Transparency Is the Rule in Chapter 11—Except for CEOs

Great article that was in the Wall Street Journal


When Reader’s Digest first ventured into bankruptcy in the summer of 2009, the multimillion-dollar payouts to top executives that showed up in court filings sparked outrage from employees facing layoffs and retirees staring down benefit cuts.

Now, less than four years later, the publisher is back in Chapter 11, but how much its insiders were paid isn’t in the public record. With top executives’ pay a hot-button topic, some companies are simply keeping the information out of the view of creditors and anxious employees.

Not disclosing insider pay—compensation to corporate officers, directors and their relatives—has worked for other companies in Chapter 11, too, even though it is the third question on the official federal forms that all debtors are legally required to complete as part of the price of getting a fresh start in bankruptcy.

RG Steel, whose collapse last year put thousands out of work, identified its top executives only as “Employee A” through “Employee G” when listing what it paid insiders. New York law firm Dewey & LeBoeuf LLP navigated bankruptcy without identifying the firm’s top earners. Media giant Tribune Co. TRBAA +0.44% didn’t reveal the names of insiders who collected $268 million the same year a leveraged buyout put the company on the path to bankruptcy.

“My concern is that there has been a move away from transparency,” said Stephen Lubben, professor at Seton Hall University School of Law. “To get the discharge you get from Chapter 11, part of the deal was that you had to lay your cards on the table.”

Reader’s Digest, RG Steel, Dewey, Tribune and their bankruptcy lawyers either declined to comment or didn’t respond to requests for comment.

Insider pay is one of the key elements that allow creditors to grasp the financial condition of a company as it enters bankruptcy. Not disclosing it leaves creditors in the dark about a potential asset that could boost their recoveries. In Tribune’s case, for example, the names of insiders were ultimately disclosed in lawsuits filed by the official committee of unsecured creditors looking to claw back some of the money.

A Wall Street Journal review of 250 Chapter 11 cases over the past five years found that 19 companies tried to keep the details of insider pay secret, and 17 were successful. Most that didn’t complete the insider-pay forms did so without seeking court permission.

“To the extent that it’s being done without court authority, I think that’s just plain wrong,” said Judge D. Michael Lynn of the U.S. Bankruptcy Court in Fort Worth, Texas.

The U.S. Trustee Program, the arm of the Justice Department charged with monitoring the bankruptcy courts, rarely took action on the pay disclosures.

“There is no specific U.S. Trustee Program policy on the level of detail required” on the question of insider pay, Jane Limprecht, a spokeswoman for the U.S. Trustee Program, said in an email. “It is not appropriate to discuss any particular case beyond the court record.”

Paul Steven Singerman, the lawyer for Ruden McClosky, a bankrupt law firm that won court permission to keep some insider-pay details confidential, explained the practice.

“There’s a major distinction between the situation of an individual consumer and a corporate debtor,” Mr. Singerman said. Disclosure of different pay levels in a company can be “terribly disruptive internally.” In Ruden McClosky’s case, revelation of insider pay would have jeopardized the sale of the firm and needlessly exposed personal confidential information of people who had no role in its financial trouble, he said.

“As a restructuring professional, I, personally, don’t think that level of disclosure is essential to the purpose of rehabilitating a business,” said Mr. Singerman, a partner at Berger & Singerman.

Mr. Singerman filed a motion seeking court permission to keep the pay information private. But in 12 of the 19 recent bankruptcy cases, lawyers didn’t file motions to keep the information out of public view.

The companies that found a way around the insider-pay question weren’t small operations. Seven had debts well over $1 billion; most had debts of $500 million or more. The group includes some of the biggest companies to seek refuge in Chapter 11 in recent years—home builder Tousa Inc. TOUSQ -57.14% and telephone-directory firm Idearc Inc. SPMD +6.79% —as well as marquee names like the Los Angeles Dodgers.

They were advised by some of the biggest bankruptcy law firms in the country—including Weil, Gotshal & Manges LLP and Kirkland & Ellis LLP. The companies and law firms declined to comment or didn’t respond.

In court papers, the seven companies that sought permission to file the insider-pay information under seal cited a range of concerns, from identity theft to the poaching of employees. Several companies simply cited general concerns about individuals’ privacy or confidentiality. Tousa, for example, warned of “discomfort for individual employees, which in turn could have a significantly negative impact on employee morale.” In most cases, the arguments went unchallenged.

The 19 companies that tried to shield the pay information used varied approaches. Some put employee identification numbers where they were directed to put names, or stamped “redacted” where they were supposed to put numbers. Others reported lump sums but listed no names.

No Comments Yet.

Leave a Comment

You must be logged in to post a comment.