CHAPTER 4 Bankruptcy Reporting Requirements

• Jurisdiction: United States

CHAPTER 4: Bankruptcy Reporting Requirements

CONTRIBUTING AUTHORS:

Edward A. Phillips (Eisner Amper LLP)

Thomas W. Buck (Eisner Amper LLP)

Allen D. Wilen (Eisner Amper LLP)

Christopher A.Ward (Polsinelli PC)

A. MONTHLY OPERATING REPORTS

Monthly reporting requirements vary by U.S. Trustee (UST) region and in some instances by district. While the formats and level of detail may be different, monthly operating reports seek to capture the operating performance of a debtor over the previous month, provide a snapshot of assets and liabilities, and alert parties to the process of any unusual changes to a debtor's business that may warrant further investigation and analysis. By way of example, this section has been written from the perspective of a debtor operating in Region 3. In general, the Office of the U.S. Trustee requires the filing, under penalty of perjury, of monthly operating reports (MORs) by a debtor 20 days after month-end.

As will become abundantly clear, nothing in bankruptcy is sacrosanct. Bankruptcy is an open and public forum that requires full disclosure. After the initial stages of a bankruptcy are complete, first-day motions are heard and usually following a cash-collateral hearing, the debtor will need to communicate with parties-in-interest on its operations during the chapter 11. The MORs are part of the disclosure process; they provide monthly snapshots of the debtor's current operating performance, pre- and post-petition liabilities and remaining assets. Additionally, a filing called the initial operating report must be filed within 15 days of the filing of a chapter 11 petition. It has nothing to do with current operating activity; rather, it requires a 12-month cash-flow projection, proof of insurance, evidence of the opening of debtor-in-possession bank accounts, and a schedule of retainers paid to professionals. The format of each report can be negotiated with the UST to conform to the specifics of each company in order to alleviate as much of the reporting burden as possible.

Frequently, multiple debtors are part of the same bankruptcy filing and are managed through a jointly administrated estate. Although the estate is jointly administered, the assets and claims of the individual estates are not substantively consolidated, so MORs must be prepared for each individual debtor. The recoveries to the individual creditors will likely vary by estate due to the differing assets and claims. This can be a contentious issue in multiple-debtor cases with different assets and liabilities existing only with certain debtors.

In smaller cases, it is not uncommon for the debtor to write "see attached" and include hard copy printouts from its accounting system or, in most cases, a small accounting package such as QuickBooks or Peachtree. Failure to file a timely MOR can result in the filing of a motion to convert or dismiss a chapter 11 proceeding by the UST. Often, a debtor will request additional time to provide the first couple of MORs, as the process can be cumbersome until a system for preparation is put in place. Additionally, the request for this additional reporting usually coincides with numerous other requests from the accounting and finance functions in the business already operating with a depleted headcount.

On a case-by-case basis, some debtors receive permission to deviate from the standard reporting requirements in their particular district or region. Following is the cover page for an MOR in Region 3.

UNITED STATES BANKRUPTCY COURT __________ DISTRICT OF __________

In re __________

Case No. __________

Reporting Period:__________

MONTHLY OPERATING REPORT File with Court and submit copy to United States Trustee within 20 days after end of month.

Submit copy of report to any official committee appointed in the case.

REQUIRED DOCUMENTS	Form No.	Document Attached	Explanation Attached	Affidavit/Supplement Attached
Schedule of Cash Receipts and Disbursements	MOR-1
Bank Reconciliation (or copies of debtor's bank reconciliations)	MOR-1a
Schedule of Professional Fees Paid	MOR-1b
Copies of bank statements
Cash disbursements journals
Statement of Operations	MOR-2
Balance Sheet	MOR-3
Status of Postpetition Taxes	MOR-4
Copies of IRS Form 6123 or payment receipt
Copies of tax returns filed during reporting period
Summary of Unpaid Postpetition Debts	MOR-4
Listing of aged accounts payable	MOR-4
Accounts Receivable Reconciliation and Aging	MOR-5
Debtor Questionnaire	MOR-5

I declare under penalty of perjury (28 U.S.C. Section 1746) that this report and the attached documents are true and correct to the best of my knowledge and belief.

When preparing a debtor's MOR, understand that most users will review the financial data from the following perspectives:

• How is the debtor doing from a cash perspective?
• How is the debtor doing from an accrual perspective?
• Is the debtor paying its post-petition tax, trade and professional fee obligations?
• Is the debtor collecting its receivables in a timely fashion?
• Did anything out of the ordinary happen last month that we should know about, but you didn't tell us in the rest of the MOR?

1. HOW IS THE DEBTOR DOING FROM A CASH PERSPECTIVE?

The key area of concern is obviously a debtor's liquidity during the chapter 11 process. This is the most important part of the MOR because without liquidity, a chapter 11 debtor cannot survive without further investment and/or incurrence of administrative expenses (i.e., post-petition payables).

The primary purpose of these schedules in the MOR is to demonstrate the debtor's liquidity. In addition, it allows parties-in-interest to see what the debtor is expending cash for during the month. As a practical matter, when including a bank reconciliation it is easiest to create a cover sheet that lays out all accounts in a summary format. The detail can be attached, but a debtor will often have numerous bank accounts, and without a cover sheet, it will be difficult to easily understand the overall liquidity. Make sure you are very careful in identifying intercompany transfers and transfers between debtors, because they can the affect the total disbursements for UST fees. In addition, be careful with accounts that sweep daily; in some jurisdictions, the UST views these amounts as disbursements.

The Schedule of Cash Receipts and Disbursements is presented by separate bank account, combined for the current month and shown as cumulative amounts from the petition date to the end of the current reporting month. The bottom of the schedule provides for a computation of disbursements used to arrive at quarterly UST fees.

Bank reconciliations and cash-disbursement journals are typically drawn from a debtor's accounting system. However, the Continuation Sheet for MOR-1 contains a form of bank reconciliation. After bank reconciliations, a Schedule of Professional Fees and Expenses Paid must be completed (shown as follows).

In re __________ Debtor

Case No.__________

Reporting Period:__________

SCHEDULE OF PROFESSIONAL FEES AND EXPENSES PAID This schedule is to include all retained professional payments from case inception to current month.

Payee	Period Covered	Amount Approved	Payor	Check	Amount Paid		Year-To-Date
				Number Date	Fees	Expenses	Fees	Expenses

2. HOW IS THE DEBTOR DOING FROM AN ACCRUAL PERSPECTIVE?

MOR-2 is the Statement of Operations for the month, as well as cumulative results to date. Typically, larger debtors use their own reporting systems.

MOR-3 is the Balance Sheet, with room for month-end book values and petition date book values.

The debtor may be flush with cash, but if it is operating at a significant loss during the chapter 11 case, that can be a very serious quandary for all stakeholders, unless it is understood in the early stages of the case that there might be losses while the debtor's § 363 sale is being planned. In fact, operating losses, if large enough, could force, or accelerate, a sale process. One of the most important aspects of the Statement of Operations is the requirement that not only is month-to-month data to be included, but filing-to-date data. Frequently, the monthly data may show an alarming item that, taken in a vacuum, might make creditors nervous, but in the context of a filing-to-date perspective may be less troublesome.

As it relates to the Balance Sheet, the MOR provides a snapshot of a debtor's assets and liabilities at month end. It can also be used as a check on whether the other numbers in the Statement of Operations and Cash Receipts and Disbursements make logical sense. Remember, the biggest risk in chapter 11 is that the debtor is often scrambling to get an MOR filed within 20 day of month end, often with reduced staffing levels and senior financial personnel involved in sale or restructuring discussions. Consequently, the data provided in the MOR is often not 100 percent accurate. When reporting liabilities, be careful to classify pre-petition liabilities subject to compromise and post-petition liabilities separately.

3. IS THE DEBTOR PAYING ITS POST-PETITION TAX, TRADE AND PROFESSIONAL FEE OBLIGATIONS?

The payment of taxing authority obligations post-petition is a serious responsibility for a debtor. Not all taxes can be paid and up-to-date at a given time. Sales, payroll and some excise taxes may have a multi-week or month-long lag before the amount owed can be calculated. When preparing the tax sections of the MOR, it is best to describe the time periods for which the taxes are due. Often, an analyst at the UST will ask a question regarding dates from which the taxes are due. Detailing the information in the report helps alleviate third-party questions.

The Status of Post-petition Taxes and Summary of...