American Bankruptcy Institute
42 IV. Proposed Recommendations: Commencing the Case
After extensive deliberation, the Commission recommended retaining the mandatory appointment of a committee of unsecured creditors in all cases, except small and medium-sized enterprise cases (addressed in a subsequent section).159 The Commissioners found value in the traditional “watchdog” function of the committee, not only as a check on the debtor in possession, but also as a check on other stakeholders and the allocation of the estate’s value among stakeholders. Indeed, unlike secured or administrative creditors — whose claims must be paid in order to confirm a plan — the Bankruptcy Code does not mandate any minimum return for general unsecured creditors (other than that they receive more than they would in a chapter 7 liquidation). The unsecured creditors’ committee is the primary statutory protection for general unsecured creditors. Nevertheless, the Commission did find merit in the argument that a committee should not be appointed if its constituents have no need for representation in the case (i.e., their claims are out of the money or are being paid in full). The Commission agreed that this standard should be part of a “for cause” standard that would, if established by evidence at the hearing, allow the court to direct the U.S. Trustee not to appoint, or to disband, an unsecured creditors’ committee.
The Commission agreed that the potential benefits of an active committee of unsecured creditors must be carefully balanced against the costs and potential delays associated with the various actions that such a committee could be entitled to take. For example, the Commissioners discussed the kinds of cases in which tactics by a committee can increase costs or delay the resolution of a case or a material transaction in the case. Although many of the Commissioners acknowledged the infrequency of such instances, they also recognized the potential harm to the estate and its constituents when they do occur. The Commission agreed, however, that the court and the U.S. Trustee have sufficient authority under the law to monitor the activity of unsecured creditors’ committees and to implement appropriate protections as needed. On that point, the Commissioners also discussed cases in which a committee of unsecured creditors was ordered to share professionals with other committees (or even the debtor, provided appropriate protections were put in place) or in which a committee’s professionals’ fees and expenses were capped either overall or with respect to certain matters.160
Finally, the Commission considered the impact of potential conflicts of interests associated with the diverse membership of a typical committee of unsecured creditors. Specifically, the interests of one committee member may not align with those of other members or even with those of general unsecured creditors in a particular chapter 11 case.161 For example, the interests of an unsecured creditor seeking to acquire equity in the reorganized debtor in exchange for its claims may not align with the interests of the debtor’s trade creditors.162 Also, committee members who hold equity
159 See Section VII, Proposed Recommendations: Small and Medium-Sized Enterprise (SME) Cases. 160 For a discussion of the costs and potential complications associated with multiple committees, see Kenneth N. Klee & K. John Shaffer, Creditors’ Committees Under Chapter 11 of the Bankruptcy Code, 44 S.C. L. Rev. 995, 1024–25 (1993) (“[M]ultiple committees can complicate negotiations, delay the reorganization process, and create additional administrative expenses to the debtor’s estate, particularly in terms of higher professional fees.”). 161 See, e.g., Michael P. Richman & Jonathan E. Aberman, Creditors’ Committees Under the Microscope: Recent Developments Highlight Hazards of Self-Dealing, Am. Bankr. Inst. J., Sept. 2007, at 22 (examining chapter 11 cases involving committee member conflicts of interest); Burke Gappmayer, Protecting the Insolvent: How a Creditor’s Committee Can Prevent Its Constituents from Misusing a Debtor’s Nonpublic Information and Preserve Chapter 11 Reorganizations, 2006 Utah L. Rev. 439, 445–46 (discussing conflicts of interest that may affect creditors’ committee members); Carl A. Eklund & Lynn W. Roberts, The Problem with Creditors’ Committees in Chapter 11: How to Manage the Inherent Conflicts Without Loss of Function, 5 Am. Bankr. Inst. L. Rev. 129, 130–33 (1997) (analyzing problems posed by committee member conflicts); Nancy B. Rapoport, Turning and Turning in the Widening Gyre: The Problem of Potential Conflicts of Interest in Bankruptcy, 26 Conn. L. Rev. 913, 916–17 (1994) (examining conflict of interest issues in bankruptcy, including in committee context). 162 For example, section 1122(b) of the Bankruptcy Code permits a debtor use an administrative convenience class to pay trade creditors in full even when the plan is not able to fully repay claims of other unsecured creditors that will be discharged. See Brad B. Erens & Timothy W. Hoffmann, The Triumph of the Trade Creditor in Chapter 11 Reorganizations, J. Bankr. L., Jan. 2013, at