Keeping It Simple A Case Study

<p>Non-lawyers, especially business professionals, love to criticize lawyers. Much of the criticism is not deserved. But

there is at least one very valid criticism. The legal profession, (including the bench as well as the bar), has not

achieved for our clients the benefits of simplicity, standardization and mass production. We still individually design

and build each product, with the concomitant delay and cost that competition long ago forced most businesses to

eliminate.

</p><p>It is not because we have not tried to modernize. We have purchased very expensive technology (computers and

word processors), but we have not taken advantage of them to change the way we do business. If anything, the

capabilities of new technology have made things worse. But too often we use the new technology <i>in lieu of

thinking</i> to make documents bigger, not better. We string together massive boilerplates (whether relevant or not),

producing long, complex documents that are frequently internally contradictory. We should not use technology as a

substitute for thinking!

</p><p>Let's start by examining <i>small</i> chapter 11 cases. I submit that in a small chapter 11 case, long, complex, internally

contradictory, meaningless plans and disclosure statements can hurt your client. They cost much more than they

need to, they take much too long to prepare, they create fights that don't need to happen, and they create ambiguity

that does not need to be. Let me elaborate, and then issue a challenge.

</p><p>Sam owns 100 percent of the stock of Sam's Fried Seafood and Organic Delights Cafe Inc. There are three secured

creditors. Mortgage Finance has a lien on the land and building; Auto Finance has a security interest in the delivery

truck; Nonfat Yogurt has a purchase money security interest in the yogurt machine. There is one executory

contract—a franchise agreement with Nonfat Yogurt. Needless to say, the Internal Revenue Service is unpaid, as is

local tax authority. Unsecured creditors include five fish purveyors, a gasoline service station, Satellite Sports

Network (for the sports bar TV), and Uncle George (who made a loan to keep the place afloat when business was

slow—the first time). Nonfat Yogurt claims that Sam owes $5,000 for yogurt mix, but Sam disputes this.

</p><p>Identifying the assets is no challenge. Nor is identification of the creditors; Sam listed all of them in the bankruptcy

schedules as undisputed, non-contingent, liquidated claims (except for that Nonfat Yogurt disputed claim.) The

judge issued an order setting a deadline for filing proofs of claim and no surprise claims were filed. The financial

problems are not complex. Business was slow, Sam didn't pay taxes, the tax authorities levied, and Sam filed

chapter 11. How complicated can the disclosure statement and plan be?

</p><p>Typically, the debtor's lawyer will file a dis-closure statement that is at least 40 pages long. To accompany this

<i>opus,</i> the lawyer also files a 30-page plan. The dis-closure statement begins with five pages explaining the chapter

11 process. Do we really need a three-page explanation of cramdown? Then there is page after page of definitions.

About half of the definitions do not even apply to this case. Does Sam's Fried Seafood really need a definition of

"contingent, subordinated claims"? Do we need definitions of "subsidiary" and "affiliate"? For each secured class,

the plan typically states the amount of the note and then says that the claim will be allowed to the extent of the

value of the collateral. That restates the Bankruptcy Code, but one cannot tell how much the debtor intends to pay

to the creditor. If you know how much you intend to recognize as an allowed claim, why do you need the

boilerplate? Would you at least concede that nobody would be confused if "Bankruptcy Code" was not defined in

both the plan <i>and</i> in the disclosure statement? Included in the definitions is a complex explanation of "allowed

claims," "claims bar date" (even though the date has already passed), etc. The plan and disclosure statements are

awesome examples of "lawyerspeak." They look like really important documents, but they confuse (rather than

explain) the simple financial problems that Sam faces and the simple way that he proposes to solve the problems.

</p><p>What happened? Perhaps the debtor's lawyer told a legal assistant to duplicate and to revise a form that the firm

used in another case, two years ago. Or maybe they replicated it from a form book. (If it was good enough for A.H.

Robbins and Continental Airlines, it ought to be good enough for Sam's Fried Seafood!) Perhaps the debtor's

lawyer practices in five different courts, and each bankruptcy judge has his or her own special "requirements" for

language to be included in a plan.

</p><p>Or perhaps it was less innocent. A cynical lawyer/judge might suspect that the plan and disclosure statement are

deliberately vague. Why? Well, perhaps the debtor's counsel has no idea how to write a plan, so just strings

together lots of words. Perhaps counsel is very worried about malpractice, so includes every paragraph imaginable.

Perhaps the debtor knows that he cannot consummate a plan now (if ever) and the debtor just wants to delay the

inevitable. By filing a vague disclosure statement and offering to negotiate, counsel can drag things out for months,

if not years. And why not? In chapter 11, the debtor need not start making payments (except adequate protection

payments) until the plan is confirmed. Or perhaps counsel ascribes to the theory that he should draft all documents

as ambiguously as possible, so that <i>some</i> plan can be confirmed and then litigation will take place <i>after

confirmation</i> to decide what the plan means. By that time, the creditors in small cases will be so worn out that they

will give in rather than fight. At the far end of the cynicism scale, one might suspect that an incomprehensible

document was drafted as part of a trap to sneak a proscribed provision into a plan or confirmation order.

</p><p>Even with the best of intentions and with complete trust among all parties, vague and complex documents require

enormous effort to negotiate, clarify and document a deal. If there is any amount of mistrust and suspicion, the

unnecessarily complex documents result in extended litigation and enormous expense. Can Sam afford it? The

money wasted in a fight could be better spent for payments under the plan. Perhaps more important, unless Sam is a

really sophisticated debtor (and very few are,) Sam will not understand a vague, complex plan. Therefore, Sam

cannot participate meaningfully in plan design, and he will be unable to carry out the plan if it is confirmed.

</p><p>A chapter 11 plan for Sam's Fried Seafood could be written in five pages or less. The most important aspect is to

define the creditors and their proposed treatment. (Who are they, how much is owed to them, do their liens survive

confirmation, who is going to pay them, and what are the terms/frequency of payment?) Most lawyers need at least

seven or eight pages of complex prose just to define the "allowed claims," to define the §502 limitations on allowed

secured claims, etc. But in simple cases you <i>know</i> who the creditors are and you know how you intend to pay them.

You do not need all that complex boilerplate.

</p><p>You can do a better job on a small spreadsheet. Name each creditor on a separate row. In the first column list the

creditor's name. In the second column specify the amount of the allowed claim. In the third column describe what

lien the creditor will retain (if any). In the fourth column state "Impaired" or "Unimpaired." In the fifth column

specify the amount of the monthly payment to the creditor. How tough is that? It can be done in less than one page.

</p><p>Not only is it more compact, but it is more precise and easier to read. It is a little like the difference between an

architect's floor plan and a written description of a house. Not only is the written description much longer and more

complex, it is not nearly as effective in communicating the idea simply and precisely. Here is a challenge: write a

description (in prose) of the arrangement of the furniture in the room where you are sitting. Then draw a little sketch,

with labels. Which is easier to prepare, shorter and easier to understand? You don't have to be an artist to draw a

floor plan, and you don't have to be an accountant to use a spreadsheet effectively. (If you were a liberal arts major

and the word "spreadsheet" scares you, call it a "chart" or a "table." If you insist on being a lawyer, call it a

"demonstrative exhibit.")

</p><p>If you prepare a simple, bare-bones plan, the Bankruptcy Code does the rest of the work for you. It specifies the legal

consequences of plan confirmation. Does the plan really need to regurgitate all the nuances of "discharge,"

"revesting of property," etc.? If you try to modify the rights provided in the Code, chances are you will create a

fight, at least. If you become known for "slipping one by" whenever you can, you can be confident that the principal

consequence of your cunning is that your adversaries will watch you more carefully, fight with you much more

frequently and with more tenacity, demand more "comfort language" in your documents, and forgive your mistakes

seldom, if ever (and you <i>will</i> make them). Can your future clients afford to pay the cost of the extra baggage that you

will bring to the future fray?

</p><p>Sam's Fried Seafood also needs a disclosure statement. The bulk of that requirement might be satisfied with another

simple spreadsheet ("demonstrative exhibit"). Put each (material) asset on a separate line. In the second column list

the liquidation value; in the third list the market value; in the fourth, show any lien against the asset; in the fifth,

show the value net of liens. You don't even need spreadsheet software. Even word processing programs have

"tables" that will handle all of the math for you. Complete the disclosure statement by adding a few paragraphs that

explain the history of the business, the fact that Sam will be the future management, and the fact that if the plan is

confirmed, creditors will be bound by the plan even if they don't vote and even if they vote against it. A few other

simple statements ought to finish the work.

</p><p>Frequently, disclosure statements regurgitate all provisions of the plan, then incorporate the plan by reference, and

then state, "And if there is any difference between the plan and disclosure statement, the plan controls." I submit

that promulgating two documents with essentially similar contents has only two effects: (i) curing insomnia, and

(ii) creation of the potential for inconsistent statements.

</p><p>Could you combine the plan and disclosure statement? In a small case do you really need to repeat the same

information in a second document just so that you have two stacks of paper, one labeled "Plan" and the other

labeled "Disclosure Statement"? The object of the exercise is to inform those who will vote on the plan and to

promulgate a document that will govern post-confirmation debtor/creditor rights and responsibilities. By excess

verbiage we actually miss the objective rather than accomplish it. Too much information is confusing, not helpful. If

you don't believe that, pull 12 monthly operating reports in any chapter 11 case. Is that pile of paper and numbers

as useful as a simple, one-page income statement? Which gives you more words and numbers? Which gives you

more useful information?

</p><p>I concede that I have overstated the case to make a point. I also concede that it is easy to preach but difficult to

perform, especially when your malpractice liability is on the line. Finally, if lawyers are to achieve simplicity,

standardization and mass production to reduce costs and make small chapter 11 plans more effective, judges must

cooperate by eliminating the "special provisions" that are personal predilections.

</p><p>I would hope that when my dentist goes to a seminar she attends lectures on how to make the process quicker,

simpler, more effective and less expensive. I would hope that she avoids lectures that do nothing but worry her

about all the "pitfalls" that might occur, thereby causing her to drill deeper and fill more teeth than might be

necessary. Why can't lawyers do that? Why can't we dedicate significant effort to promulgating the simplest, most

standardized, most understandable, most efficient document to save Sam's business? As participants in the legal

process, we need to be thinking about how to make the process serve the entire public. If we don't, the market will

produce "petition preparers" who will charge less, help the clients even less, and put more lawyers out of business.

After all, Darwin was right.

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