Article Source: Dorsey & Whitney Bankruptcy Team for Foreign Suppliers
Original Article Link
This Series Five will address questions relating to the role
of official unsecured creditors committees in bankruptcy and considerations of
whether to join such a committee.
1. Question: What is the official unsecured creditors
committee and what role does it play in Chapter 11 bankruptcy cases?
The official unsecured creditors committee (the “UCC”) is a
statutorily authorized committee of unsecured creditors whose role is to
advocate, as a fiduciary, on behalf of all unsecured creditors in a Chapter 11
case. The UCC is entitled to obtain valuable information in the case and
advances the interests of all unsecured creditors to ensure such interests are
represented in the bankruptcy process.
The UCC is usually comprised of three to seven of a debtor’s
largest unsecured creditors that are willing to serve. The UCC takes an active
role in steering the Chapter 11 case and may, with court approval, investigate
the debtor, its financial affairs, and its business operations. The UCC will
usually participate in the formulation of a plan of reorganization and is
afforded consultation rights in connection with any sale of the debtor’s
assets.
The UCC is entitled to its own advisors, including counsel,
and the related professional fees and other costs are borne by the bankruptcy
estate and not the individual members of the UCC. While the costs of the UCC’s
advisors are paid by the bankruptcy estate, the UCC is not otherwise entitled
to any compensation for its work in the case. Individual members may wish to
retain their own counsel to assist them in their role on the UCC, and the cost
for such individual counsel is borne by the individual committee member.
2. Question: Should I join the UCC?
That depends. Being a member of the UCC means that you will
have an active and important role in the bankruptcy case and serve the
interests of unsecured creditors. The UCC typically negotiates recoveries under
a plan of reorganization for unsecured creditors or, in less common instances,
proposes its own plan of reorganization.
Serving on the UCC requires some time commitment. The UCC
and its advisors typically convene about once a week during periods of
significant activity, and less often other times, until a plan is confirmed. As
noted above, individual UCC members often retain their own counsel to assist
and advise in connection with UCC obligations (e.g. participate in UCC
meetings), in addition to representing the member’s personal interests.
Regardless of whether a member of the UCC acts on its own or through counsel,
each member of the UCC owes a fiduciary duty to all unsecured creditors and
must act for the benefit of all unsecured creditors. This means that members of
the UCC cannot act solely in their own interests. Being a member of the UCC will
also often involve receiving and reviewing confidential information about the
debtor that must be kept confidential.
3. Question: What role does the U.S. Trustee play with
respect to the committee and in a Chapter 11 case generally?
The U.S. Trustee, which is part of the U.S. Department of
Justice, oversees all bankruptcy cases filed throughout the U.S. At the outset
of large and mid-size Chapter 11 cases, the U.S. Trustee will reach out to the
debtors’ largest unsecured creditors and ask whether they would be willing to
serve on the UCC. If and once the U.S. Trustee has appointed the UCC, it plays
no role on the UCC itself. Rather, the UCC determines what actions to take in
the bankruptcy case, with the advice of counsel.
The U.S. Trustee is often referred to as the “bankruptcy
watchdog” and acts to ensure everyone plays by the rules – whether that be
debtors, creditors, or other parties in interest. During the Chapter 11 case,
the U.S. Trustee will actively monitor the case, with particular attention to
the retention and payment of the debtor’s professionals, compensation of
debtor’s management, and proposed plans of reorganization and whether they
provide for releases for non-debtors.
4. Question: Can multiple creditors work together and retain
the same counsel?
Yes, so long as there is sufficient disclosure to and
informed consent by all creditors retaining the same counsel. Indeed, large
Chapter 11 cases often feature a variety of ad hoc committees of similarly
situated creditors and interest holders, in addition to the formally appointed
UCC, which act in the interests of their respective groups. This can be an
effective way for creditors to increase their leverage while keeping costs
down. However, informal groups of creditors do not have the same powers and
advantages as the UCC and, importantly, will not be entitled to have their
costs and expenses paid by the bankruptcy estate.
***
For any questions regarding this article, kindly contact:
Catherine Pan Giordano (pan.catherine@dorsey.com)