Creditors Committee In A Bankruptcy Case
What Is Its Relationship To The U.S. Trustee?
During the pendency of the bankruptcy case, many U.S. trustee offices only will take a limited role in the case. If an active creditors’ committee appears to be representing the interests of unsecured creditors, the U.S. trustee will usually not duplicate their efforts. Of course, the trustee is always free to take part in a case, even if it involves a large creditors’ committee. More often, it is in large cases that the U.S. trustee will be active and respond to motions and other pleadings filed in the case, even if there is an active creditors’ committee.
How Do You Participate?
If one of your debtors files Chapter 11 and you believe that your claim is large enough to place you in the top 20 unsecured creditors, but you have not received notice of your position as one of the top 20 creditors, you should immediately contact your counsel, credit representative or the U.S. trustee’s office.
This is important since the debtor may have listed your claim incorrectly (or not at all) and — unless you act promptly — you may be denied participation on the committee. You should act quickly because the meeting may be held on short notice. Attending the organizational meeting will allow you to participate in important decisions with respect to retaining attorneys and accountants and formulating case strategies.
Why Participate?
Your membership on a creditors’ committee allows you to help shape the debtor’s reorganization. You, as a representative of all unsecured creditors, will consult with the debtor and decide what position your attorney will take before the court. Being on the creditors’ committee allows you to know what is happening with the debtor.
While you must avoid using confidential information to your individual advantage, you are in a position to have the most up-to-date information about the debtor. The best reason to participate, however, is that a creditors’ committee is important to making the bankruptcy system work and keeping the debtor “honest.” Without the creditors’ committee, one of the important checks and balances in bankruptcy is missing.
The Creditors’ Committee In A Bankruptcy Case
What Is It?
The official committee of unsecured creditors or creditors’ committee generally consists of the largest unsecured creditors in a Chapter 11 proceeding. The committee should be representative of all unsecured creditors.
Under the Bankruptcy Code, the committee may:
• Investigate the acts, conduct, assets, liabilities and operations of the debtor.
• Participate in the formulation of a plan, either by negotiation with the debtor (or another party) or by preparing one of its own.
• Consult with the trustee or debtor-in-possession concerning the administration of the case.
• Perform other services that are in the interests of the unsecured creditors.
How Is It Formed?
The precise process by which the committee is formed may differ from the district to district, depending on the procedures of the court and of the Office of the United States Trustee. In most cases, however, the formation and appointment process is controlled by the Office of the United States Trustee. The office will either solicit participation by mail (or by telephone in an urgent situation) from among the debtor’s largest unsecured creditors. The trustee’s office may solicit indications of interest first or simply invite the 20 largest unsecured creditors to a meeting to form a creditor’s committee.
The Bankruptcy Code contemplates, in the usual case, a committee of seven of the debtor’s largest unsecured creditors. However the code (at §1102) also allows the trustee discretion in the appointment.
Subsequent to the appointment of the committee by the U.S. trustee, upon request of a party in interest and in appropriate circumstances, the bankruptcy judge may intervene and direct changes or additions in the composition of the committee or to direct the appointment of additional committees of creditors or interest holders.
How Does It Function?
After formation, a meeting of the creditors’ committee should be held upon proper notice. If all members are present when the committee is appointed, an organizational meeting could be held at that time. One of the first orders
of business in the organization of a creditors’ committee is to elect a chairperson and other officers, if necessary or appropriate. The chairperson is responsible for executing documents on behalf of the committee, calling meetings of the committee and working with any professionals retained by the committee. In appropriate situations, the committee may choose to appoint a secretary or other officers.
The committee may retain professionals such as attorneys, accountants, appraisers and the like. It is a rare occasion when a committee can or should operate without counsel. As indicated, there are many duties and powers that a committee has, and the committee is the best advised by counsel as to its rights and obligations.
When appropriate, the committee should consider hiring an accountant or other professional to assist it with its duties vis-à-vis the debtor.
All professional fees are paid from the assets of the debtor after proper court approval. Unless there is agreement to the contrary, the individual members of the committee are not individually responsible for the professional’s fees.
What Does It Do?
The court relies upon the creditors’ committee to present the unsecured creditors’ perspective in issues in the case.
The creditors’ committee also is charged with the responsibility of negotiating a plan of reorganization with the debtor. In appropriate cases, the creditors’ committee will file its own plan of reorganization (or liquidation).
An active creditors’ committee with an effective, responsible lawyer will improve the changes for a successful reorganization.
Source: Commercial Law League of America