William G. Schwab and Associates
811 Blakeslee Blvd. Dr. East (PA Route 443) PO Box 56 Lehighton, PA 18235
Tel 610-377-5200 Fax 610-377-5209
NEWSLETTER
Bankruptcy July 26, 2016
 
Personal Injury
Bankruptcy
Business
Criminal Law
Elder Law
Estate Planning/Probate
Real Estate
 

Banning the Future Application of the New Value Exception in a Chapter 11 Case

In the 1999 case, Bank of America National Trust and Savings Association (LaSalle), the U.S. Supreme Court issued a landmark ...(more)

 

Criminal Penalties for Bankruptcy Fraud

Bankruptcy fraud has become a common way for debtors to abuse and manipulate a system that was intended to help ...(more)

 

The Scope of the Homestead Exemption

In states that provide a homestead exemption for debtors who have filed or are contemplating filing for bankruptcy, a debtor's ...(more)

 

The Role of the Bankruptcy Judge

A United States bankruptcy judge has the ultimate discretion whether to grant requests for bankruptcy relief. In addition, the judge can issue ...(more)

 

Bankruptcy Law In The News

Former NFL Quarterback Vince Young Files For Bankruptcy

Central California Diocese Files for Bankruptcy

Duke Energy settles suit over Crescent bankruptcy

Detroit water department mediation to continue next week

Detroit bankruptcy plan threatens survivor benefits of families of fallen cops, firefighters

The Appointment of a Creditors' Committee in Chapter 11 Reorganization Cases


As the efficient administration of the Chapter 11 debtor's reorganization plan is crucial to the successful rebirth of the business and to the equitable repayment of creditors, the Bankruptcy Code requires the United States trustee to appoint a creditors' committee to supervise and manage the reorganization process. 
 
Appointment of an Official Unsecured Creditors' Committee
As set forth in Section 1102 of the Code, the U.S. trustee must appoint "a committee of creditors holding unsecured claims" as soon as possible after the order for relief under Chapter 11.  The committee ordinarily must consist of the creditors holding the seven largest claims against the debtor.
 
In addition, the U.S. trustee may appoint additional committees of creditors or of equity security holders in the exercise of the U.S. trustee's own discretion. 
 
Adequate Representation of Unsecured Creditor Interests Involved
Generally, bankruptcy courts have preferred to limit the number and size of creditors' committees.  However, a court may order the U.S. trustee to appoint additional committees "if necessary to assure adequate representation of creditors or equity security holders." 
 
With the goal of adequate representation in mind, the U.S. trustee should appoint creditors to the committee who reflect the diverse interests of the unsecured creditors involved in the case as a whole.  This means that the creditors' committee should proportionately reflect the debt structure, giving a "voice" to all parties in interest.  While the seven largest creditors may very well reflect the various positions of the parties in interest, the trustee's determination ultimately demands a thorough analysis of all interests involved and a comprehensive examination of the debtor's financial structure.
 
The Powers and Duties of a Creditors' Committee
Under Section 1103 of the Code, creditors' committees appointed by the U.S. trustee are entitled to retain counsel, accountants, and other professionals to represent their interests, if approved by the court.  As fees for professional services will be taken out of the debtor's estate, the creditors' committee owes a fiduciary duty to the debtor to avoid excessive costs.  For example, the appointment of co-counsel in a case is generally not warranted, unless necessary in a very large and complex case.
 
Furthermore, a creditors' committee may:
  • Consult with the trustee or debtor concerning the administration of the case
  • Investigate the acts, conduct and financial condition of the debtor
  • Participate in the formulation of the reorganization plan
  • Request the appointment of a trustee
  • Perform other services in the interest of those represented
Because most Chapter 11 cases permit the debtor to retain control over ordinary course business transactions, creditors' committees can be necessary instruments in ensuring the proper management of the reorganization plan.