After a U.S. District Court departed from the “apparent consensus” that an official committee automatically dissolves when the chapter 11 case is dismissed, the Talc Claimants’ Committee in the similarly dismissed In re LTL Management, LLC case was quick to take notice.

TAKEAWAYS

• The longstanding notion that dismissal of a chapter 11 case automatically dissolves its committees is under challenge.
• Based on the text and policies of the Bankruptcy Code, committee members and counsel may continue to have post-dismissal viability if their activities are consistent with the committee’s statutory powers.
• Following a dismissal, committee members should consider whether they have any duties and, if not, whether an order dissolving the committee is warranted.

Official committees of creditors and equity holders play a central role in chapter 11 cases overseeing case administration, investigating the debtor, serving as fiduciary representatives of their respective constituencies, and negotiating the plan of reorganization. Section 1102(a)(1) of the Bankruptcy Code requires that the U.S. Trustee appoint a committee of creditors holding unsecured claims (if there are sufficient creditors willing to serve) and permits the appointment of additional committees of creditors or equity security holders as the U.S. Trustee deems appropriate. The Bankruptcy Code, however, is silent as to when a committee’s appointment terminates.

In re Integrated Nano-Technologies, LLC
In In re Integrated Nano-Technologies, LLC, No. 2-22-20611-PRW (Bankr. W.D.N.Y. 2023), the bankruptcy court dismissed the chapter 11 case and held that the Official Committee of Equity Securities Holders (Equity Committee) was “automatically dissolved.” The Equity Committee appealed the dismissal, and the U.S. Trustee moved to dismiss the appeal arguing that the Equity Committee lacked any capacity to pursue an appeal having been automatically dissolved.

On appeal, District Judge Frank P. Geraci, Jr. disagreed, concluding that dismissal does not necessarily result in dissolution of an Official Committee. Off. Comm. of Equity Securities Holders v. Integrated Nano-Technologies, Inc., 2024 U.S. Dist. LEXIS 38504 (W.D.N.Y. March 5, 2024). The court noted that “the apparent consensus [on automatic dissolution] is built almost entirely on one case,” Unsecured Creditors Committee of Butler Group, Inc. v. Butler (In re Butler), 94 B.R. 433 (Bankr. N.D. Tex. 1989) (In re Butler), which “failed to tether its reasoning to the text of the Code itself.” Id. at *6. Judge Geraci denied the motion to dismiss the appeal, reasoning that there is “no rigid rule of automatic termination upon dismissal” for committees. Id. at *8.

In reaching this conclusion, Judge Geraci contrasted the sections of the Bankruptcy Code authorizing the appointment of committees, trustees and examiners with those that provide for the termination of a trustee appointment and the effects of a case dismissal.

The Bankruptcy Code authorizes the appointment of committees under Section 1102(a)(2) and trustees and examiners under Section 1104. Section 1105 allows a party in interest to request termination of a trustee’ appointment “to restore the debtor to possession and management of the property of the estate and of the operation of the debtor’s business,” which does not implicate committees because they are not charged with such duties.

Section 348(e) expressly terminates the appointment of trustees and examiners upon conversion (not dismissal), and Section 349 addresses the effect of dismissal but does not mention appointments or their termination. The In re Butler court believed “there was no reason for the statute or rules to require formal dissolution” because dismissal of a chapter 11 case eliminates the statutory basis for the committee’s existence. Id. at *7. Judge Geraci analyzed the lack of specific reference to what happens to committees on dismissal differently. He found that “Congress clearly considered the issue of appointment termination in some detail ... [and so] it is implausible that, having addressed appointment terminations in several contexts, Congress would decide to purposefully omit an automatic-termination rule for committees on the ground that such a rule was so obviously implied from the operation of the statute, as the Butler court claimed.” Instead, Judge Geraci concluded, “Congress did not call for the automatic termination of a committee’s appointment upon dismissal because it was unnecessary to do so; the Code already sufficiently limits the scope of committees’ activities” as set forth in Section 1103(c), which “must of necessity be exercised in connection with a bankruptcy proceeding,” minimizing any “risk that a committee can operate at a time or in a manner far removed from the [c]hapter 11 case.” Id. at *10.

Judge Geraci posited that post-dismissal committee activity be analyzed under the same rubric as a committee’s post-confirmation activity. The Bankruptcy Code does not expressly authorize either activity. However, in the post-confirmation context, several courts have found such activity was not precluded by the Bankruptcy Code and instead “analyze[d] whether the post-confirmation activity is consistent with the committee’s statutory powers.”

Under this framework, Judge Geraci held that the Equity Committee’s appeal was consistent with powers granted to it under the Code because a committee is authorized to “perform such other services as are in the interest of those represented” and a committee’s interest in the issue of dismissal is “indisputable.”

In re LTL Management, LLC
The participation of an official committee in the appeal of a case dismissal is also at issue in a case with far broader implications for the public. On January 30, 2023, the Third Circuit affirmed the dismissal of the chapter 11 case of LTL Management, LLC (LTL), an entity formed to house Johnson & Johnson’s talc-related tort liabilities, due to lack of financial distress. LTL Mgmt., LLC v. Those Parties Listed on Appendix A to Complaint (In re LTL Mgmt., LLC), 64 F.4th 84 (3d Cir. 2023) (LTL I). After dismissal, the funding agreement for LTL was cancelled and replaced, resulting in another chapter 11 case and another dismissal based on a finding of lack of financial distress. The dismissal of the second LTL chapter 11 case is currently on appeal to the Third Circuit. In re LTL Management, LLC, Nos. 23-2971, 23-2972 (3d Cir. 2023) (LTL II). The capacity of the Official Committee of Talc Claimants (TCC) to participate in LTL II has been challenged by LTL, which has argued that section 103(g) of the Bankruptcy Code effectively requires dissolution of committees on dismissal of a chapter 11 case because that section states that subchapter I of chapter 11 of the Bankruptcy Code, which provides for the appointment of committees shall “only apply in a case under such chapter.”

A week after Judge Geraci’s opinion was issued, TCC sent a notice of supplemental authority to the Third Circuit in LTL II highlighting the similarities between the post-dismissal activities of the committees in Integrated Nano-Technologies and in LTL II. LTL responded to the notice and maintained its position that dissolution of a committee is automatic under Bankruptcy Code § 103(g) when a chapter 11 case is dismissed. Official committees should follow the developments in LTL II for insight into changes in this area of the law.

Conclusion
One bankruptcy court has rejected the simple approach that official committees automatically dissolve upon dismissal of a chapter 11 case in favor of a more nuanced approach that allows committees to continue to act as a committee so long as their post-dismissal activity is consistent with their statutory powers. The opinion, however, leaves open many questions, including: Do committee members’ duties change after a dismissal? If the dismissal is not appealed, then is the committee dissolved? Is an order from the bankruptcy court dissolving the committee required? If so, when? Committees and their members should not ignore these questions. If dissolution is not automatic, then there may be a risk that a committee’s fiduciary duties to their constituents continue, at least for some time, after dismissal of a case.

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