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Disclosure Statement Tips

On the topic of disclosure statements, Judge Davis would direct parties’ attention to a March 2014 email circulated by Lisa Fancher, then Chair of the Bankruptcy Law Section of the Austin Bar Association, which said:
As some of you know, Judge Davis has been focusing on disclosure statements lately and has offered some suggestions in court for improving them. This summary is being provided to you in order to communicate his suggestions to all Austin bankruptcy lawyers.
Judge Davis says that the disclosure statements that he sees are generally fairly good and cover the required Metrocraft elements. He also says that Austin lawyers are doing a reasonably good job of managing Chapter 11 cases. However, he believes that with relatively minor retooling to disclosure statement forms, they could be improved and made more useful to creditors and equity holders. While his suggestions are particularly important in connection with individual and small Chapter 11 cases in which there is no creditors’ committee, all Chapter 11 disclosure statements would benefit from including them.
His suggestions are as follows:

  1. Add a thumbnail summary in the introductory section of the disclosure statement describing what the plan provides and how it will affect impaired creditors, unsecured creditors and equity holders: what, if anything, does the plan propose to distribute, and what are the risks that this proposed treatment will not occur.

  2. Make the disclosure statement adequate at the time that it is initially filed if at all possible.

  3. If it is necessary to amend the disclosure statement prior to the hearing, please  do so as far in advance of the hearing as possible,  and email his law clerk ( a redline showing the changes made.

  4. Provide better financial disclosure. This is the area of the greatest concern.

A. Don’t attach all of the monthly operating reports; they create bulk   without offering enough information. If you believe the financial information in the MORs is the most appropriate information, then provide a chart showing the numbers on a monthly basis.
B. In general, before attaching any voluminous document, consider whether the information contained in the document could be summarized.  Even with disclosures, less could be more.
C. Include estimates of outstanding professional fees and projected future fees. Please note that Judge Davis will compare subsequent fee applications with the disclosure statement and may consider disallowing fees if they were foreseeable at the time of the foreclosure statement and were not sufficiently disclosed.
D. Tailor the financial disclosures to the needs of those impaired creditors and equity holders who have not already agreed to their treatment and will be voting on the plan. If it is a liquidating plan, that could be very simple.
E. If it will be an operating plan, provide historical information regarding operations or explain why operations will be different in the future.       
F. In business cases, provide appropriately detailed income, balance sheet, and statement of changes in financial condition projections.   Also, include where appropriate a cash flow budget showing cash on hand as of (or near) the time of the disclosure statement hearing, and anticipated cash on the effective date.
G. In individual cases that resemble Chapter 13 cases, provide statements of anticipated income and expenses similar in detail to Schedules I and J, but (in most cases) on a monthly basis for the life of the plan.

5. Include a request to vote for the plan and the reasons that the plan is preferable to the alternatives, but be modest in the sales pitch and craft appropriate disclaimers; think like a securities lawyer.

6. Tailor the boilerplate (including the Metrocraft factors) to fit the facts of the case.

7. A table of contents would be very helpful for both the disclosure and the plan, particularly if the document is 25 pages or more.

8. With respect to preserving causes of action, please refer to Judge Davis’s recent findings of fact and conclusions of law in Ciesla v. Harney Management Partners, Adv. Pro. No. 13-01013, Doc. No. 40), which is posted on the Court’s website at:   13-01013 Michael Ciesla Trustee of the KLN Liquidating Trust v. Harney Management Partners.
[Ed. Note: Ciesla is also instructive regarding Judge Davis’s views on preference defenses... and pleading requirements. And while you’re on the website, please take a look at the judges’ links and their procedure.]