You have just received a notice that your largest customer, who owes you a substantial amount in unsecured trade debt, has just filed for bankruptcy protection. What do you do next? First and foremost, all collection efforts must halt. The most significant consequence of filing a bankruptcy petition is imposition of the automatic stay. Specifically, the automatic stay forbids creditors holding pre-petition claims from seeking to recover those claims outside the bankruptcy. Moreover, a debtor-in-possession cannot pay pre-petition claims except with explicit Court authority.
Now that you have received the notice of the bankruptcy filing, you have some decisions to make about how involved you want to be in the debtor’s Chapter 11 case. You can chose to take a “wait and see” approach and simply file a proof of claim and wait to see if there will be funds for distribution, or, if you wish to be more proactive, especially if your claim is substantial, there could be an opportunity for you to serve as a member of the committee of unsecured creditors.
Section 1102 of the Bankruptcy Code provides that as soon as practicable after the order for relief under Chapter 11, the United States trustee shall appoint a committee of creditors holding unsecured claims. The committee of unsecured creditors typically consists of unsecured creditors wiling to serve who hold the seven largest unsecured claims against the debtor. Whenever possible, the United States trustee will try to appoint a committee that is representative of the various types of claims against the debtor. The Office of the United States Trustee in the District of Delaware posts organizational meeting notices for recently filed cases at https://www.justice.gov/ust-regions-r03/region-3-organizational-meetings-0.
Section 1103 of the Bankruptcy Code sets forth the powers and duties of the unsecured creditors’ committees. Among other things, a committee appointed under section 1102 consults with the trustee or debtor in possession concerning the administration of the case; investigates the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor‘s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan; participates in the formulation of a plan, advises those represented by such committee of such committee’s determinations as to any plan formulated, and collects and files with the court acceptances or rejections of a plan; requests the appointment of a trustee or examiner under section 1104; and performs such other services as are in the interest of those represented. Section 1103 of the Bankruptcy Code also authorizes the committee to employ one or more attorneys, accountants or other agents to assist the committee in the performance of its duties. Fees and expenses of the professionals employed by the committee are allowable as administrative expenses of the Chapter 11 case, and committee members are not responsible for payment. Committee members may also submit expenses for reimbursement from the debtor’s estate.
Advantages of serving as a member on the committee include the opportunity to be proactive in the direction of the Chapter 11 case, the ability to participate in the formulation of a plan of reorganization, and to obtain information about the debtor for purposes of determining the potential recovery on your claim. Members of the committee are entitled to receive copies of the periodic financial reports filed by the Chapter 11 debtor, as well as other reports that might be prepared by other professionals involved in the case. As you weigh the advantages of being a member of the committee of unsecured creditors, you should be aware that the committee has a fiduciary duty to represent the best interests of all creditors and not just the interests of the individual committee members.
Although there is a fiduciary responsibility and a time commitment involved in serving as a member of a committee, a creditor holding a substantial unsecured claim against a Chapter 11 debtor can have a significant impact on the outcome of the case by serving as a member of the committee. In negotiations with a Chapter 11 debtor, especially in the formulation of a plan to repay creditors, having a seat at the table can be very beneficial to an unsecured creditor.
If you’d like to schedule a consultation with one of our attorneys about the corporate Chapter 11 bankruptcy process, please contact our office at 610-436-0100.