Commentary: Issues with bankruptcy and disclosure statements

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).

In non-bankruptcy proceedings, the expense and difficulty of providing notice to thousands of putative class members in a class action suit is akin to the notice to thousands of creditors required in a bankruptcy case.

Non-bankruptcy courts have approved the posting of required class notices on websites in conjunction with other forms of publication as an adequate way to disseminate notices and to protect the rights of those in the class.

Similarly, a bankruptcy court could find that notifying creditors by mail of important dates concerning the plan, in conjunction with posting the Plan and disclosure statement on a website as was done in Rocor, sufficiently protects creditors' rights to adequate notice required by the Fifth Amendment.

Allowing debtors to notify creditors that critical documents are accessible on the Internet meets the requirements of procedural due process - or else the electronic case filing (ECF) system being implemented this year in bankruptcy courts across the county is fundamentally flawed, because it is wholly based on the sufficiency of notice by email.

Due process is satisfied by notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.

Known creditors must receive actual notice and unknown creditors must receive constructive notice (often in the form of publication)8 in bankruptcy proceedings.

Mailing a written notice to known creditors that directs them to key bankruptcy documents that are electronically available online should meet fundamental requirements for providing constitutionally adequate notice.

Publishing the notice regarding the availability of the plan and the disclosure statement in a local and national newspaper effectively provided unknown creditors constructive notice, and the opportunity to almost instantaneously access the plan and disclosure statement on their home computers due to the publishing of the website address.

The constitutional limits of due process might be the only restriction on a bankruptcy judge's general ability to specify the form and manner of notice, unless otherwise specified in the Rules. Fed. R. Bankr. P. 9007.

In regulating the transmission of the plan and disclosure statement to creditors and other parties in interest, however, the Rule 3017 does specify that they must be mailed.

Nevertheless, the D.C. Circuit in Utility Solid Waste Activities Group v. EPA, 236 F.3d 749 (D.C. Cir. 2001) stuck with the tried and true notice procedures that require citizens to poke through the nether regions of local libraries in search of the Federal Register. This court has never found that Internet notice is an acceptable substitute for publication in the Federal Register, and we refuse to do so now. Id. at 754. USWAG should be narrowly read as prohibiting Internet notice when a statute mandates publication of the notice in the paper version of Federal Register.

The Federal Register from 1994 to present is online at www.gpoaccess.gov/fr/index.html, which means publication in the Federal Register also means publication on the Internet, effectively making a bound paper copy of the Federal Register a quaint legal formality in this age of electronic data.

Given the widespread accessibility to and use of the Internet and the prospect of saving significant sums for creditors, more and more bankruptcy courts will likely allow Internet posting of Chapter 11 plans and disclosure statements in lieu of mailing paper versions, especially in large cases with significant numbers of creditors and significant potential savings. In a hypertechnical sense, however, the legal issues remain open, and the practice remains open to challenge.

Daniel D. Doyle practices with Spencer Fane Britt and Browne LLP and is a Partner and member of the firm's Bankruptcy and Financial Restructuring Group, as well as the Litigation Group. He practices throughout the state of Missouri and nationally.

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