III. Chapter 11 Creditors' Committees

• Jurisdiction: North Carolina

III. CHAPTER 11 CREDITORS' COMMITTEES

The statutory scheme of Chapter 11 suggests that committees are intended to serve as "bankruptcy watchdogs" on behalf of the creditors they represent. Where the debtor remains in possession under Sections 1107 and 1108, the responsibility for monitoring the debtor's operations, participating in the formulation of a plan, and overseeing the general conduct of the case shifts primarily to the committee. Ideally, activities of the committee assure each creditor in the committee's constituency that its interests are being adequately represented in the case without the necessity and expense of personal participation. This representation, however, only extends to the protection of the general rights of similarly situated creditors vis-a-vis the debtor. The committee does not protect the individual interests of any particular creditor. In fact, the committee often, for example, will take the lead in objecting to claims and pursuing avoidance actions on behalf of the estate. In such instances, the committee will be directly adverse to particular creditors whose general interests otherwise would be protected by the committee.

A. Appointment of Committee

Section 1102(a)(1) directs the appointment by the Bankruptcy Administrator of a committee of creditors holding unsecured claims as soon as practicable after the order for relief under Chapter 11. Pursuant to Section 1102(b)(1), the composition of the committee shall ordinarily consist of the persons willing to serve who hold the seven largest claims against the debtor of the kinds represented by such committee. See Bankruptcy Manual Form No. 155, "Order Appointing Committee of Unsecured Creditors in a Chapter 11 Reorganization." The court does, however, have considerable discretion to appoint those unsecured creditors whom the court determines will best serve in the case, whether or not such creditors are among the holders of the seven largest claims. See, e.g., In re Texaco, Inc., 79 B.R. 560 (Bankr. S.D.N.Y. 1987). The committee members must be representative of the different kinds of claims that require representation, and may include partially secured creditors, disputed claimants, and preferential transferees. On request of a party in interest in a case in which the debtor is a small business and for cause, the court may order that a committee of creditors not be appointed. 11 U.S.C. § 1102(a)(3). While not prohibited by the Bankruptcy Code per se, insiders may be removed from a committee due to the conflict of interest which may arise as a consequence of their participation in the same.

Section 1102(a)(4) provides that a creditor who is a "small business concern," as that term is defined in the Small Business Act, may request that the court order the Bankruptcy Administrator to include that small business creditor as a member of the committee if the court determines that the creditor holds a claim against the debtor that is disproportionately large with respect to the creditor's annual gross revenues. This section is intended to address the needs of smaller trade creditors who previously felt underrepresented on creditors' committees.

A committee formed prior to the filing of the Chapter 11 case will ordinarily qualify as the official committee after the case is filed only if it (a) was fairly chosen, and (b) is representative of the different kinds of claims that require representation. 11 U.S.C. § 1102(b)(1). Such a committee could be one organized informally, where there was no antecedent bankruptcy case, or could be a committee formed in a Chapter 7 case that was subsequently converted to a Chapter 11 case.

Additionally, pursuant to Section 1102(a)(2), the court, upon request of a party in interest, may appoint other "official" committees of creditors, in addition to the unsecured creditors' committee, if such appointment is necessary to assure adequate representation of other types of creditors or of equity security holders. This section has been liberally applied in Chapter 11 cases and has been construed to permit the appointment of committees representing secured creditors whose claims might prove to be unsecured, investors, franchisees, lien claimants, non-insider wage claimants, asbestos litigants, and computer software users. See, e.g., In re Yahweh Center, Inc., 2016 WL 5417363 (Bankr. E.D.N.C. Sep. 28, 2016).

Each of the three districts in North Carolina has slightly different procedures in determining whether to establish a committee and in determining the composition of the committee. The general procedures in each of the districts are as follows:

1. Western District of North Carolina

Upon receiving the List of Creditors Holding 20 Largest Unsecured Claims from the debtor's attorney, the Bankruptcy Administrator for the Western District of North Carolina sends a Notice of Intent to Accept or Decline Appointment to Creditors' Committee to each of the listed creditors. The Bankruptcy Administrator normally allows 10 days for responses and encourages responses by facsimile in the interest of time. Ordinarily, at least three acceptances are required to form a committee.

If the Bankruptcy Administrator does not receive at least three acceptances, she will send the clerk's office a letter...