It will come as no surprise to anyone in the bankruptcy and corporate restructuring world over the last few years that the overall number of bankruptcy filings has steadily declined since 2010. Statistics maintained by the Administrative Office of the U.S. Courts[1] demonstrate that the total number of bankruptcy petitions that have been filed has decreased from approximately 1.6 million in 2010 to fewer than 940,000 in 2014. The number of chapter 11 business petitions alone have plummeted from almost 12,000 filings in 2010 to slightly more than 6,000 filings in 2014 (see the attached chart).[2] This decrease has lead to significantly greater competition among financial advisors and investment bankers for restructuring engagements, both on the debtor and creditors’ committee sides.
In addition to the more commonly known debtor and creditor advisory service lines, a chapter 7 trustee advisory service line is another avenue that can round out a corporate restructuring practice. It draws on a range of skills that often overlap with those lines, as well as those skills of forensic and litigation support professionals. Just as there are significant differences between debtor and creditor focused practices, there are a number of issues specific to chapter 7 cases that require unique skills to effectively meet the needs of a chapter 7 trustee. Chapter 7 cases can often turn into some of the most unusual, complex and longest-lasting engagements that a financial advisor may undertake. These engagements can be intellectually challenging, and at times exceedingly frustrating and heartbreaking. They can also be some of the most rewarding cases that a financial advisor can undertake.
For those of you who are only generally familiar with chapter 7, chapter 7 trustees (also known as panel trustees, collectively “trustees”) are generally attorneys or accountants who are randomly appointed by the U.S. Trustee from a list of approved panel trustees and charged with maximizing a debtor’s nonexempt assets for the benefit of the unsecured creditors.[3] Trustees are authorized to retain professionals to assist with the administration of the debtor’s estate and typically include legal counsel, financial advisors, auctioneers and other specialized service providers as necessary.[4] The incredible variety of tasks that a financial advisor can be asked to perform for a trustee makes it difficult to simply have a checklist of “best practices,” but there are a number of ways in which a financial advisor can maximize the value that they are providing to a trustee.
The trustee’s mandate, as dictated by the Bankruptcy Code, requires the trustee to take almost immediate action upon appointment. It is during the first few days (if not hours) after the appointment that the trustee and any retained professionals need to assume control of the estate and safeguard any assets that can later be liquidated for the benefit of the unsecured creditors. For a financial advisor, a chapter 7 engagement often starts with the proverbial “blindside” phone call. The financial advisor will need to quickly respond to the trustee’s needs in a rapidly changing environment and anticipate the “next issue.” Once the debtor’s place of business and assets have been secured, the next critical task is to determine whether it appears that sufficient assets exist to make the case administratively solvent. More simply put, the financial advisor will need to access the likelihood that that the trustee will be able to cover court costs, professional fees, etc., and still allow for a distribution to creditors, however small that might be.
In some cases, there may appear to be a number of immediately available assets (cash, inventory, accounts receivable, investments, etc.) to fund the bankruptcy estate. In other cases, however, the trustee and estate professionals will need to work together to uncover assets that might not be readily apparent. These recoveries often include those derived from actions brought by the trustee pursuant to chapter 5[5] and under applicable state law. These actions, including (but not limited to) preferences, fraudulent transfers and claims made against directors and officers’ insurance policies, can yield meaningful returns to an estate, yet carry a significant degree of risk. Litigation, as any industry veteran knows, is no certain thing and the ramp up to pursue these claims is often a labor-intensive and expensive process.
In bankruptcy, no two cases are identical. Nowhere is that more apparent than in the unpredictability and myriad of issues that can arise from even a seemingly straightforward chapter 7 engagement. These cases require a financial advisor to constantly juggle a multitude of diverse roles, including those of crisis manager, restructuring advisor, fraud examiner, expert witness and tax accountant, just to name a few. A financial advisor must remain flexible enough to act as the trustee’s problem-solver. It is vitally important to keep an open mind and constantly be willing to ask questions such as “What else is there?” or, as anyone with a toddler will recognize, “…but why?” Even the most junior staff on an engagement can find the thread that becomes a major component of litigation down the road. In particular, a task as simple as cataloging a debtor’s insurance policies so that they can be reviewed for recoverable premiums may yield evidence of an undisclosed automobile driven by an officer’s family member or, as it happened in one case, a corporate jet that was used for executive joy rides and vacations.
When providing advisory services to trustees, the tasks that one will need to juggle vary, including reconstructing financial records, processing employee payroll, administering claims distributions, investigating complex multi-million dollar fraud/Ponzi schemes, preparing tax returns, terminating a debtor’s remaining employees, breaking down the offices of bicoastal law firm, and even serving as a computer network administrator — all in addition to the “normal” restructuring and administrative tasks associated with bankruptcy engagements. These challenges often come with incomplete or misleading financial records, fielding unexpected phone calls from fraud victims who have lost their life’s savings, chasing assets that have funded distributions to creditors in cases that initially appeared to have no assets, and hopefully helping to ease the burden on those trustees with whom advisory professionals are working.
Any financial advisor taking on a new chapter 7 engagement will be faced with a number of challenges. The challenges can be as straightforward as a debtor failing to file tax returns in the years leading toward the bankruptcy filing or as complicated as allegations of improperly accounting for swaps of commodities futures. Financial advisors, like the trustees they advise, often do not get to pick an industry of focus. Your first case may be working to liquidate a software developer but the next could a long-term care facility, only to be followed by a private-equity fund. It is precisely this unknown and unexpected environment that hones a diverse range of operational, investigative and analytical skills. These skills gained on chapter 7 engagements can only help to bring more robust insights to the traditional insolvency and restructuring engagements. Oh, tracking down and working to recover hidden assets that allow for distributions to fraud victims feels pretty good, too!
[1] See Administrative Office of the U.S. Courts, Filings, available at www.uscourts.gov/Statistics/BankruptcyStatistics.aspx (last visited Feb. 6, 2015).
[2] Id.
[3] http://www.nabt.com/faq.cfm
[4] While financial advisors can be retained in chapter 7 cases filed by individuals, the bulk of engagements will be for trustees overseeing a business filing.