One of the unique traits of a corporate chapter 11 bankruptcy is the role that a creditors committee can have on a case. Virtually any person or entity can be appointed a member of a creditor committee. In fact, New York Yankees third baseman Alex Rodriguez was named to the creditors committee for the Texas Rangers’ bankruptcy case. This article provides a brief overview as to what a creditors committee is and its role in chapter 11 cases.
Pursuant to Section 1102 of the Bankruptcy Code, the U.S. Trustee is tasked with forming a creditors committee to represent the interests of all unsecured creditors in a case. The U.S. Trustee will solicit the individuals and entities that are owed the largest amounts of unsecured debt for service on the committee. After reviewing the solicitation responses, the U.S. Trustee will form a committee of three to eleven members. After the committee is formed, it may be represented by legal counsel that represents the committee as a whole. Like bankruptcy counsel, the committee’s counsel’s employment must be approved by the Court.
One of the committee’s main tasks is to oversee the happenings of the chapter 11 case on behalf of all unsecured creditors. For instance, a corporate debtor may not wish to challenge a certain creditor’s claim in a bankruptcy case in order to preserve its relationship with that creditor. However, the creditors committee may undertake to challenge that claim or influence another party to do so because it may ultimately benefit the estate and all unsecured creditors later on.
Another purpose of the creditors committee is to act as advisor to the Bankruptcy Court. There may be issues in the case which will prompt the Bankruptcy Court to look to the creditors committee for its opinion, such as when a corporate debtor wishes to dispose of assets.
Put simply, the creditors committee is put in place in order to protect the interests of all unsecured creditors in a chapter 11 case. The oversight of the committee helps ensure that unsecured creditors are not left in the cold when it is time to confirm a plan of reorganization. It is through this oversight that the Bankruptcy Code attempts to give fair weight to the interests of all parties in a bankruptcy case.