating that “[t]he scope of a Rule 2004 examination is extremely broad and has often been likened to a ‘fishing expedition.’”); Bank One, Columbus, N.A. v. Hammond (In re Hammond), 140 B.R. 197, 201 (S.D. Ohio 1992). Indeed, Rule 2004 is an especially useful tool because it, unlike the discovery tools used in litigation, does allow questioning without predetermined focus.

The Code (and rules) not only provide means to collect information about the debtor. They are also intended to prevent the use by creditors of opacity to conceal facts that should be available to parties to the case. To begin with, the claims process requires a creditor to disclose essential aspects of the basis on which it claims entitlement to part of the estate. Federal Rule of Bankruptcy Procedure 2019, especially since its 2011 amendment,7 requires those purporting to act as representatives of a constituency to provide extensive information to assist others in judging their ability to represent.

Of course there are other disclosure requirements—for example, Federal Rules of Bankruptcy Procedure 2014 and 2016 pertaining to professionals. These and the provisions I have cited above are all intended to ensure transparency. Each can be an important tool for the practitioner. Indeed, the overarching congressional goal of transparency should be sufficient to justify any request for information legitimately related to the estate which is not covered specifically by rule or statute.


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