Montana Diocese Files for Bankruptcy Protection byEliza Wiley - Article Example

Newspaper Article on Bankruptcy Protection Newspaper Article on Bankruptcy Protection According to an article in News-Journal.com, the Roman Catholic Diocese of Helena in Montana filed for a bankruptcy protection Friday 31 of January 2014 as part of a proposed 15 million dollar settlement for victims who alleged to have been sexually abused by clergy members. There were two suits filed in respect of the alleged abuse. The Chapter 11 insolvency reorganization plan comes after classified conciliation sessions with the insurers and plaintiffs’ attorneys, resulting in a proposed agreement to solve the abuse claims. Some of the law issues in the case are that the diocese filed a suit in court for bankruptcy protection to prevent its closure. It was to pay 2.5 million dollars to the victims while the remaining amount was to be settled by its insurers. The diocese officials were to pay a share of the settlement in cash although they anticipated that some of the church’s property would need to be sold in order to settle their payments. However, the church’s financial position was precarious before the current suits were filed against it. From the documents filed in court, the church’s assets were up to 10 million dollars while its liabilities were up to 50 million dollars. The U.S. bankruptcy Court in Montana was to approve and supervise the settlement payment to the victims. Most of the clergy members accused of the sexual abuse had however died. The issue concerning the settlement of the abuse victims however was still under negotiation between the parties. One of the legal issues in the above case concerning the Montana Diocese church is about protection against bankruptcy. Such a suit is based on protecting the church from liquidation and allowing it to proceed with the day-to-day running of its business. It is therefore founded on Chapter 11 of the Bankruptcy Code on reorganization. There is however another possible solution with regard to bankruptcy claims against the church. This is liquidation. Bankruptcy is the state where the liabilities of a company exceed its assets. One is declared bankrupt through a legal procedure that takes place in a federal court. The existing types of bankruptcy are namely, liquidation (under Chapter 7) and reorganization (under Chapter 11). In liquidation, chapter 7, all of the company’s assets are sold to settle the creditor’s claims. A trustee is appointed to manage and sell the assets of the church. Proceeds from selling the assets of the church are then channeled towards paying creditors for debts owed. In reorganization (chapter 11), a repayment plan to pay the company’s debts over time is developed by the creditor’s committee. The plan is then required to be approved by the court. Federal bankruptcy laws govern how a company goes out of business or recovers from debts owed to its creditors. A company may normally become bankrupt company because its liabilities exceed its assets. Under Chapter 7 of the Bankruptcy Code, a company that is unable to pay its debts will stop all of its operations. A trustee is the appointed to deal with its assets. Therefore, a company that chooses Chapter 7 will stop all its operations and a trustee will be appointed to sell all its assets in order to settle its debts. Secured creditors usually get paid first if a company is declared bankrupt. Secured creditors are those who have been given collateral by the company in exchange for financial benefit to the company. A bankruptcy suit under chapter 7 of the Bankruptcy Code has its advantages and disadvantages. Some of the advantages are that it is less time consuming and simple than that of Chapter 11. The disadvantages as such a bankruptcy suit are that there must be a trustee appointed who must manage and sell the company’s assets. Also, the day-to-day operation is likely to stop in such a case. An authority on Chapter 7 of the Bankruptcy code is the case of re Michael Letourneau 2010 at the United States Bankruptcy Court in Illinois. The matter was con concerned a debtor who filled an involuntary bankruptcy case against himself. The debtor had filled the suit under chapter 7 of the bankruptcy code. The court held that the suit filled was in violation of the law and it was the creditors who are required to file an involuntary suit against a debtor. If the suit in re Michael Letourneau had succeeded, all the assets of his business would be sold in order to offset debts owed to creditors. It would also have bed likely that the daily management of the business would stop. In relation to the legal issue on bankruptcy protection filled by the church there could have been another option. The church should have opted for liquidation under Chapter 7 of the Bankruptcy Code. This is because its assets after payment of the victim’s claims appeared to be less than its liabilities. It would therefore be difficult to continue with its business with hardly enough financial resources. A trustee would then be appointed by the court to manage and sell the assets in order to pay off debts owed. A company may also opt for Chapter 11 of the Bankruptcy Code to reorganize its business. This provision allows the company to still continue with the day-to-day management and running of its business. However, it is required that for a company that opts for bankruptcy protection under Chapter 11, for all decisions that it makes regarding the business they must be approved by a bankruptcy court. Companies that file a suit under Chapter 11 are mostly not able to continue trading in the New York Stock Exchange. The provision under Chapter 11 does not prevent a company’s securities from continuing to trade. A company that files under Chapter 11 can thus continue to trade in the New York Stock Exchange. The advantages of Chapter 11 are that the assets do not need to be sold and it is not necessary for a trustee to be appointed as the day-today business management will continue. The disadvantages are that its process is longer and it is necessary for the debts to be paid eventually. Majority of public companies prefer to file under chapter 11. This is because it allows the company business to continue running and also gives it control over the bankruptcy process. This provision enables rehabilitation of the business. A company proceeds with its business under this provision and also continues to trade in the securities market. It is required that the company should file SEC reports because it is still in trade and not out of business. The SEC report is to contain information about significant developments such as any corporate changes within 15 days since filing for bankruptcy. In essence, chapter 11 allows the company to re-organize itself. The bankruptcy protection suit filed by the church under Chapter 11 of the bankruptcy code according to the newspaper article is another option that is available to it. From the above rules of law, it will not be mandatory for a trustee to be appointed for the church in managing and selling its assets. The reason for this is that the daily management of its business will continue and therefore eliminating the need for a trustee. The Montana Diocese can also continue to file Securities and Exchange Commission reports. The provision under Chapter 11 of the Bankruptcy Cone will therefore serve to prevent closure of the Montana Diocese. A committee to represent the creditor’s interest is appointed by the U.S. Trustee, a bankruptcy arm of the Justice Department. With the help of the committee, a reorganization plan to settle the company’s debts is developed. It is required that the plan developed must be consented to or accepted by the creditors. If however the creditors do not consent to the pan, the court will approve the plan. The court only approves the plan if it if satisfied that it is in the best interest of the creditors or they stand to benefit from it. A summary of the confirmed plan should be put in a report which is then filled with the SEC. A copy of the completed plan may be attached to the report. . The appointed committees of creditors negotiate the plan meant to reorganize the company. It is mandatory that in the formation of committees, one of the committees formed should consist of a committee of unsecured creditors. The plan formed by the committees is meant to revive the company business. Before the plan formed can be implemented, the court must find that it is legal and it in conformity with the Bankruptcy Code. In developing the plan, the company prepares a disclosure statement and reorganization plan that is filled with the court. The disclosure statement is then reviewed by the SEC and voted by the creditors. It is then confirmed by the court and the company can proceed to implement it by executing the contents of the plan. From the suit filed by the Montana Church according to the newspaper article, the court upon being satisfied that it is just, will allow for a committee of creditors to be appointed to develop a plan that will enable the business to get back on its feet. Among the committees appointed, one of them has to consist of secured creditors. They will develop a plan for the church that will allow its debts to be paid over time. If the church’s creditors do not approve of the plan, the court will authorize it. The courts approval is subject to it being satisfied that the plan will be in the best interest of the creditors. After the courts approval it will then be implemented. Role of the U.S. Securities & Exchange Commission under Chapter 11 is to review the disclosure documents in order ensure that the company does not mislead its creditors with the statements it contains. The SEC may intervene where it is evident that the company and its officials are using the bankruptcy laws to avoid fraudulent litigations for securities. The Federal Rules of Bankruptcy Procedure (Bankruptcy rules) govern the bankruptcy procedural process. The rules provide formal procedure for settling business debts. The federal bankruptcy laws are aimed at providing a fresh start to companies from their debts. This was as stated by the Supreme Court in the case of Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). In implementing the plan developed by the committees, the federal bankruptcy laws will be adhered to. A debtor who files for a bankruptcy suit is protected from the creditors in various ways by the law. One of the ways in which a debtor receives protection is that no fresh suits can be filled against him and the ones pending in court are postponed. The creditors are not allowed to collect their unpaid debts until the suit filed by the debtor is dispensed with. Also, there is no collection of existing lien in court while the current suit is still pending. An authority on this is the case of re Michael Letourneau 2010. In this case, the debtor filled a bankruptcy suit on his own under Chapter 7, although the suit was later dismissed by the court. The creditors were not present at the hearing of the case. All of the above rules on debt and lien collection were observed. Having filled the current bankruptcy protection suit on its own mandate, the church will stand to enjoy some of the benefits outlined above. Its creditors will not be allowed to claim any offset of debts owed to them by the church while the suit is still pending in court. The creditors will also not be able to claim lien over any of the assets belonging to the diocese’s business. The court has first to dispense with the suit legally before the existing assets of the business are used in any way for the benefit of its creditors. The resulting effect is that the officials of the Montana Diocese do not have to worry about pending debt claims by its creditors after using most of its money to settle claims by the abuse victims. The effect of the above rule of law that fall under Chapter 11 of the Bankruptcy Code would be to enable the church to get back to its feet without being unfair to the creditors. The current situation of the diocese is that it has paid settlements to the abuse victims and has filed a suit in court for bankruptcy protection. The bankruptcy protection suit has been filled to prevent its closure due to pending debts owed to creditors after payment of the abuse victim’s settlements. The diocese has also had to lay off some of its employees. The insurers of the Montana Diocese have also underwritten to pay off the victims. References Eliza Wiley, (February 1, 2014). 2014Montana diocese files for bankruptcy protection United States Courts, 2014. Process United States Bankruptcy Court Northern District of Illinois Eastern Division, (February 4, 2010), 2014.Re Michael Letourneau Read More