On June 25th, the Debtors in the SemCrude bankruptcy present their Motion Approving Debtors’ Disclosure Statement (the "Motion"). Debtors’ Motion provides a good opportunity to review the standards by which bankruptcy courts often measure the content of a debtor’s disclosure statement. The following provides a summary of some of the frequently cited cases and Bankruptcy Code provisions governing this fundamental component of the bankruptcy reorganization process.
The Code Provisions
A disclosure statement must contain adequate information for creditors and shareholders to make an informed judgment about a plan of reorganization. See In re Scioto Valley Mortgage Co., 88 B.R. 168, 170 (Bankr. S.D. Oh. 1988). Section 1125(b) of the Bankruptcy Code provides the threshold level of information that must be included in a disclosure statement:
An acceptance or rejection of the plan may not be solicited after the commencement of the case under this title from a holder of claim or interest with respect to such solicitation, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.
11 U.S.C. § 1125(b). (Emphasis added).
“Adequate information” is defined under 11 U.S.C. Sec. 1125(a)(1) as “information of a kind, and in sufficient detail, as far is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interest of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan.”
Courts have denied approval of a disclosure statement where the allegations contained in the statement were “unsupported by factual information so that voting parties were unable to independently evaluate the merits of the plan.” In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 980 (Bankr. N. D. NY 1988) (internal citations omitted). Congress intended the disclosure statement to be the primary source of information that will allow creditors and shareholders to make informed decisions regarding the proposed plan. In re Scioto, supra., citing In re Egan, 33 B.R. 672, 675 (Bankr. N.D. Ill 1983).
Factors Considered by the Court
Bankruptcy courts exercise broad discretion when deciding whether to approve or reject a disclosure statement. In making a determination, courts often look at whether the disclosure statement contains the following types of information:
- the circumstances that gave rise to the filing of the bankruptcy petition;
- a discussion of assets available and their value;
- a summary of what the debtor anticipates to do going forward;
- where the information used in the disclosure statement came from;
- a disclaimer stating that no statements or information regarding the debtor, its assets or securities are authorized, other than those included in the disclosure statement;
- the debtor’s condition during its bankruptcy proceeding;
- claim information;
- an analysis showing what creditors would receive from the debtor were it liquidated under chapter 7;
- the accounting and valuation methods used in the disclosure statement;
- information regarding the debtor’s management going forward;
- a summary of the plan of liquidation or reorganization;
- a summary of the administrative expenses, including bankruptcy professional fees;
- a review of the debtor’s accounts receivables;
- financial information necessary to allow a creditor to decide whether to approve or reject the plan;
- information regarding the risks being taken by the creditors;
- the amount expected for recovery through avoidance actions;
- a discussion of nonbankruptcy litigation;
- tax consequences of the plan; and,
- the debtor’s relationship with any affiliates.
See In re Scioto Valley Mortgage Co. supra., 88 B.R. at 170-71.
The Producers’ Committee in SemCrude filed a Preliminary Objection to the Debtors’ Disclosure Statement claiming the Disclosure Statement failed to provide "adequate information" regarding Debtors’ assets and liabilities and the feasibility of the Debtors’ plan, among others. When a party objects to a disclosure statement, there are usually one of two outcomes: a consensual resolution is reached by the debtor and objecting party; or the Court decides the matter. If the Court has to rule on the Producers’ Objection, it will be interesting to see the level of disclosure that is required of the SemCrude Debtors in light of the facts of this case.
Jason Cornell is a commercial bankruptcy attorney with the law firm Fox Rothschild LLP in Wilmington, Delaware. If you have questions regarding this, or any other Delaware bankruptcy, you may contact Jason at (302) 427-5512 or firstname.lastname@example.org.