Dorsey U.S. Bankruptcy Law Q&A Series Five

Dorsey & Whitney LLP

We hope that you found the four previous Q&A series regarding what to do when a U.S. customer files for Chapter 11 bankruptcy protection helpful. 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.

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Please keep an eye out for Series Six which will address issues relating to the plan process, including the disclosure and solicitation process and what happens if a plan is or is not confirmed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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