An important way for bankruptcy professionals to give value to their clients is by advising about the claims process and related provisions of the law early in the case. While enjoying the moratorium invoked by bankruptcy, a debtor should be mindful that clarifying pre-petition debts is an integral part of developing a plan of reorganization or liquidation. Claims management may be overlooked by debtors and bankruptcy professionals until creditors perceive they are losing value or a time crisis occurs. Improper claims management results in wasted time and potentially enormous expense. Successful claims management requires preparation, leadership and delegating technical tasks to the appropriate debtor or outside specialists.

Forming a Cross-functional Team

Forming the debtor’s internal team is the first step. The team must include key management, including general counsel, the CFO and controller, risk manager, as well as accounts payable staff and outside litigation attorneys. Determining when to include an outside consultant for special types of claims resolution is essential. Insurance claims, including liability and workers compensation, are an example of areas that may require technical expertise not found within the company.

As the company is forming the internal team, one person from the debtor’s staff should be appointed to control the process. Expect that this will be a full-time job and may not be appropriate for an already burdened executive. This person should be knowledgeable about and able to supervise and participate in a thorough investigation of the supporting accounting records. Responsibilities may include all aspects of the claims management process, from filing schedules, managing the reconciliation of claims, providing information to supporting claim objections, working with case professionals to resolve claims, and the eventual distributions to creditors. This person would coordinate the team members to resolve all claims issues that arise, including those outside the normal course of business (lease rejection and employee claims, for example).

Preparing Schedules

The first step in effective handling of bankruptcy claims is preparing a schedule of liabilities that will assist, rather than hinder, the process. At this point the bankruptcy professional can provide valuable advice in organizing the debtor’s resources. Although this may appear to be a routine clerical task, experience with thousands of claims worth billions of dollars shows that the quality of the original schedules dictates the ultimate cost of the claims process in terms of time and money. Management often underestimates its "universe" of debts while focusing on its most urgent restructuring matters. The scheduling process is often put on a back burner while the debtor’s management is focused on the current operating and accompanying financial crisis.

Understanding the provisions of the Bankruptcy Code is important to approaching the process effectively. In essence, the schedules are the debtor’s statement of valid claims. Scheduled claims are classified according to secured status and priority rules prescribed in the Code. In addition, scheduled amounts must be footnoted if the debtor considers them to be unliquidated, disputed or contingent. The Code states that "a proof of claim is deemed filed" for any debt appearing in the schedules, except for those noted in the schedules as disputed, contingent or unliquidated [§1111(a)]. Bankruptcy rules provide that holders of claims scheduled as disputed contingent or liquidated for which no proof of claim is subsequently filed shall be deemed not to be creditors for the purpose of all distributions made under a plan of reorganization or liquidation, and may be disallowed by the court [F.B.R.P. 3003(c)(2)]. Undisputed, liquidated claims will be deemed allowed and have the right to participate in the plan, unless an appropriate party under the law objects [§ 502(a)].

Debtor accounting is typically dis-organized, erroneous, and not designed for the burdens a bankruptcy filing places on the accounting systems and procedures. Therefore scheduling liability requires a thorough review of the accounting system for weaknesses and resulting omissions and inaccuracies. If a debtor has sound schedules, much additional work can be avoided. Lack of thoroughness at this point often results in additional work and professional fees to create and file amended schedules later in the process.

Debts that are contingent, unliquidated and disputed are often misunderstood in the process or ignored. Predicting the outcome of these undetermined claims can be essential for internal estimation of potential creditor dividend and, therefore, negotiation of the bankruptcy plan. Identifying claims that cannot currently be quantified, such as workers’ compensation reserves or warranty claims, as well as noting disputed debts, is an essential part of schedule preparation.

Claims Reconciliation

Once schedules are prepared, the focus of the claims management process is to identify the valid amounts of claims filed with the bankruptcy court and to implement a process for reconciling or objecting to disputed claims. Creditors can be expected to file invalid or inflated claims that must be sifted out. A reliable claims database must be maintained to match claims with scheduled amounts, identify variances and track reconciliation and resolution. Sorting the data will reveal the largest variances between claims filed by creditors and the debtor’s schedules, and aid in focusing the claims team on problem areas.

While most courts will handle the filing of bankruptcy claims and keep the original register of such claims, the increase in "mega" bankruptcy cases has resulted in increasing reliance by courts on outside firms that act as claims agent to process the filing for creditor claims. Several such firms have evolved from strictly recording claims to assisting the debtor in matching claims to schedules, preparing exhibits to omnibus claims objections, tracking the resolution of claims, noticing and counting plan ballots, and assisting in the distribution process. Courts may even require a large debtor to employ such a firm. These firms will be most effective if they work closely with the debtor’s claims team.

Dispute Resolution

Relying on negotiation techniques that minimize the debtor’s expense is also crucial. A team of company personnel familiar with the creditor base should be formed to reconcile claims that do not agree to the scheduled amounts. The main emphasis should be on reconciling to the right answer, not just the easy one. Although parameters for negotiation with creditors should be set at each level within this team, an emphasis on fast and fair claims resolution is crucial. This approach will result in more satisfied creditors and lower outside professional fees. An attitude of "let’s just split the difference and go home" normally results in higher claims for the debtor and a lower ultimate return to the entire creditor base.

A crucial aspect of the fast and fair settlement methodology is documentation and debtor support. As a professional, it is critical to assist the debtor in determining the types of documentation that may be needed to resolve claims issues in the future. These may include contracts, purchase orders, proof of delivery, written payment plans, credit authorizations, copies of corporate policies regarding vendor payments and items that may impact a vendor’s balance. For example, a debtor in the retail industry should retain copies of any purchase orders, advertising agree-ments, proof of any items taken as a credit on the account, proof of performance under any advertising agreements, etc. The more documentation retained by a debtor at the time of filing, the easier it will be to resolve future claim issues.

The cross-functional team is also important for future resolution of claims in cases where the appropriate documentation is misplaced or destroyed, or employees have left the company. These team members may have the proprietary or institutional knowledge to track down alternative documentation, and employees. They may also have existing relationships with certain claimants that smooth the way to an amicable resolution of the creditors’ claims.

Although the reconciliation process should result in resolving the majority of disputes, certain creditors will insist on having their day in court. Bankruptcy counsel and the debtor’s team will develop a strategy that usually relies on timely, accurate information from the debtor’s records. Once again, documentation is the key to success. In some cases, corre-spondence and documentation of normal business practices can be as important as the actual purchase orders, invoices or other claims back-up.

Alternative dispute resolution (ADR) is another effective tool for those cases that have a large number of claimants with personal injury related claims, including workers’ compensation claims. ADR provides an opportunity for claimants who have claims against the estate but have not yet filed a lawsuit to pursue their claims in a less expensive and structured manner. A typical ADR process might involve mediation, arbitration, and then, if the claimant still contests that the claim amount should be higher, he/she may pursue a claim through the appropriate court venue.

ADR not only provides an efficient method of managing the litigation cases, it also provides a third party forum for dispute resolution that is normally faster than litigating the case. The court may decide to impose a limit over which the court must approve the settlement. This allows the court to review all large settlements; and the additional scrutiny helps ensure consistent settlements.

In Woodward & Lothrop Holdings Inc. et. al. (S.D.N.Y. 94 B 40222-4), ADR resulted in fast, fair settlements. In addition, over 150 claims were settled within approximately two years from the inception of the ADR process, without a single claimant pursuing litigation.

These are but a few suggestions to make the claims administration process run more smoothly. However, few of these tools will be as effective without early planning, action and teamwork. In the long run, reliable and complete schedules are fundamental to an efficient claims process. A well-managed system of claims reconciliation, negotiation and litigation is arguably essential to success in bankruptcy.