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Strength in Numbers: Benefits of Serving on an Unsecured Creditors Committee

by Nancy King


As an unsecured creditor owed money by a Chapter 11 Debtor, your company has a claim in the bankruptcy case. One of the best ways to maximize your recovery may be to seek membership on an Official Committee of Unsecured Creditors.


A Committee gives influence to unsecured creditors who may otherwise be disenfranchised if left to go it alone. Unsecured creditors have the lowest priority claims, the least bargaining power, and thus the most to lose in Chapter 11. A Committee allows unsecured creditors to band together and hire professionals that are paid for by bankruptcy estate, not the individual creditors or the Committee members.


This article discusses how Committees are formed, how they function, and how they benefit Committee members and all unsecured creditors.


Formation of the Committee

An Unsecured Creditors Committee is formed to protect the interests of all unsecured creditors. The Committee is appointed by the Office of the United States Trustee (“UST”), a division of the United States Department of Justice. The UST typically solicits interest to serve on a Committee from the twenty largest unsecured creditors in a Chapter 11 case. If your company has an unsecured claim but is not included on the list of largest creditors, you may still submit a form to the UST seeking to be appointed to the Committee. If enough interest is generated, the UST will appoint a Committee that can consist of interests such as trade creditors, suppliers, landlords, litigation claimants, unsecured bondholders and noteholders, unions and employees. Once the UST forms the Committee, the members hold an organizational meeting, select a chairperson, and choose legal counsel and sometimes financial advisors to help the Committee carry out its functions.


The best description of the role of a Creditors’ Committee is contained in the legislative history to 11 U.S.C. §1102 of the bankruptcy code: “[Creditors Committees] will be the primary negotiating body for the formulation of the plan or reorganization…they will represent the classes of creditors from which they are selected [and] will provide supervision of the Debtor [and] will protect their constituents’ interests.”


Hiring Professionals

The Committee is entitled to legal representation that is paid for by the bankruptcy estate. This means that there is no cost to Committee members to have legal counsel. It is important to hire counsel who is mindful of efficiency – maximizing the return for unsecured creditors while not unnecessarily spending bankruptcy estate resources. If needed, the Committee is also permitted to hire other professionals, including financial advisors, to assist in understanding the Debtor’s finances and to facilitate formulating and understanding a plan of reorganization.


Responsibilities

Each Committee member acts as a fiduciary to the entire unsecured creditor class. The Committee has broad responsibilities which include:


(1) consulting with the Debtor concerning the administration of the case;


(2) investigating the acts, conduct, assets, liabilities, and financial condition of the Debtor, the operation of the Debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan;


(3) participating in the formulation of a plan, advising those represented by the Committee of the Committee’s determinations as to any plan formulated, and collecting and filing with the court acceptances or rejections of a plan; and


(4) any other duties as required.


The Committee is also entitled to be heard on all legal issues and at hearings in the bankruptcy case. In most cases, the Bankruptcy Judge relies heavily on the Committee to help determine if a plan of reorganization should be confirmed or not.


Top 5 Benefits of Serving on an UCC

1. Early Influence

The influence of a Committee cannot be overstated – it gives the Committee members and unsecured creditors strong influence and sway over the progress and outcome of a case. A Committee’s influence begins immediately upon formation. In the early days of a new Chapter 11 filing, decisions are often made which shape the outcome of the entire case, including first day motions or sometimes a proposed sale of assets. The Committee and its legal counsel must be vigilant and nimble when faced with common Chapter 11 issues such as DIP financing, the preservation of unencumbered assets, formation of a plan, or a proposed sale. Decisions made in the early days of a Chapter 11 case are often crucial to maximizing the return to unsecured creditors, and a Committee’s input early in the case is essential.


2. Inside Knowledge

Serving on a Committee provides inside knowledge about the Debtor’s operations, finances, and plans for the Chapter 11 case in real time. A Committee will typically hold weekly meetings where professionals inform the Committee of the status of the case. Oftentimes a Committee will learn information such as: (1) is the plan to liquidate or reorganize? (2) will current management stay in place? (3) is a sale of assets contemplated? (4) what is the status of litigation being pursued? (5) what preference actions will be pursued and how? and, most importantly, (6) what is the potential distribution for unsecured creditors? Having legal and financial professionals representing the Committee means that members have access to the Chapter 11 Debtor’s business operations and plans, and have that information explained to them in terms of what it means specifically for the unsecured creditors’ recovery.


3. Impact

In many cases the Committee is the most important player in the success of a Debtor’s reorganization. The Committee can use its influence to: (1) set the terms of plan of a reorganization; (2) persuade the Debtor to reach settlements and agreements to maximize estate assets; (3) influence the Debtor to pursue litigation against insiders that would enhance estate assets; (4) affect the recovery to unsecured creditors with regard to amount, timing of distributions or payment terms; and (5) when necessary, force a conversion of the case to chapter 7 or seek the appointment of a trustee. Additionally, the Committee will influence the way a case is administered because of the impact a Committee has on essentially all major decisions in a Chapter 11 case. In almost every case, the existence of a Committee means the recovery for all unsecured creditors will be much greater than if no Committee had been formed.


Perhaps the biggest impact of the Committee is the weight of its positions on major legal issues. Courts take Committee positions seriously, and oftentimes the Committee’s position on the Debtor’s Plan of Reorganization is what makes or breaks a Debtor’s efforts to reorganize. This gives the Committee substantial leverage to extract the best possible treatment for unsecured creditors.


4. Relationships

Committee service can serve to strengthen relationships with other creditors, as well as the Debtor. When a Debtor is reorganizing, and unsecured creditors are getting paid, then “all ships rise” because the creditors continue their business relationships with the reorganized Debtor. Joining the Creditors’ Committee means weekly contact with other parties within the same industry. In the event of a successful reorganization, Committee members working with the Debtor during the case may lead to new business opportunities and synergies.


5. Efficiency and Education

One of the most important benefits of serving on a Creditors’ Committee is cost-sharing. The Committee, with bankruptcy court approval, is permitted to hire legal counsel (and, if warranted, other professionals including financial advisors, accountants, appraisers or investment bankers) to assist in fulfilling their fiduciary duties. The service of the professionals is paid for by the bankruptcy estate. Although this increases the overall cost of administering the case, the recovery to unsecured creditors in particular is much better than in the absence of pooled cost-sharing. Bottom line: serving on a Committee provides a cost-effective means to get access to professionals and be influential in a Chapter 11 case.


In addition to efficiencies, the education of Committee members is a real benefit of serving on a Committee. It is reality that certain industries will experience multiple Chapter 11 filings from businesses in their industry. For example, medical vendors may have multiple bankruptcy cases among their clients. While each Chapter 11 case is unique, serving on a Committee educates the Committee member on the Chapter 11 process. This knowledge can help an unsecured creditor maximize its recovery in each Chapter 11 case.


Conclusion

The impact and influence of a Committee can only be realized when unsecured creditors seek to serve on a Committee. With the right legal representation, a Committee can make or break the Debtor’s chance to successfully reorganize while maximizing the benefit to unsecured creditors. Debtors are typically motivated to work cooperatively with a Committee to conserve resources, maximize value, and sometimes present a unified front against secured creditors. If your company finds itself holding an unsecured claim when a client, customer or trading partner files Chapter 11, do not miss the opportunity to serve on an Unsecured Creditors Committee and maximize your recovery.

 

Nancy King is a partner in EmergeLaw, PLC's Nashville office where she represents creditor's committees, debtors and other parties in Chapter 11 bankruptcy cases. In her past life, she served for 25 years as a career law clerk for Hon. George Paine and Hon. Randal Mashburn at the U.S. Bankruptcy Court for the Middle District of Tennessee.