American Bankruptcy Institute
46 IV. Proposed Recommendations: Commencing the Case
The debtor’s financial information is perhaps among the most important of its disclosures. Under current law, a debtor is required to file some, but not necessarily the most relevant financial data early in the chapter 11 case, unless the court orders otherwise for cause. For example, every debtor that files periodic reports with the Securities and Exchange Commission must file “Exhibit A” along with its chapter 11 petition, which requires the debtor to list the value of its assets and the amount of its liabilities plus basic information regarding its capital structure (public and private debt and equity securities). Similarly, section 521(a) of the Bankruptcy Code and Rule 1007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) require the debtor to file schedules of assets and liabilities and a statement of financial affairs, unless the court orders otherwise for cause. There is no specific requirement that such schedules and statements be prepared in accordance with generally accepted accounting principles (“GAAP”), and extensions of the deadline to file these documents are routinely requested and granted by courts. Separately, the U.S. Trustee requires a debtor to submit its financial information within one week of its petition date, as outlined in the applicable U.S. Trustee’s Operating Guidelines and Reporting Requirements for Debtors in Possession and Chapter 11 Trustees, to facilitate the U.S. Trustee’s oversight functions. The required information includes a list of bank accounts and insurance policies.177 Finally, Bankruptcy Rule 2015 contains additional obligations to disclose financial information relating to inventory, receipts, disbursements, and other relevant matters.
Notably, none of these required disclosures provide the court, the U.S. Trustee, or parties in interest with financial data that could assist the parties in valuing the debtor’s business or assets.178 Such valuation information may be critically important early in the case when a debtor is seeking permission to use cash collateral, obtain debtor in possession financing, or sell some or all of its assets, and when creditors are seeking relief from stay.
Valuation Information Packages: Recommendations and Findings
The Commissioners analyzed the potential benefits of the requirement that debtors provide additional and earlier disclosures of meaningful financial data, particularly data that may assist parties in interest to assess valuation issues.179 Among other potential benefits, such disclosures may help reduce information asymmetries and allow parties to make better-informed decisions regarding the impact of the debtor’s proposed exit strategy on their recoveries in the case. Such disclosures could
177 The U.S. Trustee also has discretion to request additional information. In addition, the debtor must complete a monthly operating report for filing and submission to the U.S. Trustee. 178 See, e.g., Legislative Update: Valuation Issues a Key Topic at Chapter 11 Commission Hearing in Las Vegas, Am. Bankr. Inst. J., Apr. 2013, at 125 (recommending earlier disclosures about debtor’s business plan and business projections) (citing testimony by Eric Siegert of Houlihan Lokey). 179 Some commentators have expressed dissatisfaction with the current lack of sufficient disclosures by the debtor early in the bankruptcy case. See, e.g., id. (“I’m generally frustrated with the notion of . . . confidentiality around a debtor’s business plan early in the process. I understand that there are competitive secrets and things of that nature that need to be safeguarded, but at the end of the day when you look at a chapter 11 confirmation process, the business projections, almost without exception, are included in a disclosure statement, so they’re made public anyway.”) (citing testimony by Eric Siegert, Houlihan Lokey); id. at 126 (“Creditors’ committees are frustrated by the amount of time [that] it takes for debtors to provide timely and thorough financial information. . . . As a result of this sluggish and time-consuming process of getting information, I believe that committees are often stymied in fulfilling their fiduciary obligations.”) (citing testimony by Sandi Horwitz, CSC Trust Co.). Other commentators have suggested that the debtor’s control of the flow of financial information, imprecise financial data, and the use of strategic valuation can have significant wealth consequences. See, e.g., Stuart Gilson et al., Valuation of Bankrupt Firms, Rev. of Fin. Stud., Spring 2000, at 45–46 (“[S]enior claimants have incentives to underestimate cash flows to increase their recovery in Chapter 11 proceedings. The junior claimants, of course, have the opposite incentive: overestimating value increases their recovery. . . . [V] aluation errors are systematically related to proxies for the competing financial interests and relative bargaining strengths of the participants. . . . [V]aluations are used ‘strategically’ in a negotiation to promote a desired bargaining outcome.”).