Cybernotice The Next Frontier in Court Efficiency

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Jul/Aug 2004

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Recently, two different Midwest bankruptcy judges entered two different orders that, at the time, had never before
been entered by any judge, in any court, in any state. One received national attention and was reported by every
major news service in the country. The second failed to generate even a murmur. Every professional publication
(except, now, this one) ignored it. Nevertheless, the second order may create an enormous impact on bankruptcy
notice procedure and potentially may save hundreds of thousands, and perhaps millions, of dollars for chapter 11
debtors throughout the country.

The first order was entered in the U.S. Bankruptcy Court for the Northern District of Illinois by Judge Susan
Pierson Sonderby in Kmart. Judge Sonderby entered an order authorizing debtor-in-possession (DIP) financing in
excess of $2 billion. At the time it was the largest DIP order ever entered, although certain to be soon eclipsed in
the next mega case.

Two billion dollars is a lot of money. To put things in perspective—$10 million is 1/2 of one percent of two
billion dollars. That is like $5,000 of a $1 million DIP order. You can't even fund a retainer with those percentages!

The financing order is voluminous. It has multiple exhibits and was undoubtedly the product of many hours of hard
work and lengthy negotiations. I am sure that many able attorneys very carefully reviewed every word of every draft
of this order and each one of its related exhibits. The ultimate entry of the order was certainly a professionally
rewarding experience for all that participated. It was an exciting project that was properly reported in every major
news service. It was a significant event affecting the economy of many cities throughout the country where more
than 3,000 Kmart stores are located and hundreds of thousands of people (many millions if you consider the
"domino effect") are employed. It is no wonder that this order received marquis status.

The second order did not approve the spending of a penny, but could have a much greater ultimate impact. This
order was entered in the U.S. Bankruptcy Court for the Eastern District of Michigan by Judge Walter Shapero in
Polar Maintenance Inc. et. al. It was entitled Order Approving Disclosure Statement and Ballot and Procedures for
Service of Plan of Reorganization and Disclosure Statement and for Filing Objections to Confirmation of Plan.
Doesn't sound like much yet, does it? Yet this order provided a unique mechanism for serving the plan and
disclosure statement on many thousands of creditors with substantial savings to the chapter 11 DIP.

The order provided:

<blockquote>
All other parties who have either been scheduled [by the debtor] as creditors or have filed a proof of claim shall
receive by mail...[a] notice that the plan and disclosure statement are available on the company's web site. The
notice shall also provide that any party who sends a written request to the balloting agent for a copy of the plan and
disclosure statement shall receive a complete copy by mail (the notice shall also contain a telephone number to
contact the balloting agent with any inquiries)...
</blockquote>

The concept of avoiding the printing and envelope-stuffing and corresponding postage costs by providing
cybernotice originated in our office. It was supported by the Office of the U.S. Trustee, the creditors' committee, the
taxing authorities (who may be owed more than $100 million plus interest and penalties) and all other
parties-in-interest.

We filed a simple motion requesting the court to conduct a status conference at the conclusion of the hearing to
consider approval of the disclosure statement and to discuss the concept and implementation of a chapter 11
cybernotice. In our motion, we suggested posting the documents on the debtor's web site and limiting the mailing
of the 300-page disclosure statement, plan and exhibits to those requesting it. The procedure was enthusiastically
adopted and energetically executed. Neither objections nor complaints were heard.

<h4>Other Uses</h4>

Cybernotice does not need to be limited to bankruptcy-mandated disclosure statements. We are all aware of the
voluminous legal announcements routinely placed at great expense in many national publications relative to class
action lawsuits, liquidation sales, plan confirmations and other legal matters. All of these advertisements could
have been replaced inexpensively with a simple notice (perhaps an e-mail transmission) directing affected
individuals to visit a web site. The distribution of reams of materials could be accomplished effortlessly via a web
site.

The use of cybernotice as a cost-saving tool is limitless. Creditors, claimants and affected parties can provide an
e-mail address on the proof of claim. Noticing of pertinent information becomes simply a computer key stroke once
your noticing program or other software is installed (and there are numerous ways to accomplish this).

Moreover, noticing via a web site allows substantial flexibility. Interactive questions and answers will allow both
the inquisitor and the claimant to better understand their respective rights and expectations. Creditors could access a
database, view how the debtor has scheduled their claim, send an e-mail and explain why, and if they disagree, view
the plan, determine what they will receive and by when, view the disclosure statement and vote. The permutations
are exponential and are limited only by the imagination of the bankruptcy bar.

<h4>Due-process Concerns</h4>

Judge Shapero entered the cybernotice order after careful review. Its terms were discussed at length for their practical
implementation. The law that supported the application of cybernotice was never challenged. I would like to think
that the law that supports this program or a kind of program similar to this one is unassailable. I am not that naïve.
Challenges to well-founded law and accepted legal principles are the stuff that transforms an expected run-of-the-mill
appellate decision into a classic. Nevertheless, I do believe that the law supports the distribution of a plan and
disclosure statement by simply referring a party-in-interest to a particular web site, and here is why.

The Bankruptcy Code provides that the solicitation of a vote to accept or reject a plan must be accompanied with an
approved disclosure statement.<a href="#2" name="2a">2</a> Section 1125 requires that a disclosure statement contain adequate information.
There is a plethora of case law establishing what constitutes adequate information.

In our district (E.D. Mich.) there are two published opinions that detail the requirements of drafting a disclosure
statement. In Malek,<a href="#3" name="3a">3</a> Judge Graves provided a specific table of contents setting forth the minimum requirements for
a disclosure statement. In Tax Shop,<a href="#4" name="4a">4</a> Chief Judge Rhodes discussed the implementation of the preliminary
approval of a disclosure statement<a href="#5" name="5a">5</a> and provided, in addition to an outline, specific language to be included within
the disclosure statement. The process of preparing a disclosure statement was made much easier by these published
opinions. The process of providing notice to creditors, however, has yet to be discussed.

Nowhere does the Code say that these documents have to be mailed to parties-in-interest. The actual word in the
Code is "transmitted."<a href="#6" name="6a">6</a> Moreover, the transmittal of a disclosure statement is not necessarily required in all cases.
In fact, the Sixth Circuit has suggested that when a party-in-interest "is sufficiently knowledgeable about the debtor"
or if the debtor is not soliciting an acceptance, one does not even need a disclosure statement.<a href="#7" name="7a">7</a> However, when
soliciting a vote, the word "transmit" has been interpreted by the rules to mean mail. Rule 3017(a) says that "the
plan and the disclosure statement shall be mailed with the notice of the hearing only to the debtor, any trustee or
committee appointed under the Code..." (emphasis added).

Because this is a Rule and not the Code, I suggest (tongue in cheek) that the "plain language of the Code"
interpretation that has been directed by the Supreme Court<a href="#8" name="8a">8</a> does not apply.

The word "mailing" does not mean what the word "mailing" says. Rather, "mailing" means "notification." After all,
the Rules are procedural in nature and have been promulgated to implement the Code, and judges have leeway to
interpret the Rules.<a href="#9" name="9a">9</a> If the Code uses the word "transmission," and if this transmission in the modern era includes
cybernotice, does the use of the word "mailing" by the Rules abridge that right? Who knows? Rule 9036 is not a
panecea because it is only operative when a party makes a written request to be notified by electronic transmission.
Rather, Rule 9036 sets forth that upon receipt of a written request, the court may direct that an electronic
transmission be sent in lieu of mailing. In today's modern era, with the proliferation of electronic communication,
shouldn't the presumption be that an e-mail will suffice?

We all know that as a practical matter, "noticing" or "transmission" was never meant to mean anything more than
providing information. In fact, you can argue that the Rule does not require the mailing of the disclosure statement
because the Rules themselves arm the court with flexibility by stating that "except to the extent that the court orders
otherwise."<a href="#10" name="10a">10</a> Moreover, "summaries or any other information as the court may direct" may also be approved.<a href="#11" name="11a">11</a>

Does a reference to a location in cyberspace qualify as a summary?

"Notice" means being informed. Being informed involves nothing more than insisting that the party upon whom
there is a burden to provide notice comply with the fundamental, well-known and well-developed concept of "due
process."

Due process is met if notice is reasonably calculated to reach all interested parties, reasonably conveys all of the
required information and permits a reasonable amount of time for response.<a href="#12" name="12a">12</a> What constitutes "reasonable notice"
will vary according to the knowledge of the parties.<a href="#13" name="13a">13</a> It is not yet clear whether a simple reference to a location in
cyberspace will satisfy the "due process" requirements, but you can certainly imagine it being sufficient.

Ultimately, some disgruntled creditor will rise to challenge cyberspace noticing. This may cause title companies, for
example, all sorts of headaches. Lack of notice may provide an opportunity for a creditor to set aside all kinds of
orders, including real property transfers.

Debtors or plan proponents need predictability and certainty. They need to know whether they have complied with
the requirements of the Code. A recalcitrant creditor unhappy with a substantive result should not be able to waive a
"procedural red herring" by resorting to the technical, albeit plain, language of the Code and Rules. Practitioners
must know whether notice in cyberspace—a far more streamlined process—will succeed.

In our case, the debtor saved multiple thousands of dollars by using cybernotice as opposed to publishing and
mailing a disclosure statement and plan to the 42,000 creditors who filed claims. If the proof-of-claim form required
a creditor to provide an e-mail address, we would save an enormous amount of time, money and expense settling
claims in cyberspace without burdening the courts.

<h4>Conclusion</h4>

The possibilities and benefits are endless. The prudent expansion of the practice of cybernotice is worth exploration
by both the courts and by those who propose new rule changes.

<hr>

<h3>Footnotes</h3>

<a name="1">1</a> Board Certified in Business Bankruptcy Law by the American Board of Certification. <a href="#1a">Return to article</a>

<a name="2">2</a> 11 U.S.C. §1125(b). <a href="#2a">Return to article</a>

<a name="3">3</a> In re Malek, 35 B.R. 443 (Bankr. E.D. Mich. 1983). <a href="#3a">Return to article</a>

<a name="4">4</a> In re Tax Shop Inc., 173 B.R. 605 (Bankr. E.D. Mich. 1994). <a href="#4a">Return to article</a>

<a name="5">5</a> See Rule 3017.1. <a href="#5a">Return to article</a>

<a name="6">6</a> 11 U.S.C. §1125(b). <a href="#6a">Return to article</a>

<a name="7">7</a> Mid-Towne Associates v. U.S. Dept. of Housing and Urban Development (In re Mid-Towne Associates), 36 F.3d 1097 (C.A. 6 (Ohio) 1994). <a href="#7a">Return to article</a>

<a name="8">8</a> If you need a citation for this concept as it applies to bankruptcy, I suggest you change your field of practice. <a href="#8a">Return to article</a>

<a name="9">9</a> Those having a hard time with this argument should consider the expansive reading of §105, or the argument that 28 U.S.C. §2075 expressly says that no rule may abridge any
substantive right. <a href="#9a">Return to article</a>

<a name="10">10</a> Bank. Rule P. 3017(d). <a href="#10a">Return to article</a>

<a name="11">11</a> Rule 3017(d). <a href="#11a">Return to article</a>

<a name="12">12</a> In re Talon Automotive Group Inc., 284 B.R. 622 (Bankr. E.D. Mich 2002), citing Mulane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950). <a href="#12a">Return to article</a>

<a name="13">13</a> Id. <a href="#13a">Return to article</a>

Journal Authors

Michael E. Baum

Journal Date

Thursday, July 1, 2004 - 12:00

Bankruptcy Rule

2004