Abstract:
A method and system of utilizing an insuring or other financially responsible party to pay claims to creditors in an insolvency proceeding aligns the financial incentives of creditors with the financial incentives of those funding and resolving claims. The present invention shifts the risk of administration of the claims resolution process in an insolvency proceeding away from the insolvent entity and transfers the risk to the insuring or other financially responsible party which is an economically stronger entity with lower costs of capital and superior risk management resources.

Description:
FIELD OF THE INVENTION  
         [0001]    The present invention relates to a method for resolving claims by creditors against insolvent debtors during an insolvency proceeding.  
         BACKGROUND INFORMATION  
         [0002]    A business organization such as a corporation, a partnership, a single proprietorship, etc. may find itself unable to meet its financial obligations to its creditors. Insolvency procedures, pursuant to applicable laws, permit a debtor organization to satisfy its debts through the creation of a court supervised plan for the distribution of all or part of a debtor&#39;s cash, assets, or securities among its creditors (hereinafter referred to as a “distribution plan”). The distribution plan is typically the result of negotiations between creditors and the debtor. The distribution plan describes which of the debtor&#39;s property will be reserved to provide value to the creditors (the “subject property”), and further describes the manner in which this property will be distributed to the creditors.  
           [0003]    In the United States, for example, the creation of a distribution plan is supervised by a court of competent jurisdiction which insures that the distribution plan complies with the Federal Bankruptcy Code or other applicable law such as laws governing the insolvencies of banks, insurance companies, stock brokerages, credit unions and other organizations not covered by the bankruptcy law. One of the requirements of insolvency law is that similarly situated creditors must receive similar treatment under the distribution plan. As a result, the distribution plan will describe a process that distributes to each similarly situated creditor a pro rata share of the debtor&#39;s subject property.  
           [0004]    Once the court has confirmed the distribution plan, the debtor carries out the distribution plan by distributing to creditors the property called for by the distribution plan. FIGS. 1, 2 and  3  are flowcharts which illustrate the current process of claim distribution.  
           [0005]    Referring to FIG. 1, a debtor  105  files for insolvency protection pursuant to applicable rules or regulations. The subject property  110  of the debtor is reserved for distribution to creditors pursuant to a distribution plan. Debtor  105  distributes the subject property  110  according to the distribution plan to those creditors  120  whose claims have been allowed by the court (“allowed claims”). Each creditor  120  receives a pro rata share of its total allowed claims. The pro rata calculation is made by dividing the amount of the subject property  110  by the total amount of all allowed claims  120 .  
           [0006]    Sometimes, however, the total amount of all allowed claims  120  is not a fixed number by the time the distribution plan has taken effect. For example, there may be some claims that are still in dispute (“disputed claims”), or other claims that have yet to be made (“future claims”). As is depicted in FIGS. 1, 2 and  3 , over time a number of disputed and future claims will be allowed by the court, which increases the total number of allowed claims  120  entitled to a pro rata distribution under the distribution plan as the claims resolution process progresses.  
           [0007]    As the total amount of allowed claims is as yet uncertain at the commencement of the distribution and the debtor typically has little experience in the administration of claim distribution, the debtor risks over-distributing the subject property. Moreover, the debtor is an insolvent company and generally is not in a strong enough financial position to assume risk comfortably. As a result, the debtor typically will create significant reserves of subject property in anticipation of disputed and future claims, as depicted in FIG. 1. The debtor will distribute allowed claims slowly until the debtor becomes more knowledgeable about the development of the disputed and future claims as illustrated by FIGS. 2 and 3.  
           [0008]    [0008]FIG. 2 depicts an example of a second distribution according to the existing process of claim distribution. The debtor&#39;s reserves  115  for disputed and future claims grow smaller as the number of allowed claims  120  has increased. Creditors holding allowed claims  120 , however, have still not received their final pro rata share of the distribution although it has been many months since the distribution plan went into effect.  
           [0009]    [0009]FIG. 3 depicts an example of a final distribution pursuant to a conventional prior art distribution plan. Prior to the final distribution, any number of distributions may have occurred. The final distribution may not occur until months or years after the distribution plan has gone into effect. At the final distribution, the debtor&#39;s reserves  115  for disputed and future claims have been exhausted, and the total number of allowed claims has been determined. The allowed creditors  120 , possibly after a long wait and much uncertainty, receive their final pro rata share according to the distribution plan. Significantly, it is not until the final distribution that the creditors  120  know the actual amount of their pro rata share of subject property  110  since it is not until the final distribution that the final number of allowed claims can be determined.  
           [0010]    There are many problems with the current process for claim distribution in insolvency proceedings. Creditors, for example, incur risk in the form of uncertainty as to when they will receive their pro rata share of subject property, and uncertainty as to how much their final share will be. The creditors have incentive to know as quickly as possible, and also to quickly receive, the amount and value of their pro rata share.  
           [0011]    In the current process of claim distribution, however, the debtor has incentives contrary to that of the creditors, i.e., to distribute the pro rata shares as slowly as possible. Furthermore, in cases of reorganization, the debtor will continue to do business after the insolvency period is over, often with the same creditors to whom it is obligated to make distributions. The debtor, therefore, has incentives to give certain creditors favorable settlements when resolving disputed claims. This raises the total number of allowed claims, and consequently lowers the pro rata share allowed each creditor upon final distribution.  
           [0012]    Thus, there exists a need in the art for a method of aligning the financial incentives of creditors in an insolvency proceeding with the financial incentives of those who will be resolving the claims and funding the distributions to creditors.  
         SUMMARY OF THE INVENTION  
         [0013]    According to an embodiment of the present invention, an insurer or other financially responsible party is used to facilitate payment to creditors of a debtor in an insolvency proceeding, thereby aligning the financial incentives of creditors in an insolvency proceeding with the financial incentives of those funding and resolving claims. The method according to an embodiment of the present invention shifts the risk of administration of the claims resolution process in an insolvency proceeding away from the insolvent entity and transfers the risk to the insurer or other financially responsible party, an economically stronger entity with lower costs of capital and superior risk management resources. 
       
    
    
     DESCRIPTION OF THE DRAWINGS  
       [0014]    [0014]FIG. 1 illustrates a block diagram for an initial distribution using an existing process for claim distribution.  
         [0015]    [0015]FIG. 2 illustrates a block diagram for a second distribution using an existing process for claim distribution.  
         [0016]    [0016]FIG. 3 illustrates a block diagram for a final distribution using an existing process for claim distribution.  
         [0017]    [0017]FIG. 4 illustrates a block diagram for a claim distribution according to an exemplary embodiment of the present invention.  
         [0018]    [0018]FIG. 5 illustrates a flowchart for a claim distribution according to an exemplary embodiment of the present invention. 
     
    
     DETAILED DESCRIPTION OF THE INVENTION  
       [0019]    Various aspects of the present invention will be described, and for purposes of explanation, specific configurations and details are set forth in order to provide a thorough understanding of the present invention. It will be apparent to one skilled in the art, however, that the present invention may be practiced without these specific details. Furthermore, well known features have been omitted or simplified in order to make the present invention easy to understand.  
         [0020]    [0020]FIG. 4 depicts a procedure for distributing claims according to an exemplary embodiment of the present invention. Referring to FIG. 4, an independent entity, which may be a financial institution such as, for example, an insurance company  430 , contractually assumes the obligations of a debtor  410  to pay the claims of creditors  440 , thereby relieving the debtor  410  of the burden of claim administration. In return, at the end of the distribution process when all allowed claims have been satisfied, insurer  430  will receive, for example, the balance, if any, of debtor&#39;s  410  subject property. If the insurer  430  can efficiently resolve the creditors&#39; claims and pay creditors for less than the total value of the subject property, the balance is the underwriting profit to the insurer or independent entity  430 .  
         [0021]    Although the financial institution is an insurance company in the present exemplary embodiment, alternative embodiments of the present invention may employ a bank or other financial institution with low costs of capital. Furthermore, although this exemplary embodiment describes the practice of the method in the context of an insolvency reorganization, the present invention may be employed in the context of an insolvency liquidation.  
         [0022]    Referring to FIG. 4, according to an agreement between debtor  410  and insurer  430 , insurer  430  issues an insurance policy to debtor  410  covering each creditor&#39;s  440  allowed claim to the debtor&#39;s subject property  420  whether or not a particular creditor elects to participate in the immediate and final payment by insurer  430  described below. In an exemplary embodiment, a predetermined percentage of creditors must elect to participate (e.g., 90%) in order for insurer  430  to offer such an insurance policy.  
         [0023]    Under the policy insurer  430  takes over from debtor  410  the administration of the claim distribution process. Insurer  430  will, for example, negotiate with the creditors&#39; committee disposition of the debtor&#39;s subject assets to ensure maximum value is achieved for the assets. In addition, insurer  430  takes control of payments made against the entire pool of subject property  420  and, making an actuarial judgment based on its experience in claims handling, offers to pay a pre-determined immediate and final pro rata distribution to all allowed creditors  440  who elect to accept insurer&#39;s  430  offer.  
         [0024]    In an exemplary embodiment, insurer  430  may make an offer of an immediate and final payment to creditors  440  based on, but not limited to, for example, the following factors: (i) the total value of debtor&#39;s  410  property that insurer  430  expects will be available for distribution to allowed creditors  440 ; (ii) the present value of allowed claims; (iii) the price of distressed securities in the market; (iv) the incentives of the allowed creditors  440  (e.g. monetary needs of the creditors and/or the desire for continued dealings with the debtor); (v) the expected value of disputed and future claims that may be allowed during the course of the insolvency proceeding (e.g., based on historical allowed claim amounts from other cases in same or different industries); or (vi) any other relevant factors.  
         [0025]    As can be seen from FIG. 4, according to an embodiment of the present invention, those creditors  440  who elect to accept insurer&#39;s  430  offer immediately receive their consideration and thus transfer the risk associated with the ultimate resolution of disputed and future claims to insurer  430 . Insurer  430  is able to successfully manage this risk because insurer  430  typically has greater financial strength than any single allowed creditor  440  and is generally financially stronger than bankrupt debtor  410  has actuarial experience and experience in resolving claims. Furthermore, insurer  430  can spread risk over all the claims in its portfolio. Thus, insurer  430  has a lower cost of capital and consequently is willing to distribute subject property much more rapidly than debtor  410 .  
         [0026]    Each allowed creditor  440  who does not elect to accept insurer&#39;s  430  initial offer of an immediate and final payment will receive its pro rata share of the subject property  420  according to what would have been paid to each of the total number of allowed creditors  440  according to the distribution plan had insurer  430  never entered the process. Insurer  430  will make a profit if, for example, the amount of the pro rata share of the subject property  420  according to the distribution plan is greater than the amount of the immediate and final payment insurer  430  pays to allowed creditors  440  depicted in FIG. 4. Insurer  430  will lose money if, for example, the pro rata share according to the distribution plan is less than the immediate and final payment made by insurer  430  to electing creditors  440 .  
         [0027]    According to the present invention, insurer  430  accepts a calculated risk of overdistributing the subject property  420  of debtor  410  by immediately paying creditors electing to participate in the offer from insurer  430 . However, the risk of loss is one that insurer  430  is better able than debtor  410  to absorb based in part, for example, on its experience in analyzing and paying claims. For example, insurer  430  makes its initial offer to allowed creditors  440  based on insurer&#39;s  430  prediction of what the total amount of allowed claims will be. Insurer  430  can more accurately predict the final number of allowed claims than either debtor  410  or allowed creditors  440  since, for example: (i) it has actuarial expertise and experience in claim distribution that debtor  410  and creditors  440  lack; and (ii) insurer  430  is an independent third entity and does not need to maintain existing relationships with allowed creditors  440 , and is thus in a better negotiating position vis-à-vis allowed creditors  440  with respect to disputed claims.  
         [0028]    [0028]FIG. 5 is a more detailed depiction of the claims distribution process according to an exemplary embodiment of the present invention. Referring to FIGS. 4 and 5, insolvency proceedings initiated at step  510  result in creation of a distribution plan at step  515 . The distribution plan is typically created, for example, by negotiations between creditors  440  and the debtor  410 . Pursuant to insolvency laws and regulations, certain property of debtor  420  are made subject to a court supervised distribution plan at step  515 , for example, which results from negotiation of the distribution plan created at step  510  between the creditors  440  and the debtor  410 .  
         [0029]    Subject to court approval, the debtor&#39;s  410  subject property  420  is insured by a policy at step  525  issued by insurer  430  to the debtor. The insurance policy issued at step  525 , as has already been described, relieves debtor  410  of the costs of administering the claims resolution process and of the costs of making distributions to allowed creditors  440 .  
         [0030]    Insurer  430  may announce an initial election period of, for example,  90  days, during which insurer  430  will give allowed creditors  440  the option of obtaining a final immediate payment at step  570  which is, for example, a pre-determined percentage of the amount of each creditor&#39;s allowed claim. Alternative embodiments of the present invention, however, may omit an election period.  
         [0031]    According to an embodiment of the present invention, those allowed creditors  440  who do not elect to receive a final immediate payment at step  570  receive their respective pro rata amounts from the next distribution and any subsequent distributions at step  550  as if the insurance policy had never been in place. The pro rata amount is calculated, for example, by dividing the amount of the subject property  420  by the final amount of allowed claims  440 , including allowed claims  440  that were satisfied by insurer  430  during the period of election.  
         [0032]    Referring to FIG. 6, alternative embodiments of the present invention may be implemented using, for example, a software application running over a conventional computer network  610  such as, for example, a local area network, a wide area network, or the Internet. An insurer, for example, insurer  430 , may employ one or more server computers conventionally coupled to a client-server network which may include computers accessible by the debtor  410 , or by the creditors  440 , or by both. In an alternative embodiment, the software application may run on one or more conventional HTTP servers and be accessible by client browsers over the World Wide Web.  
         [0033]    Referring to FIG. 7, a software application, according to an exemplary embodiment of the present invention, may perform the functions described in FIGS. 4 and 5. Debtor  410  establishes a financial relationship with an insurer  430  by entering registration information into debtor regisration module  710  which transmits debtor registration information to database  720  for storage. Creditor registration module  730  takes registration information provided by a creditor  440  and transmits said information for storage in a database  720 . Offer processing module  740  transmits to the creditor  440  the amount of insurer&#39;s  430  offer of a final and immediate payment which is calculated by the offer calculation module  750 .  
         [0034]    Through election module  760 , a registered creditor may, for example, transmit to offer processing module  740  an acceptance or rejection of insurer&#39;s offer of an immediate and final payment. If the insurer&#39;s  430  offer of payment is accepted by creditor  440 , control may then be passed, for example, to the payment verification module  770  which gathers payment information from the creditor  440  and transmits said information to database  720  for storage. Payment processing module  780  may then, for example, process payment of the immediate and final offer to electing creditors  440  using information stored in database  720 .  
         [0035]    The process according to the present invention gives allowed creditors  440  incentives to elect immediate payment under the insurance policy. By refusing an immediate final payment, allowed creditors  440  incur added risk since the amount to which allowed creditors  440  are entitled in the post-election period is no greater than the amount to which they would have been entitled had debtor  410  remained in place as administrator of the claims resolution process. Furthermore, distributions under the distribution plan  550  may take as much as several years to conclude.  
         [0036]    The present invention will result in more rapid distribution to allowed claim holders during the process of insolvency resolution, creating greater liquidity for claims and further resulting in a greater availability of credit.