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ENRON:
YOU CAN'T TELL THE PLAYERS WITHOUT A SCORECARD

Dean Nancy B. Rapoport
University of Houston Law Center
JURIST Guest Columnist

Down here in Houston, Enron痴 stock collapse has been front-page news for months. Bankruptcy law is center-stage now, and the public is getting a first-hand view of its quirks and intricacies. I致e found myself talking about the automatic stay, the duties of the creditors committee, and venue-and I致e found myself having to explain some of the rather odd language that bankruptcy lawyers speak. Here痴 a handy lexicon to help you through some of the more arcane words and concepts. For purposes of readability, I will be vastly oversimplifying each topic.

Automatic stay. Think of the automatic stay as a 杜other, may I provision, where the Bankruptcy Court acts as the 杜other who can give or deny permission. Once a bankruptcy petition is filed, almost all of the action that someone could take against the debtor in other state or federal courts can no longer go on outside the confines of the bankruptcy case. The automatic stay is a blanket injunction, designed to put a halt to the various individual lawsuits, dunning letters, and other acts that pull the debtor in several directions at once. Although some actions, notably actions by the state to use its police powers to protect the health and safety of its citizens, aren稚 subject to the automatic stay, virtually everything else is, which is why Enron痴 aggrieved former employees can稚 now sue Enron in state court-their claims against Enron have to be filed in the bankruptcy case(s) (several Enron entities have filed for bankruptcy protection) that are now before the United States Bankruptcy Court for the Southern District of New York. Note: the automatic stay only protects the debtor, not those people who are in charge of running the debtor. It痴 possible to get stay relief from the Bankruptcy Court under certain circumstances. For example, some secured creditors will be seeking stay relief in Enron to foreclose on their collateral. Some plaintiffs will try to get stay relief in order to try their claims in other courts (although the result of such a trial is usually imported back into the bankruptcy case as a liquidated claim). The Bankruptcy Court determines whether to grant stay relief.

Chapter 11. Under the Bankruptcy Code, chapters 1, 3, and 5 apply to all types of bankruptcy cases, and chapters 7 (liquidation), 9 (bankruptcy of a municipality), 11 (reorganization), 12 (reorganization of 吐amily farmer debtors), and 13 (reorganization of debts of certain individuals) are the chapters that dictate what type of bankruptcy is being filed. Chapter 11 is available for most types of businesses and for individuals who don稚 qualify for chapter 13 protection and don稚 want to file a chapter 7 case. Chapter 11 is designed to keep the business running and to restructure its debts. In stark contrast, chapter 7 is designed to sell off what can be sold, pay off as many claims as possible, and quietly walk away into the night, forever. The goal of a chapter 11 case is to confirm a plan of reorganization, which officially restructures the pre-petition debt as post-confirmation debt, pays off the various classes of claims, and enables the post-confirmation entity to continue as a going concern. (It痴 possible to confirm a plan of reorganization that liquidates the debtor, a la chapter 7, but liquidation isn稚 what most chapter 11 debtors want.) Note: you don稚 have to be insolvent to file a voluntary bankruptcy petition.

Creditors committee. Typically composed of the twenty largest unsecured creditors (or some subset of that group), the creditors committee serves as the watchdog for the rights of all of the unsecured creditors, on the theory that most unsecured creditors won稚 be able to afford hiring their own lawyers to protect their rights. In Enron, several of the former employees have called for the formation of their own separate committee, which would focus on the special issues (e.g., the 401(k) plans) that the employees face. The Bankruptcy Court has the authority to appoint more than one creditors committee, although each additional committee adds its own layer of expense to the case.

Debtor-in-possession. The key player in a chapter 11 case is the debtor-in-possession (or DIP). The DIP is the post-petition debtor, and the DIP runs the company unless the Bankruptcy Court decides that the DIP is doing such a bad job that it has to be 吐ired and a trustee (sometimes called the trustee in bankruptcy, or TIB) appointed in its place. If Enron, pre-petition, was run by management with responsibility to the board of directors (who owe their responsibility to the shareholders), Enron as DIP is run by those very same managers (except that Ken Lay, the former CEO of Enron, has been replaced by Steve Cooper, a turnaround expert), whose responsibilities run now to this vague concept of the estate (see below). There is currently a motion to appoint a trustee (this motion was filed after the reports that Enron had allegedly shredded documents) or, in the alternative, an examiner. Examiners are a bit like auditors: they don稚 run the company, but they do go back through the company痴 records with a fine-toothed comb to find out what went wrong and where all of the assets and liabilities are. DIPs, TIBs, and examiners are all creatures of the Bankruptcy Code, and each is to be distinguished from the United States Trustee (or UST), which is an arm of the Department of Justice, designed to act as the overall ombudsman in the case. USTs appoint the creditors committee, review fee applications of those who want to be paid out of the unsecured funds of the estate, and explore the possibility of bankruptcy crimes that may have been committed.

Estate. Remember the 澱undle of sticks image for property rights? Think of the estate as the bundle of rights that the debtor has as of the date that the petition was filed, as well as what it can add post-petition via the Bankruptcy Code, no matter where that asset is located or whether someone else is holding it). This estate will eventually get divvied up, pursuant to the Bankruptcy Code. Anything to which Enron was entitled as of the commencement of the case, along with any claims that Enron might be able to bring against, say, its auditors or its executives, will be part of Enron痴 estate.

Executory contracts and unexpired leases. Contracts and leases that haven稚 yet terminated according to their own terms can be very useful in a bankruptcy case. (Martha Stewart, Inc.痴 contract with K-Mart is an example of an executory contract.) When the DIP has some below-market leases or lucrative contracts, it can use them to its advantage to raise money for the estate by assuming them (paying off any arrearages and assuring the other party that it will keep current on all remaining obligations) or assuming and assigning them to a third-party in exchange for those same cure-and-assure promises. (The naming rights to Enron Field, for example, are likely to get assumed and assigned to another entity that wants the prime-time exposure to a large audience.) Above-market leases and contracts that are hemorrhaging money can be rejected (a/k/a breached), and the claims for damages resulting from the breach will be treated as unsecured claims (which usually means that those claims get paid in 田ents on the dollar - a real advantage over the 100 cents on the dollar liability for breach outside bankruptcy).

Fraudulent transfers, preferences, and the trustee痴 strong-arm powers. These are all ways for the DIP (or the TIB, if the DIP has been replaced by the TIB) to reclaim certain assets of the estate in order to make the 菟ie available to the unsecured creditors larger. Each of these is designed to undo some pre-petition act or to punish someone for not following pre-petition law to the letter. Although Enron hasn稚 yet gotten to the point where it is looking at making the pie bigger, it will. Look for a discussion of fraudulent transfers when an asset leaves the estate for less than fair market value (e.g., selling your house to your mother for $1). Look for a discussion of preferences when some screaming unsecured creditor gets a big payoff shortly before the filing of the bankruptcy petition. And look for the use of the strong-arm power when someone claims to have a secured claim but doesn稚 have proof that the claim was perfected pre-petition.

Plan of reorganization. Think of the plan as a novation (remember that word from your first-year contracts class?) The old rights and obligations go away in favor of the new rights and obligations created by the confirmed plan. During the first 120 days of the case, the DIP has the exclusive right to propose a plan; after that exclusivity period expires (if the Bankruptcy Court doesn稚 extend it), then others (usually creditors) can propose their own plan. Chapter 11 emphasizes disclosure to, and protection of, creditors, which is why sales outside the ordinary course of business (such as the sale of Enron痴 on-line trading business) are rare in chapter 11. Sales outside the ordinary course are designed for exigent circumstances, such as selling at the high point of a rapidly fluctuating market. Most sales of a DIP痴 assets will be done pursuant to the plan of reorganization. Once the Enron case gets to the plan and disclosure statement (like a prospectus that describes the plan) stage, you値l hear other odd words, such as cramdown (confirming the plan over the objections of some of the creditors).

Priority claims. Secured creditors will eventually get paid an amount equal to the value of their collateral. Unsecured creditors get paid from a pool of money that is left over after other groups have been taken care of, according to a priority scheme that starts with administrative claims (hang on, we値l get to that in a second), winds its way through various types of special claims (such as certain types of wages, certain types of debts owed to a former spouse, and even certain claims by United States fishermen), and eventually ends up with garden-variety unsecured claims that don稚 fit into any of the listed priorities. Administrative claims come first: those costs associated with providing valuable services to the DIP. The best way to think about administrative expenses is that the lawyers who benefit the estate (the DIP痴 counsel, counsel for the creditors committee) and who will be paid out of estate funds are in that group which stands first in line.

I hope that this alphabetic guide helps you to follow the news stories more easily (and more avidly). When in doubt, ask a bankruptcy person: most of us are still stunned that bankruptcy cases are now being discussed in the front section of the papers, rather than on the inside back page of the business section, and we池e tickled pink when asked to explain the peculiar terminology of bankruptcy law.


Nancy B. Rapoport is Dean of the University of Houston Law Center and an expert in bankruptcy law.

February 4, 2002

© Nancy B. Rapaport. All right reserved.
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Discussion

JURIST welcomes your reaction to our columns and op-eds...

  • Thursday April 25, 2002 at 12:35 pm
    I enjoyed the article. We are trying to find out who makes up the creditors committee as we are interested in buying some of the assets.

    Larry Kelley
    Texas Americas Energy
    Houston, Texas

  • Thursday April 22, 2004 at 10:03 am
    If Enron owes a post-petition debt and wont come to the table to pay it..... who can I report them to or what repercussions do they have?

    Mark Lawson
    Summit
    Texas

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