Banking & Finance

What You Should Know About Ch. 11 Unsecured Creditors’ Committees

Often unsecured creditors in a Ch. 11 bankruptcy case do not get actively involved in the case because they are not in a strong position to recover significant amounts on their claims since their claims are not secured by liens. They also usually do not hire attorneys to pursue their rights in bankruptcy, especially if their claims are not large, because they believe the amount of legal fees will outweigh any benefit they might receive from the representation. It is for these reasons that the Bankruptcy Code allows for the creation and appointment of an Unsecured Creditors’ Committee (“Creditors’ Committee”) in standard Ch. 11 cases to represent the interest of all unsecured creditors in the bankruptcy case.

The following are some facts which you should know about appointment and operation of Creditor Committees in Ch. 11: 

1. Duty to Appoint: The United States Trustee, a federal agency which assists in the administration of bankruptcy cases, must attempt to appoint a Creditors’ Committee “as soon as practicable” after the filing of a Chapter 11 case that is not a Small Business Debtor Reorganization.  11 U.S.C. 1102(a)(1).

2. Sub-Ch. V Small Business Cases: A Creditors’ Committee may not be appointed in a Small Business Debtor Reorganization unless the Bankruptcy Court “for cause” orders otherwise.  11 U.S.C. §1181(b).  Note that a Standing Trustee is appointed in Small Business bankruptcy cases, unlike in standard Ch. 11 bankruptcy cases.
3. List of 20 Largest Unsecured Creditors: A Chapter 11 Debtor is required to file with its bankruptcy petition a list of its 20 Largest Unsecured Creditors who are not insiders of the Debtor.  Bankr. R. 1007(d).  The United States Trustee asks the creditors on this list whether they are interested in serving as a member of the Creditors’ Committee.  Although it is not required for a creditor to be on this list in order to serve on the Creditors’ Committee, most committee members are typically included on this list.
4. Number of Committee Members: A Creditors’ Committee shall ordinarily consist of the persons willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such Committee.  11 U.S.C. §1102(b)(1).  The United States Trustee will typically not appoint a Creditors’ Committee if less than three unsecured creditors agree to serve on the Committee.
5. Contingent, Unliquidated or Disputed Claims: The mere fact that a creditor holds a claim that is contingent, unliquidated, or disputed does not disqualify the creditor from appointment to the Creditors’ Committee. S. Trustee Program and Policy and Practices Manuel, Ch. 11 Administration, Section 3-4.3 et seq. (Feb. 2020)
6. Eligibility of Certain Creditors: The following types of creditors are also not disqualified from serving on a Creditors’ Committee:
   a. Unsecured creditors that have an administrative, reclamation, or Section 503(b)(9) claims,
   b. Under-secured creditors, or
   c, Creditors holding both a secured and unsecured claim.

However, the United States Trustee may choose not to appoint these types of creditors to serve on the Creditors’ Committee if it does not believe that they are representative of the Debtor’s unsecured creditor class.  Id.  Common sense applies on appointments to a Creditors’ Committee. For example, if a creditor has a claim that is 95% secured and 5% unsecured, that creditor will almost certainly not be appointed to an Unsecured Creditors’ Committee.

7. Critical Vendors: Parties who obtain orders and are to be paid as “Critical Vendors” should not be included on the Creditors’ Committee. 
8. Landlords: Landlords may serve on a Creditors’ Committee. However, if the Debtor assumes the Landlord’s lease and all defaults are cured, the Landlord is no longer a creditor and can no longer serve on the Committee. 
9. Governmental Units: Governmental Units are generally not eligible to serve on a Creditors’ Committee except in limited circumstances. 
10. Competitors: The fact that a creditor is a competitor of the Debtor does not disqualify the creditor from membership on the Creditors’ Committee, but it may be a factor which the United States Trustee considers in determining whether the creditor should be appointed to the Committee. 
11. Retention of Professionals who may be paid by the Estate: Perhaps the most significant fact about a Creditors’ Committee is that it may, with Bankruptcy Court approval, retain professionals including attorneys and accountants to represent the interest of unsecured creditors, and these professionals may be paid by the Debtor’s bankruptcy estate.  11 U.S.C. §1103(a) and §330(a)(1).  Attorneys can assist a Creditors Committee with obtaining information necessary to make decisions and recommendations, negotiating with the debtor, other classes of creditors and other interested parties, and guidance regarding legal obligations and responsibilities as Committee members.
12. Permitted Actions of a Committee: The Unsecured Creditors’ Committee may:

    a.     Consult with the debtor in possession (or trustee) concerning the administration of the case

    b.     Investigate the acts, conduct, assets, liabilities, and financial condition of the debtor

    c.      Investigate the operation of the debtor’s business and the desirability of the continuance of such business

    d.     Investigate any matters relevant to the formulation of a plan

    e.     Participate in the formulation of a plan, advise those represented by such committee of such committee’s determinations as to any plan formulated, and collect and file with the court acceptances or rejections of a plan

    f.      Request the appointment of a trustee or examiner

    g.     Review and possibly object to any applications for administrative expenses, including but not limited to professional fees

    h.     Negotiate executive compensation issues

    i.       Negotiate bid procedures in a proposed sale of substantially all the assets of the estate

    j.       Acquire the right to pursue avoidance and other chapter 5 claims or other claims on behalf of the estate, and

    k.     Investigate the legitimacy of pre-petition secured debt

11 U.S.C. §1103(c); U.S. Trustee Program and Policy and Practices Manuel, Ch. 11 Administration, Section 3-4.3 et seq. (Feb. 2020)

If you ever have any questions about Creditors’ Committees in a Ch. 11, please feel free to contact Sam King. Also, our firm has experienced, highly qualified attorneys who are able to effectively represent a Creditors’ Committee in a Ch. 11 case to assist it in maximizing the return on unsecured creditor claims. If you are on a Creditors’ Committee and are interested in retaining legal counsel for the Committee, please contact us.

Fri Sep 4, 10:11pm Share