Navigating bankruptcy courts

By Bernie Kohn

In the pecking order of public records, there may be none – short of a juicy divorce file – that more completely unlock the secrets of the palace guard than bankruptcy filings.

Few things say more about a person or group of people than how they borrow, invest and spend their money. And if anyone involved in a bankruptcy case believes someone is keeping secrets, they’re often happy to work with you to get them revealed.

The unlocking of secrets begins with the filing itself, sketchy as it may be. The initial filings are accompanied by schedules that not only detail what major creditors are owed, but often list the names and addresses of every known creditor. That list sometimes will contain a roster of employees (though it won’t be labeled as such.) Consider this one of the richest source lists you’ll ever find in one place.

These early filings can fill out profiles of individuals who can be otherwise inscrutable. The Baltimore Sun, for example, used a local real-estate kingpin’s bankruptcy filing to show that while he claimed to be a poor bail bondsman with no assets, he’d created trusts that collected hundreds of thousands of dollars a year in real estate income and spent it on shopping sprees, foreign vacations, and marble flooring and a custom sound system for his high-rise vacation condo in Florida.

As a case goes on, companies must file monthly financial results with the court. These don’t necessarily follow the same format as required by the SEC but they’re good windows into how the company’s operations are performing. They can provide insight as to whether the company will be able to successfully reorganize.

Lawyers, accountants and other professionals must seek permission to be paid. The fees in major cases are often quite large and almost certainly newsworthy. They provide ample evidence of why it’s often said that it’s expensive to go bankrupt.

When going through dockets, be sure to review the separate listing of adversary proceedings. Adversary proceedings are the bankruptcy court equivalent of civil lawsuits. Often they’re filed by creditors against a debtor, but sometimes, a U.S. trustee – a lawyer appointed by the court to keep watch over what’s left of a person’s or business’s assets and affairs – will file one. Trustees often use adversary proceedings to accuse management or a person of fraud or mismanagement.

Businesses normally get 120 days to come up with a plan to reorganize. Sometimes that can be extended by the court. But that can go the other way if allegations of fraud or mismanagement surface, or if a potential buyer for the business quickly surfaces. Creditors can ask a judge to break exclusivity – that is, to let them file their own plans – or a trustee can seek permission to take control of management and make his or her own plan.

When a reorganization plan is proposed to the court, it’s accompanied by what’s called a disclosure statement. This is often more revealing than the plan itself. It makes the case for why creditors should have faith in what the reorganization plan proposes. Sometimes, of course, it can have the opposite effect.

Apart from the paper, bankruptcy courts tend to not operate as formally or rigidly as other federal courts and to not get much attention. All of those things work in your favor.

You can get to know the court clerks and trustees. Trustees will frequently talk on the record. And unlike civil and criminal judges, some bankruptcy judges may be willing to talk with you on background about factual aspects of an ongoing case if they see you often in their courtrooms.

Lawyers for the creditors’ committee can be your best sources for both quotes and background. They want their money back and are smart enough to know that reporters can help them make their cases for getting maximum return. They’re also good as sounding boards when you’re not sure how significant a particular filing might be.

Trustees have extraordinarily difficult jobs. They are expected not just to oversee administration of complex cases, but also are expected to exercise police powers within the bankruptcy system with little in the way of resources. That can make a diligent reporter the best friend they have.

Thanks to electronic access to court filings through Pacer, the secrets are more open than have ever been. Once you register, you can check filings made in any district, appellate or bankruptcy court for free, and get names and phone numbers of every lawyer with prominent positions in a case. And filings can be downloaded for a very reasonable per-page fee (currently 8 cents).

Happy digging.

Bernie Kohn is a former investigations editor at The Baltimore Sun and past president of the Society of American Business Editors and Writers.