Bankruptcy Coverage Tutorial

Finding stories in bankruptcy court Prepared by Chris Roush Director, Carolina Business News Initiative University of North Carolina at Chapel Hill

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Bankruptcy court background
The bankruptcy court system is a federal court system.
It allows for individuals and companies to enter the court and seek to reorganize the debt it owes.
Most major cities in the country have bankruptcy courts.

The bankruptcy court system is a process that allows companies and individuals that cannot pay their debts to have some or all of their debts discharged or reorganized.
Attempts to provide fair method of repayment.
A company entering bankruptcy court does NOT necessarily mean it’s going out of business.

Understanding how bankruptcy court works and why businesses file for bankruptcy court protection is important for any reporter, not just those working on the business desk.
When businesses file for protection from their creditors, those that are owed money could range from government entities such as the local school board to a federal agency that contracted with the business to perform services or provide goods.

In the quarter ended June 30, 2008, there were more than 276,000 bankruptcy court cases filed, up dramatically from the 210,000 filed in the same quarter of 2007.
Business filings went from 6,705 in the second quarter of 2007 to 9,743 in the second quarter of 2008 – an increase of 45.3 percent.
Tracking total bankruptcy filings can tell you something about the economy.

The largest number of filings occurs when an individual files Chapter 7. There are more than 1.3 million of those every year.
But it’s the big corporate cases that get most of the attention – and news coverage.

Six of the 13 largest bankruptcies in terms of company assets were filed in 2002.
Those major companies included WorldCom, Enron, Global Crossing, Conseco and Kmart.
Airlines such as Delta and Northwest recently reorganized under the bankruptcy laws. Goldman Sachs filed earlier this year as part of the economy crisis
Web sites such as www.bankruptcydata.com follow major company cases.

Chapter 7 is liquidation. Everything must be sold to repay creditors.
Chapter 9 is for municipalities.
Chapter 11 is reorganization. Debtor maintains control of the business unless court appoints trustee.
Chapter 12 is for farmers and fishermen.
Chapter 13 is when person believes that they can repay debt within reasonable time period.

Although Chapter 11 filings make up a small portion of the total filings, this is the filing that most businesses undertake.
Still, there are some businesses that file for Chapter 7.
Chapter 11 filings can also be converted to Chapter 7 by judge if no reorganization plan can be agreed upon.

Understanding how bankruptcy court works – and where to obtain information about bankruptcy cases – can determine the success or failure of someone’s coverage.
Bankruptcy court operates just like county, circuit and federal courts.
You have to know the playing field.

You also have to know the issues surrounding bankruptcy court.
In October 2005, new bankruptcy court legislation took effect, attempting to wipe out abuse of the system.
As a result, there was a glut of cases filed before Oct. 17, 2005, under the old laws.

Quick review
Answer the following questions before going on to the next session.
What is the filing that most businesses commonly make?
Chapter 7
Chapter 11
Chapter 12
Chapter 13
The answer is B. Most companies file for Chapter 11 bankruptcy court protection.

Quick review
2. The bankruptcy system is part of what court system?
State court
Circuit court
Federal court
Small claims court
The answer is C. Bankruptcy court is part of the federal court system.

Bankruptcy court filings

Documents filed by companies in a bankruptcy reorganization can be valuable resources for reporters.
They often have names and phone numbers, and information about the company’s inner workings.
The U.S. Bankruptcy Code does allows a court to prevent public access to filings if they include trade secrets or confidential information about a company’s operations, or if scandalous or defamatory information about a person is filed.

The initial filing, or petition, will list the company’s assets and debts.
The trick often is finding the initial filing.
Companies will shop for a preferred venue – i.e., a friendly judge. Winn-Dixie created a New York subsidiary simply to file in that jurisdiction.
Many companies will file in Delaware because that is the state in which they are incorporated.

Also, some bankruptcy court jurisdictions allow companies to file after the court has closed and on the weekends.
This allows them to avoid publicity until they make an official announcement.
Note that all public companies must file a Form 8-K when they file for bankruptcy court protection.

Why does a company file for bankruptcy court protection instead of trying to work out a deal with its creditors?
Because bankruptcy court automatically halts all judgments, collection activities, foreclosures, and repossessions of property

Here is a typical story from an initial filing:
When it opened in 1990, the Oxmoor golf and steeplechase development in eastern Jefferson County was another success among the vast holdings of HFH Inc., the Louisville real-estate developer that soared during the golf course and residential building boom in the late 1980s and early 1990s.
Today Oxmoor Golf & Steeplechase Inc., which operates Oxmoor Country Club at 9000 Limehouse Lane, is proceeding through bankruptcy after running up debts to nearly 200 creditors and facing four lawsuits by suppliers seeking to recoup their money.
The not-for-profit corporation filed for protection from its creditors in U.S. Bankruptcy Court for the Western District of Kentucky on July 5, a move that shields its assets while it attempts to reorganize. In a petition entered with the court, Oxmoor Golf & Steeplechase claimed debts of $5 million and assets of $1 million .

Note the term “filed for protection from its creditors.”
This is how you describe a company entering Chapter 11 bankruptcy court.
Do NOT write that the company is bankrupt.
Do NOT write that the company is going out of business.
Can write that the company doesn’t have enough money to pay all of its bills.

Here is a tip: When writing about businesses, don’t just look for corporate bankruptcies.
Once found a CFO of a publicly traded company who had two personal bankruptcies in his past.
How can he manage the books of a public company when he can’t manage his own finances?

A later filing, called the debtor’s list , will list all of the people that the company owes money, as well as their addresses and phone numbers.
This should be considered a free source list.
Many people and businesses owed money by a company in bankruptcy court are willing to talk.

Sometimes, the decision to file is not made by the company but by some of its creditors.
This is called an involuntary bankruptcy .
At least three creditors owed money by a company can join together and force a company into bankruptcy court.
The company can contest the involuntary filing.

The business will have to develop a reorganization plan and file it with the court.
This plan will detail how much it plans to repay creditors and must be approved by those owed money.
Can often detail store closings, layoffs, etc.

The most important detail in the reorganization plan is how much creditors will be repaid.
Typically referred to as a ratio, such as 60 cents for every $1 they are owed.
The higher the ratio, the better the deal for the creditors.

It’s also important for reorganization plan stories to point out how much the company’s debt was reduced as part of the plan.
An inability to pay the money it owes is the primary reason why a company enters bankruptcy court.
If the debt has not been reduced enough, then the company could face trouble down the road.

The reorganization plan is vital to the future success of a company.
A reorganization plan that weakens a company can lead to the business falling back into the habits that caused its initial problems and leading to yet another bankruptcy court filing.
A reorganization plan that gives little or nothing back to creditors often results in investors not wanting to be involved in the new company.

A committee of creditors may also come up with a reorganization plan. These creditors can often be valuable sources.
If the creditors approve the plan, and if the court agrees that the plan is fair, then the company is allowed to reorganize its debts and emerge from bankruptcy court.

Look for different types of creditors.
Secured creditors are more likely to get repaid some money than unsecured creditors .
Unsecured creditors are stock holders, while secured creditors are bond holders.

Also note that some companies will file for bankruptcy court protection after negotiating with their lenders.
The lenders will agree to a reorganization plan before the actual bankruptcy filing occurs.
This is called a pre-packaged bankruptcy.

The length of a company’s stay in bankruptcy court can vary depending on the negotiations with its creditors.
Some bankruptcy court proceedings have lasted for years, while others have taken months.
It’s important to stay on top of a company’s case and its progress, or lack of progress.
Regularly check the docket in the case file.

Companies that enter bankruptcy court protection typically need what is called debtor-in-possession financing.
These are typically loans from banks and other lenders.
The company must get this financing approved by a judge.

Here is a typically DIP financing story:
Conseco Inc. on Tuesday received final court approval for $150 million in debtor-in-possession financing to keep the company operating during its bankruptcy proceedings.
Conseco, Indianapolis, will receive the $150 million from a syndicate of lenders, including $125 million from FBS DIP LLC, an affiliate of the group leading the bidding for the Conseco Finance unit. That group, known as CFN Investment Holdings LLC, consists of Fortress Investment Group LLC, J.C. Flowers & Co. LLC and Cerberus Capital Management LP.
The additional $25 million in financing, known as the junior facility, will be provided by Lehman Brothers Inc.
Judge Carol A. Doyle issued interim orders on the financing matter on Dec. 23.

Anytime someone needs to be paid money from the company in bankruptcy, there is a filing.
This can include the executive’s pay, attorneys, accountants and consultants.
Regularly check for these documents. They detail the hidden cost behind bankruptcy court.

In February 2003, Bloomberg News disclosed that the 25 largest bankruptcies in 2001 and 2002 had resulted in a total of $235 million in legal fees as of Jan. 31 for the lead law firms for the companies.
Some of the fees charged in the Global Crossing bankruptcy case during that time period by its lead law firm, Weil, Gothsal & Manges LLP, included $21,694 for meals, $73,182 for computerized research.
Also, there was a request for more than $24,000 for activities that included composing its fee applications for the bankruptcy court judge to approve.

Always get outside comment about these expenses.
The Bloomberg story of the large fees drew criticism from the Texas attorney general, who said he saw “little accomplished” for the fees and that the “creditors and other people who deserve this money are seeing it depleted.”

Lastly, check for judge’s rulings involving a bankruptcy case your tracking.
A judge has to issue orders for everything involved in a bankruptcy case.
Regularly check with the clerk or the judge’s secretary for new rulings.

Quick review
What creditors typically get repaid first in a bankruptcy case?
Secured creditors
Unsecured creditors
Shareholders
All of the above
The answer is A. Secured credits are the ones who get repaid first in a bankruptcy case.

Quick review
2. What document would give a reporter a list of the creditors owed money in a bankruptcy case?
Reorganization plan
Initial petition
Debtor’s list
Judge’s ruling.
The answer is C. A debtor’s list will include the names of creditors and how much money each is owed.

Bankruptcy court hearings

When a company files for bankruptcy court protection, its assets are frozen.
After the filing, there are hearings to decide whether a company can spend large amounts of money.
There are always documents filed before the hearings. Get those, and you’ll know what’s going on.

For example, a judge typically reviews how much a company in bankruptcy court is paying its executives and its attorneys.
A judge may cut that pay if he or she thinks it’s too much.
Don’t ignore these hearings regarding how a company is spending its money.

There will also be hearings if a company in bankruptcy court wants to sell part of its operation to raise cash.
The judge has to approve the transaction.
The hearing for transactions often results in a bidding war there in the courtroom of the subsidiary has value.
Check for bids in the case file before the hearing.

Here’s a bidding story from a hearing:
Berkadia Equity Holdings, a group controlled by investor Warren Buffett’s Berkshire Hathaway, led the bidding late Tuesday in a spirited auction to buy Conseco Finance Corp. out of bankruptcy.
Berkadia presented the highest bid of $1.2 billion as of 7 p.m. The bid is equal to the book value -- or the value of the assets -- of St. Paul-based Conseco Finance as of Sept. 30, according to court documents.
However, Berkadia could yet be topped by a higher bid. Bidding by parties interested in buying Conseco Finance’s mobile home, credit card, home equity and home improvement lending businesses continued well into Tuesday night.

A judge will also hold hearings about the reorganization plan if there is a disagreement between the company and creditors.
And there will be hearings to approve the reorganization plan as well.
Judge may not issue a ruling at the end of a hearing, but he will take testimony from attorneys and others.

The final hearing can be the most important one because it means that the company is leaving bankruptcy court protection.
Often, the company executives will attend, and you can grab them outside of the courtroom.

Here is a typical exit story:
SpectraSite Holdings completed its reorganization Monday, emerging from bankruptcy protection with less debt, a new stock and a modified name. The operator of cell-phone towers shed about $1.8 billion in liabilities during the three-month process, and it now shows just more than $700 million in debt on its balance sheet, said David P. Tomick, the chief financial officer.
The Cary company will issue 23.75 million new shares, which could begin trading today under the ticker symbol SPCSV, and changed its legal name to SpectraSite Inc.
The moves reflect a new beginning for the beleaguered company, which fell upon hard times when growth slumped in the mobile-phone industry. As carriers such as Cingular Wireless won fewer customers, they cut spending, leaving SpectraSite with a $2.6 billion debt it couldn't manage.

Quick review
Who decides how a company in bankruptcy court spends its money?
The CEO
The clerk of the court
The lawyers representing the company
The judge presiding in the case.
The correct answer is D. The judge must approve all major expenditures.

Bankruptcy court sources

Lawyers, accountants, investment bankers, turnaround consultants and even company executives often receive millions of dollars in return for their services in helping steer the company through the bankruptcy maze.
These groups of interested parties often clash with each other and the company during bankruptcy court proceedings. Therefore, it’s important to understand what role they play in the process – and what information they can give a reporter.

All bankruptcy cases are overseen by a judge .
A U.S. bankruptcy judge is a judicial officer of the U.S. district court who is appointed by the majority of judges of the U.S. court of appeals to exercise jurisdiction over bankruptcy matters.
The number of bankruptcy judges is determined by Congress. The Judicial Conference of the United States is required to submit recommendations from time to time regarding the number of bankruptcy judges needed.
Bankruptcy judges are appointed for 14-year terms.

Judges rarely talk on the record about pending bankruptcy cases.
But if you get to know them, they often will tell you how they plan to rule on certain matters in a company case.
Judges can also steer you in the right direction for stories.

Sometimes, a judge will appoint a trustee to oversee a company filing.
A trustee often will act in the same role as the CEO of a company.
A trustee can be assigned if creditors or others argue that the company management is unfit to manage its operations.
In some occasions, the trustee will object to something that the company wants to do.

Here is an example of that, from a hearing:
The administrator for Midway Airlines’ bankruptcy is worried that the carrier may be piling up too much debt too fast as it gears for its new life as a US Airways commuter.
On Wednesday when Midway proposed buying two expensive airplanes, she opposed the purchase until the airline could show how its existing creditors will be repaid.
“ We’ve got a situation where the debtor is in a hole with regard to expenses,” Marjorie Lynch, the administrator for the Eastern District Bankruptcy Court, told the judge. “The debtor’s ability to pay is doubtful.”

Attorneys for the company, the creditors and other parties will crowd the courtroom during any hearing.
Find out who they are and check in with them regularly.
Attorneys representing creditors are more likely to talk than those representing the company.

Often, an attorney will be appointed to represent the creditor’s committee.
This is the person who typically negotiates with the company on the reorganization plan.
Become this person’s best friend. Call them repeatedly.
They often know what the reorganization plan will be before it is filed with the court.

The clerk of the bankruptcy court is often a good source as well.
Think about it. They have all of this juicy information, but no outlet for it.
They know all of the good filings.
Attorneys will call them and warn them when a big case is about to be filed.

Don’t forget about the people at the company.
Once followed a car dealership bankruptcy case where the owner was my best source.
Other times, employees will be more than happy to discuss what’s going on because they believe they’re going to lose their job.

How do you find these employees?
Check Internet message boards.
Run a Google search of the company name and resume to see who’s looking for a new job already.
Lexis-Nexis search of announcements of new employees or new employees at other companies who have left the company now in bankruptcy.

Two sources that you may not think about initially can be extremely valuable:
The judge’s clerk or administrative assistant often knows what rulings are about to come down and what cases he or she has been reviewing.
The court workers who actually process the filings on a daily basis can tell you if anything juicy has come through that day. (Always check right before court closes at 4:30 p.m.)

Quick review
Who is appointed by a judge to oversee a company in bankruptcy court’s operations?
A trustee
A creditor’s committee
The lawyers representing the debtors
All of the above.
The correct answer is A. The trustee often oversees a company’s operations.

Quick review
2. Who are valuable sources that should be tapped by a reporter covering a business bankruptcy case?
Company employees
Members of the creditor’s committee
A judge’s administrative assistant
All of the above
The correct answer is D. All of these people are good sources in bankruptcy cases.

Bankruptcy court resources

All bankruptcy court districts have an online Web site.
A list is available at http://www.bankruptcydata.com/Courts/Bankruptcy_Links.htm
While few have actual documents available online, most do post the court dockets for each judge.

The federal courts have a number of electronic public access systems available for business reporters.
They include Voice Case Information System (VCIS), modem-based Public Access to Court Electronic Records (PACER), the U.S. Party/Case Index (USPCI), Internet access to dockets (which sometimes includes document imaging) (PACER/RACER), and Electronic Case Filing (ECF).
Go here to find what you’re looking for: http://www.bankruptcydata.com/Courts/Bankruptcy_PACER_Links.htm

http://www.bankruptcylawfirms.com/ is a nice resource of information, but is run by bankruptcy attorneys.
There is some good background on the history of bankruptcy and an overview of the process.
Also links to regional resources for each state.

http://www.uscourts.gov/bankruptcycourts.html is the home page for the U.S. bankruptcy court system.
It has statistics on the different types of cases filed by quarter and by geographic area.
Also has samples forms so you can see what the filings look like.

The SEC also has a good site explaining the impact for investors of bankruptcy court filings on public companies.
http://www.sec.gov/investor/pubs/bankrupt.htm
SEC has limited role in bankruptcy cases, but will step in if it thinks that company filed for bankruptcy court protection to avoid securities fraud litigation.

Conclusion
Covering bankruptcy court is all about knowing what to look for and who to ask for the information.
It’s also about being in the right place at the right time and showing up for important hearings.
But wait, there’s more….

Self-test
Answer the following 10 questions about finding information when reporting on bankruptcy court and its cases.
When you have completed answering a question, click on continue, and the answer will show with an explanation.

Self-test
No. 1: Which of these statements is false?
A.) Both public and private companies can file for bankruptcy court protection.
B.) Executives of companies can file for personal bankruptcy court protection.
C.) A person or company files for bankruptcy court protection when it can’t pay its bills.
D.) It’s faster for a company to exit bankruptcy cour than a person.
The answer is D. The time it takes to navigate bankruptcy court depends on negotiations with creditors, not who has filed.

Self-test
No. 2: What information can you get from a company’s bankruptcy court filings?
A.) Its revenue for the past year.
B.) Who it owes money.
C.) Executive compensation.
D.) How it was originally formed.
The answer is B. A company in bankruptcy court files a debtor’s list of everyone it owes money.

Self-test
No. 3: What is the most common bankruptcy court filing?
A.) Personal bankruptcy by an individual.
B.) Business filing for Chapter 11 reorganization.
C.) Business filing for Chapter 7 liquidation.
D.) None of the above.
The answer is A, although reporters tend to write more stories about companies in bankruptcy court. Personal bankruptcies are more than 95 percent of all filings.

Self-test
No. 4: What document details how a company plans to exit bankruptcy court?
A.) Initial petition.
B.) Debtor’s list.
C.) Reorganization plan.
D.) A and B.
The answer is C. The reorganization plan explains how a company will pay off some of its debt and how it plans to cut expenses.

Self-test
No. 5: What type of information can a reporter find out by sitting in a bankruptcy court hearing?
A.) The amount of money paid to the attorneys representing the company.
B.) The sale of a subsidiary to raise cash.
C.) The approval of the reorganization plan by creditors.
D.) All of the above.
The answer is D. All of these answers are information that can be gleaned from bankruptcy court hearings.

Self-test
No. 6: Which of these people involved in a bankruptcy case is unlikely to talk on the record?
A.) The creditors.
B.) The attorneys representing the business.
C.) The judge.
D.) The trustee.
The answer is C. A judge must remain impartial while hearing a bankruptcy court case.

Self-test
No. 7: Where would you go to find information about a bankruptcy case?
A.) The online PACER system.
B.) The regional bankruptcy court.
C.) The circuit court.
D.) A and B.
The answer is D. Most bankruptcy court filings can be obtained by subscribing to the PACER system online or by going to bankruptcy court and visiting the clerk’s office.

Self-test
No. 8: If you wanted to find information about a company’s reorganization plan before it was filed with the court, who would you talk to?
A.) Large creditors.
B.) Attorneys representing the creditor’s committee.
C.) The trustee.
D.) All of the above.
The answer is D. All of these sources might talk to a reporter about details of a reorganization plan before it is officially filed with the court.

Self-test
No. 9: What’s the difference between a secured creditor and an unsecured creditor in a corporate bankruptcy case?
A.) A secured creditor holds stock in the company, while an unsecured creditor does not.
B.) A secured creditor has filed a lawsuit against the company, while an unsecured creditor has not.
C.) A secured creditor typically receives some of the money they are owed, while an unsecured creditor is rarely repaid.
D.) A and B.
The answer is C. Secured creditors are first in line to be repaid.

Self-test
No. 10: True or false, can a company in bankruptcy court protection receive money from lenders?
A.) True.
B.) False.
The answer is A. A company in bankruptcy court protection is a candidate for debtor-in-possession financing that allows it to continue to operate.

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Bankruptcy Coverage Tutorial

by Reynolds Center for Business Journalism on May 03, 2010

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Bankruptcy Coverage Tutorial — Presentation Transcript