How valuable would it be to serve on the Committee of Unsecured Creditors?

  • Extremely
  • Somewhat  
  • Not so much
  • Not at all

With bankruptcy filings up by more than 25% during this past year, and surely with many more to come in the near future, an increasing number of businesses and individuals may find themselves listed amongst the largest unsecured creditors of a debtor, with much to lose in a bankruptcy case. 

The formation of an official committee of unsecured creditors is provided for under section 1102 of the U.S. Bankruptcy Code. Pursuant to section 1102, the U.S. Trustee is tasked with forming the unsecured creditors’ committee as soon as possible after a debtor files for chapter 11 relief. Accordingly, the process for choosing and appointing a committee will begin within days after the bankruptcy filing with the U.S. Trustee, sending solicitation letters and questionnaires to the largest unsecured creditors identified by the debtor as part of its chapter 11 petition. 

An unsecured creditors’ committee can be comprised of anywhere between three and eleven members, but it’s usually made up of no less than five and no more than seven members. 

Committees can play an integral role in shaping the course of a bankruptcy case. Although the ordinary day-to-day operations of a chapter 11 debtor’s business are normally determined by the debtor’s existing management, a committee can influence both the long-term strategy of the debtor’s business and affect any decisions it makes out of the ordinary course of a debtor’s business, which may affect all creditors generally.

Serving on a bankruptcy committee has some advantages which include:

Providing your opinion. The committee has a fiduciary responsibility to represent the interests of all the unsecured creditors. As such, a bankruptcy judge relies heavily on the committee’s opinions and recommendations, as opposed to the self-interested view of one creditor. Being a member of the committee enables a creditor to influence how their own claim is treated (and possible recovery) along with the claims of all the other creditors.

Cutting down costs. Because the committee will hire its own attorneys and financial advisors, a creditor serving on the committee may often find that its interests are aligned with the entire committee in taking action or objecting to an action. Asserting those positions through a singular voice of the committee saves costs to the individual creditor when outside professionals and services need to be hired. Moreover, while payment for outside services from the debtor’s assets will decrease the amount available to pay creditors in the long run, the cost for those services is disbursed evenly among all the creditors which the committee is formed to benefit.

Networking opportunities. Participating on a committee provides a unique opportunity to work with other individuals involved in the same industry. Due to the committee’s access to confidential information and heightened knowledge of case developments, many members view committee service as a way to sustain or strengthen the existing business relationship with the debtor and other committee members, who may provide vital business opportunities to the creditor. 

The major disadvantages include:

A Time Commitment. The time commitment will vary depending on the complexity of the case. In general, the typical committee may meet several times a month (by Skype or Zoom is fine) which takes time away from other business obligations. So often the time spent on trying to save the insolvent party is way in excess of what is owed. In addition, since service is voluntary, committee members are not directly compensated for the considerable time they may expend. 

Acting as a Fiduciary. The committee and its members have a fiduciary duty to act in the best interests of the unsecured creditors as a whole. Specifically, as a fiduciary, committee members are prohibited from using the confidential information gained in their service on the committee to their own advantage based on such information. Practically speaking, this would prohibit any such member from taking any action which may appear to be in violation of this duty, including effectively prohibiting any securities trading because of an assumption that such trading was based on insider information. 

Conclusion

Although serving on a bankruptcy committee requires a considerable time commitment accompanied with extensive responsibility, a creditor may find that being on the committee allows them some limited control in a situation where most creditors often find themselves feeling somewhat helpless. In addition, the education gained through participation on a bankruptcy committee is invaluable and can facilitate what to do the next time a significant bankruptcy arises.

Source: Sheppard Mullin

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