“All our times have come
Here but now they’re gone
Seasons don’t fear the reaper
Nor do the wind, the sun or the rain, we can be like they are
Come on baby; don’t fear the reaper…” – Blue Oyster Cult

“I gotta have more cowbell” – Christopher Walken (as The Bruce Dickinson), Saturday Night Live

Both bankruptcy practitioners and potential clients thereof can take comfort in a recent decision issued by the United States Court of Appeals for the Fifth Circuit.  Last week, the Fifth Circuit concluded that hiring bankruptcy counsel is not an admission of insolvency or of a downward trajectory that would necessarily result in bankruptcy.

In Neiman v. Bulmahn, the plaintiffs-appellants were shareholders of ATP, a Texas company that developed oil and gas properties and filed for bankruptcy. Plaintiffs sued the former officers or directors of ATP, alleging that they had made misrepresentations related to ATP’s business, including with respect to certain of the company’s operations, its liquidity, and the allegedly “true” reason for the CEO’s resignation.

Plaintiffs alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in connection with these alleged misstatements. To prevail on such claims, the plaintiffs were required to prove, among other things, that the defendants had intentionally made misstatements or misrepresentations such that they had a “mental state embracing intent to deceive, manipulate, or defraud.”

In connection with their attempts to demonstrate the requisite scienter, the plaintiffs alleged that ATP’s decision to retain bankruptcy counsel demonstrated that the company’s executives and directors were fully aware of the company’s struggles and the alleged inevitability of a bankruptcy filing.  The Fifth Circuit, however, rejected that argument, noting that a consultation with (or retention of) bankruptcy counsel does not necessarily demonstrate that “ATP’s executives knew that they would run of cash.” Additionally, the Fifth Circuit emphasized that many companies consult bankruptcy counsel to “explore potential options before management is sure that the company will fail.”  Citing academic literature on the subject, the Fifth Circuit reasoned that a principal reason for hiring bankruptcy counsel is to avoid bankruptcy.  Indeed, the court noted that restructuring lawyers are most successful “when a company never has to commence a bankruptcy case.”

Although this point was one of several made in the Fifth Circuit’s decision, it provides meaningful comfort for those who want to understand their financial state and weigh their options.  Notwithstanding an understandable fear of consulting (or hiring) bankruptcy lawyers, the very act of doing so will not, according to the Fifth Circuit, constitute an admission of guilt or any particular financial position, nor will it support an inference that key actors knew that the company under their stewardship would run out of cash and file for bankruptcy.  Indeed, in some instances, it may be in the company’s best interest to retain bankruptcy counsel at an early date so as to maximize the company’s chances of success and mitigate any potential downturns.  Consulting bankruptcy counsel may, in fact, prevent a filing altogether.  And even if a filing is inevitable (or the best option), capable bankruptcy counsel can make sure it is done responsibly and for the benefit of all stakeholders.