WHAT WILL HAPPEN IF PACIFICA FILES FOR CHAPER 11 BANKRUPTCY?

(Caveat: I am not a lawyer and nothing I say in this post is intended to be legal advice. Please seek advice from a qualified attorney.)

interim Pacifica CEO Bill Crosier said the following in his Friday 10/5 memo to Pacifica employees:

People need to know what when/if we go into bankruptcy (more likely now), it will be *chapter 11 bankruptcy* (look it up). Ch. 11 brings with it additional problems but would stop collection efforts by ESRT and allow us to keep operating while we develop a plan to pay off the debts. 

I did look up Chapter 11 bankruptcy for a nonprofit, 501c3, organization.  Crosier is right when he says Chapter 11 is a mixed bag for Pacifica.

On the positive side, it is a way to play for time. Collection efforts by creditors will halt. Pacifica folks will still run the stations.

On the other hand, Pacifica and its Directors should prepare to bend over, spread ‘um wide and get ready for invasive penetration. Every memo, every deal, every payment will be combed through.  Verbal promises don’t matter here.  It is all about the documentation.

I did consulting work for a commercial broadcaster in the 1980s and Chapter 11 is not an easy experience. It is especially hard for people who work in a very specialized business like broadcasting. The bankruptcy folks usually don’t know the terminology or how things work. "Trade outs" are viewed as questionable.

THE CHAPTER 11 BANKRUPTCY PROCESS

Bankruptcy is governed by both federal and state law. Since Pacifica, including all of it’s five stations, are charted in California.  That is where the petition will be filed. Pacifica is particularly vulnerable because the individual stations are not independently chartered in their home states. Businesses and nonprofit organizations often break there holdings into smaller pieces to provide a separate level of legal protection.

First, the organization (“the debtor”) voluntarily files a standard bankruptcy petition and pays a fee (typically $500 to $1,700). At the time of filing, the debtor also must file a list of its assets, liabilities, creditors, and a statement of the debtor’s financial affairs, which includes details and discloses of sources of income, transfers of property, and other relevant financial information.

Upon filing of the petition the case is assigned to a judge from U.S. Bankruptcy Court to be the Trustee, an arm of the federal district court.

Then, the Trustee, in coordination with  and the office of the United States Trustees, appoints a committee of the debtor’s creditors. They review the information filed by the debtor to ensure that meets the requirements of the bankruptcy code.

At that point the Trustee and creditors committee are a “forum” that is in charge of the resolution of debtor’s problems.

The effect of a voluntary bankruptcy is that the debtor is “relieved” of making payments, in most cases is even prohibited, from making payments to the creditors. In Chapter 11, the debtor may continue to operate its day-to-day business without Court approval.

The Court will monitor the debtor’s financial activities. The parties will horse-trade in the hope of finding resolution of the debts. At the end of the process, the Trustee’s orders are the final word and the Trustee can force divestitures to settle the debts.

If the Trustee feels the debtor should have to liquidate its FCC licenses, the Trustee will find a competent, FCC recognized, interim party to operate the stations until the case is closed.

WHAT TO LOOK FOR AS THE PROCESS PROCEEDS

The first thing the Trustee and creditors will look for are the organization’s physical assets. From what I have seen, Pacifica does not declare the market value of its FCC licenses on its IRS Form 990 tax filings.  They aren’t required to do this, but whether assets are declared or not, an asset is an asset and it can be liquidated.

Another thing the Trustee will look for is evidence of malfeasance by the debtor. Because the probe into the debtor’s affairs is deep penetration, a finding of malfeasance gives the Trustee wide latitude including moving the case to a Chapter 7 bankruptcy proceeding. Then virtually everything is taken away from the debtor in Chapter 7.