Section 341 of the Bankruptcy Code requires the United States Trustee to “convene and preside at a meeting of creditors.” Section 341(a) of the Code requires the trustee to convene what is commonly referred to as a “341 meeting” or “meeting of creditors” within a “reasonable time” after a debtor files for bankruptcy. Bankruptcy Rule 2003(a) requires the Trustee to call a meeting of creditors “no fewer than 20 and no more than 40 days” after the commencement of a bankruptcy proceeding.
The meeting of creditors is a unique part of bankruptcy proceedings. Clients and co-counsel often want to know what information is made available, and what procedures are followed, during a typical meeting of creditors. This post will take a look at the recent meeting of creditors in the Magna Entertainment bankruptcy. By doing so, the goal is to provide creditors and their counsel with an idea of what to expect in future meetings of creditors.
Commencement of the Meeting
The U.S. Trustee presiding over Delaware bankruptcies generally holds meeting of creditors in a meeting room on the second floor of the J. Caleb Boggs Federal Building. Notices of the meeting of creditors are prepared by the Trustee and filed with the Court. A copy of the notice in the Magna Entertainment bankruptcy is attached here.
In the Magna Entertainment 341 meeting of creditors, the Trustee commenced the meeting by identifying himself and the representatives of the Debtor. Magna had three representatives participating in the meeting – its bankruptcy counsel, the CFO and its general counsel. Before the CFO and counsel spoke at the meeting, they were sworn-in by the Trustee. As required under Rule 2003(c), the Trustee recorded the “examination under oath … using electronic sound recording equipment …”
The Trustee’s Questions for the Debtor
The U.S. Trustee began his questioning of the Debtor’s representative by confirming who prepared and signed Magna’s schedules and statement of financial affairs. Magna’s CFO stated that he reviewed the various statements and schedules, however, the documents were prepared with the assistance of Alix Partners, one of Debtor’s advisers.
The Trustee’s questions in the Magna meeting of creditors were similar to other meetings. Many of his questions focused on the structure of Magna and its various debtor-entities. For example, the Trustee asked Magna’s representatives to explain the relationship of Magna as parent to various Debtor subsidiaries. Some of the Trustee’s questions focused on the extent of the parent company’s operations, revenue and payroll.
The Trustee’s questions also addressed Magna’s secured debt and tax liability. Here, the Trustee asked the Debtor to explain claims of insiders and whether Magna was current on its taxes. The Trustee also asked Magna’s professionals to state whether Magna had learned of any inaccuracies in its schedules and financial statements after they filed the documents with the Court.
Other questions asked by the Trustee included:
- How were employee bonuses determined and paid by Magna;
- What certain account receivables consisted of;
- Magna’s collective bargaining agreements and other executory contracts;
- Insiders for each of Magna’s debtor-entities;
- Magna’s management structure;
- Why some debtor-entities had little or no assets;
- Whether Magna experienced any changes in revenue since filing for bankruptcy;
- Whether insurance remained active;
- Whether Magna continues to pay employee wages and benefits;
- Why Magna filed for bankruptcy; and,
- Magna’s long term plan while in bankruptcy and after it emerges from bankruptcy.
Magna’s meeting of creditors ended with counsel for two creditors asking Magna’s professionals questions that were specific to their particular clients. One creditor asked whether Magna had made a decision to assume or reject particular contracts. Another creditor, a municipality, asked Magna questions regarding specific leases and related contracts relative to property located within the municipality.
By most standards, Magna’s meeting of creditors was uneventful. The meeting lasted approximately two hours, the majority of which consisted of the Trustee asking questions about Magna’s businesses. The meeting provides a good idea of some of the questions a debtor might encounter during a meeting of creditors. Equally important, the Magna meeting of creditors provides creditors with an idea of what to expect in future meetings in other bankruptcies.