American Bankruptcy Institute
40 IV. Proposed Recommendations: Commencing the Case
committee has been viewed not only as necessary to protect the interests of the many unsecured creditors unable to participate directly in the process, but also to further monitor the actions of the debtor in possession during the chapter 11 case. It can play “many roles” in a chapter 11 case.146
The appointment of a committee of unsecured creditors is mandatory in chapter 11 cases, but cases do proceed without committees in certain circumstances. For example, the U.S. Trustee can only constitute a committee if a sufficient number of creditors are willing to serve on the committee.147 An individual creditor will often engage in a cost-benefit analysis to decide whether to serve on the unsecured creditors’ committee. As a committee member, a creditor owes certain fiduciary duties, and its service consumes time and effort that could otherwise be devoted to the creditor’s own business. Consequently, unsecured creditors may decide, particularly in smaller chapter 11 cases, that the economics do not favor service on a committee of unsecured creditors.
The U.S. Trustee must form (or try to form) a committee “as soon as practicable after the order for relief.”148 To meet this requirement, the U.S. Trustee, shortly after the petition date, actively solicits interest in committee service from the debtor’s unsecured creditor body. “The size and exigencies of a case guide the solicitation and formation process.”149 The U.S. Trustee typically solicits the debtor’s 20 largest unsecured creditors, but may expand its search to the top 30 if warranted by the case. Although many committee formation meetings are held in person, the U.S. Trustee also constitutes committees through telephone interviews, particularly in smaller cases.150 “What does not vary, however, is the U.S. Trustee’s need to gauge a creditor’s genuine willingness to serve on the committee for legitimate reasons and the committee members’ obligation to act as fiduciaries to the entire unsecured creditor constituency.”151
The U.S. Trustee generally tries to appoint members to the committee who reflect the general unsecured claims pool in the particular case — e.g., bonds, trade, landlords, etc.152 Section 1102 allows parties in interest to request, and the court to direct, a change in the composition of the unsecured creditors’ committee or the appointment of additional committees.153 The U.S. Trustee is the party, however, that implements the change in the composition of the unsecured creditors’ committee or constitutes any additional committees. Moreover, section 1102 does not specifically address whether a single unsecured creditors’ committee may represent the interests of unsecured creditors in multiple, jointly administered cases. The U.S. Trustee has used a single unsecured
146 In re Haskell-Dawes, Inc., 188 B.R. 515, 521 (Bankr. E.D. Pa. 1995). “[T]he Bankruptcy Code authorizes such committees to, inter alia: consult with the trustee concerning the administration of the case; investigate the acts, conduct and financial condition of the debtor; investigate the operation of the debtor’s business and the desirability of having such business continue; participate in the formulation of a plan; and provide advice to those whom the committee represents regarding any plan that is formulated.” Id. at 519. 147 Roberta A. DeAngelis & Nan Roberts Eitel, Committee Formation and Reformation: Considerations and Best Practices, Am. Bankr. Inst. J., Oct. 2011, at 20 n. 2 (noting that the U.S. Trustee “often cannot appoint a committee in other cases because an insufficient number of creditors are willing to serve”). See Harner & Marincic, Committee Capture?, supra note 140, at 777 (finding that in a study of chapter 11 cases filed between 2002 and 2008, 48.3 percent of cases involved at least one creditors’ committee and 51.7 percent involved no creditors’ committee). See also In re Aspen Limousine Serv., Inc., 187 B.R. 989, 994 n.6 (Bankr. D. Colo. 1995), aff’d as modified, 198 B.R. 341 (D. Colo. 1996) (“[I]n practice, a committee is rarely appointed in a smaller case.”); In re ABC Auto. Prods. Corp., 210 B.R. 437, 442–43 (Bankr. E.D. Pa. 1997) (“[A]s courts and commentators alike have noted, in many cases creditors’ committees are inactive or ineffectual.”). 148 11 U.S.C. § 1102(a)(1). 149 DeAngelis & Eitel, supra note 147, at 20.
150 Id. 151 Id.
152 In re Park W. Circle Realty, LLC, 2010 WL 3219531, at *2 n. 6 (Bankr. S.D.N.Y. Aug. 11, 2010) (“Although committees do not necessarily need to reflect the precise composition of the creditor body, committees should adequately represent the various creditor types.”); accord In re Hills Stores Co., 137 B.R. 4, 7 (Bankr. S.D.N.Y. 1992). 153 11 U.S.C. § 1102(a)(2), (4).