Commentary: Issues with bankruptcy and disclosure statements

Daily Record and the Kansas City Daily News-Press, Apr 23, 2004 by Daniel D. Doyle

Somebody once said that laws never seem to catch up with current technology.

The Bankruptcy Code is no exception, particularly as more and more debtors in possession are posting Chapter 11 plans, disclosure statements, ballots, and related schedules on websites to save the estates the sometimes staggering costs of postage and copying in large cases. But do the Code and Rules allow it?

Our first experience was in In re Rocor International Inc., Case No. 02-17658 (Bankr. W.D. Okla.).

The debtor, which was the largest motor carrier in Oklahoma, had approximately 18,000 notice parties, including long-haul drivers who spent more time on the road than at their home addresses.

To conserve cash, Rocor obtained an order from the Court on January 15, 2003, allowing the debtor to save expenses by posting the approved disclosure statement, the plan, and related documents on the Internet (at www.spencerfane.com/public).

The order also required the debtor to mail a notice of pertinent dates and balloting, which included the website address from which the creditors could access and download an electronic copy of the plan, publish notices of the Plan and its website availability in The Daily Oklahoman and The Wall Street Journal, and include a postal address at which creditors could obtain hard copies of the documents.

The order approved this electronic procedure as providing adequate notice and opportunity to be heard pursuant to 11 U.S.C. Section 102 and Fed. R. Bankr. P. 9008.

Avoiding copying, stamping, and mailing about 18,000 copies of our purposefully brief plan and disclosure statement saved the estate more than $50,000. Attorneys involved in other cases later asked for copies of the motion and order for use with service of their plans and disclosure statements.

We might all agree that electronic dissemination of chapter 11 plans and related materials is significantly cheaper, faster, and more accessible than using the U.S. Mail, and that it is in the best interests of nearly all estate and their creditors - and we could also all disagree about whether the Code permits it.

Fed. R. Bankr. P. 3017(d) would seem to exclude electronic mailing, which was not readily available when the Rule was initially adapted from the former rule governing Chapter X plans under the Bankruptcy Act:

Upon approval of a disclosure statement . . . the debtor in possession, trustee, proponent of the plan, or clerk as the court orders shall mail to all creditors and equity security holders, and in chapter 11 reorganization case shall transmit to the United States trustee,

1. the plan or a court-approved summary of the plan;

2. the disclosure statement approved by the court;

3. the notice of the time within which acceptance and rejections of the plan may be filed; and

(4) any other information as the court may direct, including any court opinion approving the disclosure statement or a court-approved summary of the opinion. (emphasis added).

The Code itself is not clear on this point. An acceptance or rejection of a plan may not be solicited unless, at the time of or before the solicitation, the plan or a summary of the plan and a written disclosure statement is transmitted to holders of claims and interests. 11 U.S.C. Section 1125(b).

The Code is silent as to whether there is an exclusive medium of transmission, such as mailing hard copies, or whether the appropriate selection of media is at the discretion of the court.

Section 1125 takes priority over judicially promulgated Rule 3017,1 so that, whatever the meaning of the word transmitted, it would supercede the requirement to mail found in Rule 3017(d) if they conflict. See 28 U.S.C. Section 2075 and In re Jeppson. In Jeppson, the court ruled that congress intended for the Bankruptcy Code to contain very little of a procedural nature, unlike the former Act, preferring that matters of procedure be dealt with by the Bankruptcy Rules or fashioned by the courts on a case-by-case basis.

The court reasoned 28 U.S.C. Section 2075 also made clear that '[s]uch rules shall not abridge, enlarge or modify any substantive right.'

At the time of this writing, there was no discernable substantive right to provide notice or electronic documents over the Internet in any court case, so that the Bankruptcy Rule by default should dictate the method of transmission of plans and disclosure statements.

An attempt to harmonize Rule 3017 and section 1125 could easily lead to the conclusion that the plan (either in toto or a summary) and disclosure statement must be mailed in the traditional manner. Transmitted and mailed could be viewed as synonymous to avoid a conflict between the Rules and the Code. Note also that Rule 3017(d) is subtitled Transmission and Notice. . . implying that transmission and mailing are one and the same. (Emphasis added.) Other Rules also facially require notice by U.S. mail. See Fed. R. Bankr. P. 2002(f) (shall give . . . notice by mail); 2002(h) (court may direct that all notices required by subdivision (a) of this rule be mailed only to [specified parties]); 9001(8) ('Mail' means first class, postage prepaid).