Creditors' Committees: Efficiently Maximizing Recoveries

Creditors in Chapter 11 bankruptcy cases may have the opportunity to serve on an official committee of unsecured creditors or other committee appointed under Section 1102(a) of the Bankruptcy Code. If a committee has not been appointed but is warranted, the creditor may take action to encourage or compel the appointment of a committee.

One of the committee's first and most important actions is to retain counsel. When we serve as committee counsel, our goal is to maximize the distribution to creditors. Committee counsel is paid by the debtor's estate, not by the committee members themselves. However, achieving meaningful results in an efficient manner, and keeping costs down, is a key concern of ours as committee counsel.

In one example, our attorneys assisted investors in bringing an alleged $85 million Ponzi scheme into an involuntary bankruptcy (the investors' legal fees were later reimbursed by the bankruptcy estate). Thereafter, we represented the official committee of unsecured creditors, on whose behalf we worked to obtain the appointment of an independent trustee to liquidate assets and make distributions to creditors. We assisted the trustee in bringing an action against one of the fraud participants, during which we assisted with investigations by the Federal Bureau of Investigation (FBI) and the Securities and Exchange Commission (SEC). The perpetrator pled guilty and was sentenced to 18 months in prison.

The United States Trustee appoints the official committee of unsecured creditors. The committee's members are usually unsecured creditors who hold the largest unsecured claims against the debtor, although committee members with smaller claims are sometimes appointed for the sake of diversity. The committee has significant power, including the right to appear and be heard on virtually every aspect of the administration of the case. In particular, the committee consults with the debtor in possession on administration of the case, investigates the debtor's conduct and operation of the business, and participates in formation of a Chapter 11 plan.

Contact us for a free copy of model committee bylaws and other helpful information. We have locations in San Francisco and Modesto, and serve clients throughout California.