Chapter II Appointment of the Committee and Retention/Compensation of Professionals
| Jurisdiction | United States |
Chapter II Appointment of the Committee and Retention/Compensation of Professionals
A. Formation of the Committee
1. Organizational Meeting
As soon as practicable after the entry of the order for relief under chapter 11 (not chapter 7, 9 or 13), the U.S. Trustee will appoint a committee of unsecured creditors. The U.S. Trustee sends a solicitation package to all creditors on the List of Creditors Holding 20 Largest Unsecured Claims, but it can send notice to additional persons, and generally does so in large cases with many creditors and a complicated capital structure.48 The package must contain:
1. notice of the U.S. Trustee's interest in forming a committee;
2. written notice of where and when a formation meeting will be held. If the committee is formed without a meeting, the U.S. Trustee must state the deadline for returning the completed package; and
3. a questionnaire seeking information about the creditor, its claims and its connections with the debtor.
The information package also has an information sheet discussing the powers, duties, roles etc. of serving on a committee.
The organizational meeting is held for the purpose of providing the U.S. Trustee with information regarding the debt structure of a particular case, as well as to identify those creditors who are willing to serve on a creditors' committee.49 An organizational meeting is not open to the public and is not held before the court; however, creditors beyond those listed as holding the top 20 claims against a debtor, their counsel, and counsel interested in "pitching" representation to the committee are permitted to attend the organizational meeting.
At the meeting, the debtor makes a presentation to creditors regarding the events that led to bankruptcy and may be examined by creditors, any indenture trustee, any trustee or examiner in the case, or the U.S. Trustee.50
These meetings frequently last several hours and generally proceed as follows: (1) a brief presentation is given by the debtor's representative; (2) a brief question-and-answer period is held by the creditors; (3) the meeting breaks while the U.S. Trustee reviews submissions by creditors and interviews creditors regarding claims and connections to the case; (4) the U.S. Trustee formally selects the committee; (5) the committee holds its first meeting after the U.S. Trustee provides basic instructions; and (6) during the initial meeting, the committee usually selects chairperson or co-chairperson and interviews committee counsel.
2. Proxies
Bankruptcy Rule 9010 allows the use of proxies. A proxy must be in writing and under oath, and must conform to the Official Form.51 It is appropriate for the U.S. Trustee to consider the following when reviewing a proxy:52
1. the nature and extent of the proxy holder's relationship with the creditor;
2. whether the proxy-holder who is a professional will seek to be retained by the committee;
3. whether the proxy-holder has committed to vote for a particular professional's retention;
4. whether the proxy was obtained through improper solicitation, including:
a. whether it was solicited by the proxy-holder or another professional and not the creditor;5. whether the proxy-holder is familiar with the creditor and its claim, and is able to answer questions about them;
b. whether it was solicited for the purpose of being retained as a committee professional; and
c. if an attorney solicited the proxy, whether the attorney has a prior family, personal or professional relationship with the creditor;
6. any agreements regarding compensation, retention or employment between the creditor and the proxy-holder; and
7. the creditor's interest in serving and actively participating.
Each jurisdiction has rules (formal or informal) as to whether the firm of a professional who holds a proxy may seek employment as a professional for the committee. In addition, an attorney's solicitation of proxies may have ethical implications under the Rules of Professional Conduct.53 Counsel is well advised to avoid the solicitation of potential committee members that would run afoul of applicable Rules of Professional Conduct in connection with the solicitation of potential clients.
3. U.S. Trustee's Appointment
As set forth above, at the organizational meeting the U.S. Trustee, if sufficient interest is shown by the creditors, shall appoint a committee or committees (see above). A "committee" is a body of two or more people appointed for some special function, usually out of a larger body.54 The use of the word "appointed" clearly contemplates some action being taken by the larger body.55 Thus, a self-appointed subset of a larger group — whether it calls itself an informal committee, an ad hoc committee or some other name — simply does not constitute a committee under the plain meaning of the word. In order for a group to constitute a committee under Rule 2019, it would need to be formed by a larger group either by consent, contract or applicable law — not by "self-help."56
After considering the information gathered at the organizational meeting, the U.S. Trustee will select the creditors to form the committee. These selected members are asked to remain following the conclusion of the general organizational meeting and are then advised regarding their duties in the case.57 Specifically, the U.S. Trustee will discuss the selection of a chairperson, adoption of bylaws, selection of professionals and reimbursement of committee expenses.58 Counsel for individual creditors are permitted to attend this initial meeting of the committee; however, the U.S. Trustee generally will not permit counsel to use the time to campaign for selection as committee counsel.59
4. Selection of the Chair
Once formed, the committee is in essence a business organization whose sole purpose is to discharge its duties as set forth in the Bankruptcy Code. It is not considered an official business entity and therefore does not have an EIN number or file tax returns. Its duties are fiduciary in nature — it is established for the benefit of all unsecured creditors — so it sells no products and earns no income, although from time to time it may prosecute causes of action on behalf of the bankruptcy estate and bring assets into the bankruptcy estate for distribution to creditors. In order to carry out its duties, the committee must adopt a form of governance, generally by adopting bylaws (see below). Although committee decisions are almost always by vote, with a majority necessary to take or agree not to take any specific action, the committee needs internal hierarchy to help govern its activities. Following appointment, committee members are advised by the U.S. Trustee to nominate and elect a chair of the committee at the committee's first meeting (which usually occurs right after the appointment of the committee by the U.S. Trustee). Generally, the chair bears the responsibility for convening, adjourning and presiding over committee meetings, preparing the contents of the agenda for meetings, and attending subcommittee meetings, if any, as an ex officio member. The chair brings meetings to order and coordinates the efforts of the entire committee. In setting the agenda, the chair opens the discussion regarding the committee's business and guides that discussion or directs committee counsel to guide the discussion.
Ideally, the chair should have some basic knowledge of the chapter 11 process, experience serving on other committees, and good leadership qualities. The responsibilities of the chair generally require a more significant time commitment than other members of the committee. In many ways, the ability of the chair to conduct the business of the committee determines the success of the committee and helps or hinders the entire bankruptcy process.
Frequently, the largest or second-largest creditor serving on the committee is elected as chair. However, creditors that serve on committees with some regularity may become acquainted with one another, particularly within a given industry. Thus, the committee members may know which creditor is best suited to serve as the chair prior to the first meeting.
The committee should attempt to avoid selecting a chair that presents a risk of a conflict of interest. While the U.S. Trustee or bankruptcy court may elect to not disqualify a questionably conflicted creditor from serving on the committee, such a creditor might be an inappropriate selection to chair the committee. For example, an undersecured creditor probably should not serve as the chair, because such a creditor has a distinctly different interest in the bankruptcy. Frequently, committees will decide to select co-chairs. This is typically seen in cases with at least two distinct creditor constituencies on a committee, each desiring a position of control on the committee (e.g., trade vs. bond).
B. Governance
The Bankruptcy Code is silent as to how a committee should conduct itself. As stated, each member of a creditors' committee owes a fiduciary duty to all creditors represented by the committee.60 Pursuant to 11 U.S.C. § 1103, the most...
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