Financially troubled companies: bankruptcy

Corporate bankruptcy proceedings and records include a wealth of information. To file for bankruptcy, an individual or company must disclose detailed financial information with the court. Bankruptcy court is a special separate court within the federal system, organized in the same districts as other federal courts. Access to the proceedings and documents filed in connection with bankruptcy filings are governed by federal law, but state law affects what property can be exempt from a bankruptcy proceeding, which can be especially important for reporting about personal bankruptcies.

Types of Proceedings

There are three main types of bankruptcy proceedings — Chapter 7, Chapter 11 and Chapter 13 — as well as a few less-used types. The law governing access to the proceedings and documents is the same for each one. The Bankruptcy Basics guide (http://www.uscourts.gov/bankruptcycourts/bankruptcybasics.html) published by the bankruptcy court system explains the details of each of the proceedings, including who can qualify for each proceeding.

Chapter 7

This is the most drastic form of bankruptcy because it requires all of a filer’s property to be sold or liquidated, and their creditors to be paid off from the sales. Companies generally do not file for Chapter 7 bankruptcy because they essentially become unable to continue operating.

Chapter 13

This type of bankruptcy is also less common for businesses, but some types of small businesses with limited debt can qualify for it in addition to individuals. Rather than requiring all of a filer’s property to be sold, it allows the filer to create a plan to pay back debt.

Chapter 11

This is the most common type for businesses to use. It allows a business to propose a reorganization plan that will allow the company to pay back its creditors over a long period of time. The company typically will sell some assets as part of its reorganization.

Other

Chapters 9, 12 and 15 of the bankruptcy code are far less commonly used and are designed for family farmers, fisherman, local governments and international bankruptcy cases.

Access generally

Section 107 of the bankruptcy code, 11 U.S.C. § 107, governs access to court documents and proceedings. It provides that the proceedings are open unless a party requests closure to “protect an entity with respect to a trade secret or confidential research, development, or commercial information; or protect a person with respect to scandalous or defamatory matter contained in a paper filed” in bankruptcy court.

A document is scandalous “if a reasonable person could alter his or her opinion of the subject based on the statements in the papers filed, taking those statements in the context in which they appear. Several cases also point out that the statements must also be more than just embarrassing or prejudicial.” In re Deborah Alice Neal, 336 B.R. 421 (W.D. Mo. 2005).

Similarly, confidential business information may be sealed in bankruptcy proceedings. Unlike in other court proceedings, the “paramount goal in the sale of assets in a bankruptcy proceeding is to obtain the best price possible for the ultimate benefit of the unsecured creditors of the bankruptcy estate.” In re Farmland Industries, 290 B.R. 364 (W.D. Mo. 2003). Thus, where confidential business information may exist in bankruptcy court filings, courts will consider whether its disclosure would result in an unfair advantage to competitors by giving them crucial information about the bankrupt company and whether disclosure of the information would be reasonably be expected to cause the company commercial injury. In re Alterra Healthcare Corp. 353 B.R. 66 (D. Del. 2006).

News organizations have often successfully intervened in bankruptcy proceedings when documents have been sealed under §107(b). In most circumstances, courts favor public access to these documents.

Settlement agreements

Creditors often enter into settlement agreements with a company filing for bankruptcy under Chapter 11. In these cases, the company will reorganize and settle with its creditors for less money than what is owed. The settlement agreements, filed with the court, are public records. However, they can always be redacted under the standards above. In re J. Fife Symington, III, 209 B.R. 678 (D. Md. 1997).

Hearings

The most common type of hearing in a bankruptcy case is a meeting of the creditors, which the U.S. Office of Trustees will preside over. The Federal Rules of Bankruptcy, Rule 2003, governs these hearings. They are open to the public.

Investigations

In some situations, a bankruptcy judge may order that an examiner from the Trustees’ Office be appointed to investigate parties or creditors. The resulting examination report is also a public record. In re Fibermark, et al. 330 B.R. 480 (D. Vt. 2005). However, that report may be redacted if it contains privileged attorney-client information or information that would otherwise be withheld.

Public companies

When a publicly traded company files for bankruptcy, the effects on shareholders can be severe. The Securities and Exchange Commission has an investor’s guide (http://www.sec.gov/investor/pubs/bankrupt.htm) that explains what will happen, such as whether outstanding shares will be canceled, the types of new shares a company will issue and how they will be traded, and the SEC’s involvement in the bankruptcy. For example, in cases of reorganization, shareholders must vote to approve the company’s plan and the SEC must review the disclosure made to them to ensure it has all the necessary information.

A public company’s reorganization plan may call for it to reform as a private company after it emerges from bankruptcy, as the General Motors bankruptcy plan did in 2009. Quarterly financial statements aren’t generally released by private companies, nor will a private company’s annual report have significant details about management and the direction of the company.

Reporter’s tip: When sorting through bankruptcy filings, figure out what phase a company is at in the process, what the next step is, who will own what when a reorganization is over, and what all of it means for common shareholders — essentially the readers — and then for the bondholders and creditors.

Reporter’s tip: In the initial filings, details like total debt, total assets, the financing in place and the top creditors are important. Bankruptcy court filings are available on PACER, the electronic court records system for federal courts and can be easily accessed for a fee.