We at The Bankruptcy Cave applaud the recent ruling by Judge Whipple of the Bankruptcy Court for the Northern District of Ohio, seeking to make the post-confirmation parties, processes, and procedures far more transparent. In In re Affordable Med Scrubs, LLC,[1] Judge Whipple declined to approve a disclosure statement for a secured creditor’s liquidating plan.  The key deficiencies were as follows:

 

  1. Disclosure Must be Provided about the Liquidating Trustee: While the secured creditor’s disclosure statement did state who the liquidating trustee would be, it provided no disclosures about the putative trustee’s connections to key creditors and other parties in interest. We applaud this effort to require disclosures about a proposed liquidating trustee or plan administrator. The selection of a liquidating trustee or plan administrator is a murky process – at best, it is based on some vague (and undisclosed) considerations of pricing and experience of the individual or company that will serve in this role.  At worst, selection of a liquidating trustee or plan administrator may reek of “payola,” favors being returned, or other completely inappropriate (and also undisclosed) factors.  It is not much to ask, at all, for any proposed post-confirmation parties to make a full disclosure under Bankruptcy Rules 2014 and 2016.

 

  1. The Same Disclosure Must be Made About any “Plan Oversight Committee”: See above – the same rules apply to Oversight Committees or other parties involved in supervising post-confirmation actions.

 

  1. Better Disclosure of Litigation Claims Against Key Parties: The Affordable Med Scrubs disclosure statement also did not clearly deal with potential claims against the largest creditor (which is not very surprising, as the largest creditor was the party submitting the disclosure statement).  References, cross-references, and unclear descriptions of claims don’t help anyone – plan proponents should carefully and plainly describe in one place in the disclosure statement what they know about various claims, and whether they plan on pursuing them or recommending that the liquidating trustee pursue them (or not pursue them).  No one should be surprised later that a claim is brought, or that a claim against a key party is not brought by the Liquidating Trustee (see above, in relation to the risk that side-deals may be involved in selection of Liquidating Trustees or Oversight Committees).[2]

 

  1. The Liquidating Trust Agreement and Other Key Documents Should be Filed with the Disclosure Statement: We at The Bankruptcy Cave are increasingly annoyed with the massive dump of “plan documents” being filed 5-10 days before confirmation.  The Affordable Med Scrubs court was not pleased with the failure of the parties to file the proposed Liquidating Trust agreement with the disclosure statement.  This is particularly important as such agreement often has key terms on the authority of the liquidating trustee, fees paid to the liquidating trustee and his or her professionals, and other items about which creditors should be aware (some or all of which, such as post-confirmation professional fees, may be shielded from future court or creditor scrutiny altogether).

 

This is an important case on issues that are not typically addressed. We look forward to a raising of the bar in our collective practices to require more disclosure of post-confirmation parties, how they came to be chosen and their connections with creditors and other parties in interest, and expected post-confirmation events and claims.

[1]           Case No. 15-33448, Bankr. N.D. Ohio, Order Disapproving Disclosure Statement, Docket No. 267 (July 5, 2016).

 

[2]           We don’t intend to imply, at all, that anything improper was going on among the parties in the Affordable Med Scrubs case – many of the deficiencies the court notes with the disclosure statement could simply be oversight, or a desire for expediency.  The Affordable Med Scrubs court does not even hint at any impropriety, and we didn’t see any in the facts at all – just a lack of disclosure.  But we have seen other cases in which substantial litigation claims are not brought, or settled for small amounts, as to creditors that had a major role in selecting the parties that will control those very same post-confirmation events.