Pennies from Heaven: A Proposal for Streamlining De Minimis Distributions in Bankruptcy Cases

Contributed by Doron P. Kenter.

“How dare you judge me? I mean what are you? You think you’re some kind of, like, angel here? No, you’re just this penny-stealing… wanna-be criminal… man.”

–Joanna (played by Jennifer Aniston) in Office Space

In the movie Office Space, Peter Gibbons (played by Ron Livingston) concocts a scheme to round off fractions of pennies from transactions processed by his software company, depositing those fractions of pennies in a separate account for his own benefit (and the benefit of his co-conspirators).  Though he articulates this scheme as being less offensive than taking a whole penny from the tray at the local 7-Eleven, comedy and a crisis of conscience inevitably ensue.
Similarly, in the world of corporate reorganization, we deal with numbers of all different shapes and sizes and face many attendant challenges and opportunities.  In The Big Short, Mike Burry is quoted as having noted that in modern financial transactions, $100 million is treated as “three digits instead of nine.”  DIP credit facilities can exceed hundreds of millions of dollars, and it not uncommon to see proofs of claim and lawsuits alleging well over a billion dollars in claims, counterclaims, and cross-claims.  Eight digit calculators are rapidly disappearing from our desks.
On the other hand, we also come across small, even miniscule, numbers.  Smaller claims, though no less important to the claimants, demand our attention in the biggest and most complex bankruptcy cases.  On occasion, distributions to these claimants can be minimal.  The administrative burden of addressing those claims is somewhat alleviated by the availability of a “convenience class” pursuant to section 1122(b) of the Bankruptcy Code, which permits unsecured creditors holding relatively de minimis claims to be treated differently from holders of larger claims (often affording the former a greater, more liquid, and/or more immediate recovery on account of their claims in exchange for the convenience of such classification and treatment).
These smaller claims can, however, cause difficulties in the logistics of distributions.  For example, in the common example of a chapter 11 plan that provides for interim distributions, a reorganized debtor might find itself making distributions of just a few cents (or less!) for each dollar of a creditor’s claim.  Such a scheme can result in distributions of 50, 25, or even 1 or 2 cents.  Often, these checks are processed and sent to each claimant by the claims agent or by the reorganized debtor, resulting in postage fees that dwarf the amount of the check itself.  These miniscule checks can be a hassle for their recipients to process and reconcile, especially if they receive such checks every six months or so until a final distribution in the bankruptcy case.
What, then, is the solution?  May de minimis distributions be ignored altogether, with the excess pennies aggregated and distributed elsewhere – perhaps to a nonprofit, court-approved, bankruptcy assistance project?  This method may be attractive (and practical), but is it fair to deprive a claimant of amounts that are owed to it, however tiny the distribution may be? (“That’s my four cents, not yours!”)  Alternatively, a plan could specifically provide for “holdbacks” of all distributions less than a certain amount (say, the price of standard postage) until such distributions exceed a specified threshold amount (say, one dollar) or until a final distribution is made in the bankruptcy case, when all accounts are reconciled and the books are closed.  Though this method may be fair to the claimant, it can create its own set of headaches, as these amounts would need to be monitored, aggregated, and recorded so that all distributions are accounted for and actually made in due course.  This method also delays payment of amounts otherwise due and owing to these creditors.
Instead, perhaps debtors could resolve such concerns by providing for a modified “minimum distribution” scheme, along with a specific “opt-out” clause.  For example, a plan could provide that any interim distribution of less than 44 cents would be deferred until the claimant stands to receive an aggregate distribution of one dollar or more, at which point a distribution would be made on account of all prior deferred distributions.  Then, when the final distributions are made, the reorganized debtor could “true up” any remaining amounts to be paid on account of these deferred distributions.  The plan would concurrently provide for the opportunity to opt-out from such treatment, pursuant to which any holder of such claims could affirmatively opt out from such treatment and receive his or her pennies with each interim distribution, resolving any concerns that the debtor should not hold back amounts that a creditor would like to receive immediately.
Perhaps this scheme is more trouble than it is worth for the debtor – after all, crafting such a provision and processing any such opt-outs and accounting for such deferred payments create their own sets of logistics which must be handled properly (though in huge cases, postage and handling of such checks could reach epic proportions).  Instead, the advantage of this scheme would primarily fall to the creditors – who would, at no great expense, simply be spared the hassle and confusion of processing and accounting for biannual checks for three, four, or seven cents.
The aforementioned convenience class can resolve some of these logistical nightmares by providing for a one-time distribution to creditors whose claims fall below a certain threshold amount.  Even then, though, a situation may arise where the creditor’s claim is less than the postage it costs to pay it.  What should a debtor do then?  Ultimately, a fair approach for both the debtor and creditor may be to require creditors (even those whose claims are classified as “convenience claims) whose claims fall below a certain threshold to request their distribution in writing.  That will spare the reorganized debtor from having to process checks for de minimis amounts to creditors who might never really have cared to receive a check for pennies, but it will ensure that the creditor who does want to receive its de minimis distribution has an opportunity to receive its “two cents” from the reorganized debtor.  But that’s just my two cents.