The Examiners: Beware Over-Disclosure in Claims Trading

Overall, does claims trading help or hinder the chapter 11 process? Should additional disclosures be required?  

Before a cash-stricken business can emerge from bankruptcy with a clean slate, the court must sort through a wide range of potential claims, both secured and unsecured, prioritizing each along the way. The review of claims can be a highly technical and painstaking process for the business as well as for its creditors.

This is particularly true for creditors with debt. For these unfortunate creditors, the amount ultimately recouped, if any, is often just a fraction of the original amount advanced. Considering the substantial time investment and related litigation expenses, creditors are increasingly looking at ways to cap their losses. At its core, bankruptcy claims trading isn’t about gains, it is about risk—mitigating risk for creditors and the assumption of risk for claims purchasers.

Claims trading allows an otherwise illiquid position to be monetized, and that is an entirely appropriate, free-market solution. To advocate otherwise is to take the position that creditors shouldn’t be able to cut their losses. Forcing creditors into such a fiscally precarious situation would have unavoidable consequences on businesses’ access to credit and would actually run counter to the policy goal of incentivizing business and job growth.

When considering the issue of disclosing the terms of a claims transaction, it is important to remember that the transference of rights associated with the claim does not impact the underlying claim or the merits of the case, in any way.

Each day, U.S. bankruptcy-court judges face the challenge of keeping pending cases on track while fairly balancing the interests of the parties before them. Generally, the courts have a good eye for homing in on relevant issues and dispensing quickly with interesting, but nonetheless irrelevant disclosure requests that may satisfy curiosity but have no bearing on dispensing with the merits of the case. The value of any claim is absolute and should in no way be influenced by the price paid by any party to take on the related risk.

As I previously observed, the courts have rightfully rejected insider pay disclosure requests when not relevant to the case at hand. Similarly, the courts are right to have rejected calls for greater disclosure of claims-trading terms that are not relevant to the underlying action.

Time is perhaps the greatest enemy faced by a business in chapter 11. The longer a management team spends looking back and not forward, the chances for survival diminish. As such, achieving the public-policy goals that the bankruptcy process sets out to accomplish requires an orderly proceeding that ignores distractions irrelevant to settling the claims at hand. Interesting doesn’t equate to relevancy, and we must take great care before imposing additional disclosure requirements on the parties to a proceeding.

Marc Leder, co-chief executive officer of Sun Capital Partners Inc. of Boca Raton, Fla., has been engaged in leveraged buyouts, investment banking, and business operations for more than 25 years.