As a creditor owed money or other property by a bankrupt customer or vendor, your company has a claim in the customer’s or vendor’s bankruptcy case. If the case is filed under Chapter 11 of the Bankruptcy Code, it may be in your company’s best interests to seek membership on the case’s official committee of unsecured creditors.
The Fisker Automotive bankruptcy case of 2014 highlights how an unsecured creditors committee can add value and recovery for creditors. When Fisker, a luxury electric car startup, filed for bankruptcy in 2013, a creditors committee was formed to represent the interests of Fisker’s unsecured creditors.
Initially, it looked like recovery on unsecured claims would only total $500,000, a paltry sum compared to the amount of unsecured debt. One of Fisker’s secured creditors offered to buy the company and assume part of Fisker’s secured indebtedness.
After evaluating the proposed sale, the committee decided to fight the transaction and press for a competitive bidding process. The competitive auction resulted in another company, Wanxiang, paying $150 million in cash and stock to acquire all of Fisker’s assets. That created a pool of $40 to $50 million to be split among the unsecured creditors, a far cry from the expected recovery under the secured lender’s original offer.
The Fisker case shows that an effective committee can create tremendous value. Along with the potential for higher recovery amounts, joining a creditor’s committee can offer additional benefits to protect you and your business.
A creditors committee is a group of creditors that hold unsecured claims against a company that is a debtor in a Chapter 11 bankruptcy case. The United States Bankruptcy Code provides for the formation of a creditors committee in Chapter 11 cases.
Chapter 11 of the Bankruptcy Code applies to a business debtor and permits such debtors to remain in possession and control of its assets, subject to Bankruptcy Court supervision, while the debtor attempts to formulate and obtain approval of a plan for repayment of its debts.
As part of this process, which can take months if not years to complete, the debtor typically negotiates with its creditors in an attempt to reach agreement on a Chapter 11 plan. The debtor may also seek to take other actions that it believes advisable, but which unsecured creditors may not believe are proper or in their best interests.
The creditors committee is formed to protect the interests of all unsecured creditors. Typically, they don’t have much skin in the game because their claims may be relatively small and they are not likely to receive 100 cents on the dollar. Because unsecured creditors frequently are loathe to incur legal fees and other expenses to fight for their rights and a greater distribution on their claims, the creditors committee plays an important role in championing the interests of the unsecured creditor class as whole, to ensure that they are heard and get a fair shake in the case.
The creditors committee is appointed by the Office of the United States Trustee, a division of the United States Department of Justice. The U.S. Trustee’s Office typically selects between three and nine creditors to serve on the committee depending on the size of the case and the number and variety of creditors willing to serve. Most creditors committees have an odd number of members to reduce the chances of a deadlock when voting on issues related to the case.
Each member of the creditors committee has a fiduciary duty to act and make decisions that are in the best interests of all unsecured creditors, and not merely its own interests. The creditors committee frequently negotiates many case-related matters, including Chapter 11 plan terms with the debtor, the debtor’s lenders and other parties.
The creditors committee is also entitled to be present and express its views and legal positions at hearings in the bankruptcy case. Judges will often ask to hear from the creditors committee’s attorneys at hearings on highly contested issues.
To assist the creditors committee in fulfilling its duties, members are entitled to receive, subject to a confidentiality agreement or court orders, the debtor’s confidential financial and business information. Because the members of the creditors committee are acting to represent the interests of all unsecured creditors, the court-approved expenses of the creditors committee, including the costs of attorneys and financial and other advisors to the committee, are paid from the debtor’s assets and, typically, are not the responsibility of committee members.
There are many different reasons for wanting to serve on a creditors committee. Some creditors volunteer because they have debtor-specific knowledge that can assist the committee in increasing recovery for unsecured creditors. Others believe they have been defrauded or otherwise wronged by the debtor and want to be sure the creditors committee takes into consideration the debtor’s unsavory conduct.
Service on the committee also provides creditors the potential to influence the case by sharing information with other committee members and committee counsel. They can help to shape how the case progresses and perhaps get better results without incurring legal fees.
Certain clients also believe that serving on a creditors’ committee provides them with such additional benefits as access to otherwise confidential industry information, a voice in the case that the creditors claim alone may not afford, and the good will of the debtor, who frequently wants to keep committee members as happy as possible to avoid unnecessary conflict.
To be eligible to serve on a creditors committee, you must be owed money or otherwise have a claim against the debtor company. At the same time, you must not have a lien on the debtor’s property of a value equal to or exceeding your claim amount.
The U.S. Trustee’s Office typically sends a claims questionnaire and invitations to an organizational meeting to the 20 or 30 creditors identified by the debtor as holding the largest unsecured claims. But you don’t have to wait to hear from the U.S. Trustee’s Office if you are interested in serving. Any unsecured creditor can reach out to the Trustee’s Office to express interest in serving.
At the organization meeting, the U.S. Trustee’s Office will typically interview creditors that have expressed an interest in serving on the committee and, at the meeting or shortly thereafter, will select the committee’s members.
Each case is different, with a unique mix of unsecured claims and creditors. While the amount of a creditor’s claim is an important factor in determining whether the creditor will be asked to serve on a committee, the U.S. Trustee’s Office often seeks a group of creditors that represent different types of claims.
By differentiating yourself from other likely committee members, but still demonstrating that you are representative of a subgroup of unsecured creditors in the case, you can increase the likelihood of your selection to a creditors committee.
Andrew Flame is a partner in the Philadelphia office of Drinker Biddle.
Photo courtesy of Fisker Automotive