Creditors Committees: Navigating Disclosures, Fiduciary Duties, - - PowerPoint PPT Presentation

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Creditors’ Committees: Navigating Disclosures, Fiduciary Duties, Attorney-Client Privilege, and Fees and Expenses

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, OCTOBER 8, 2015

Edwin Caldie, Partner, Stinson Leonard Street, Minneapolis Janine M. Figueiredo, Partner, Hahn & Hessen, New York Steven Kortanek, Partner, Womble Carlyle Sandridge & Rice, Wilmington, Del.

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• I. STRUCTURING THE COMMITTEE

5

The General Rule – the Official Committee

• “A committee of creditors appointed under

subsection (a) of this section shall ordinarily consist of the persons, willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such committee...” 11 U.S.C. 1102 (b)(1).

• Notwithstanding the language of Section 1102,

the size and complexity of a case as well as the types of creditors involved should dictate the composition of the official committee of unsecured creditors.

6

Optimal Composition of the Committee

• Largest Creditors vs. Diversity. The United

States Trustees have put increasing focus on diversifying committees rather than simply selecting the largest creditors.

• This may lead to longer and more contentious

deliberations by the committee, but it also helps ensure that the committee acts to protect the interests of all unsecured creditors.

7

Optimal Composition of the Committee

• The categories of unsecured creditors that are
• ften represented include:
• Trade Vendors
• Unions
• The PBGC
• Landlords
• Bondholders/Indenture Trustees
• Employees
• Tort claimants/Other litigants
• Factors
• Rare: Deeply out-of-the-money secured (EFH)

8

Optimal Composition of the Committee

• Not Too Big and Not Too Small. In some cases

a 7 member committee is too big and in

• thers it may be too small.
• Case Considerations. The UST should take into

consideration the status of the case and how certain motions may affect a creditor’s position in the case.

• critical vendor motions
• 503(b)(9) motions

9

Optimal Composition of the Committee

• Special Considerations for Proxies.
• Depending on the circumstances and provenance
• f a proxy, some USTs may be less likely to appoint

a creditor represented by a proxy at the formation meeting.

• The provenance of the proxy and candor of a

proxy holder are key considerations.

• If possible, the creditor itself should make itself

available by phone for the UST interview of the proxy.

10

Optimal Composition of the Committee

• Getting Appointed to the UCC.
• When you’re a creditor or a proxy, you need to be prepared – Some representative UST

“test questions” – part of the gauntlet to getting on the UCC:

• If appointed, will you personally sit and serve on the UCC?
• What 503(b)(9) claim do you hold?
• Do you have any credit insurance? Any security? A judgment?
• Any guarantees of the Debtor’s obligations?
• Are you a competitor?
• Do you hold any equity?
• Are you or anyone at your company a current or former D&O of the Debtor?
• Do you have any setoff rights?
• Have you traded or sold any part of your claim?
• Have you had any contact with professionals interesting in pitching committee?
• Have you made any promise to a professional that you would vote for them?

11

Ad Hoc and Other Official Committees

• The UST may appoint additional official

committees of creditors or of equity security holders as the UST deems appropriate.

• Those creditors that do not believe their

interests will be adequately protected by the composition of the official committees will

• ften join forces with like creditors and form

an ad hoc committee.

12

Selection of Professional Advisors

• The Process Generally – Delaware, the SDNY,

and everywhere else…

• Ethical Considerations
• A few “hypothetical” scenarios: cold calls,

schmoozing, and hunting in packs

• Model Rules 7.2, 7.3, and 8.4 – Yes on written

solicitation with “Lawyer Advertising”; No on cold calls.

• The Wrath of Walrath

13

Selection of Professional Advisors

• Proxies in action: Do’s and Don’ts in the room

selecting UCC professionals:

• Do disclose relevant information – duty of candor.
• Do carefully consider and receive express

direction from the principal – the creditor.

• Don’t advocate for a professional out of self-

interest, absent a principled basis to do so, and at the instruction of the creditor.

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• II. COMMITTEE MEMBER CONSIDERATIONS

15

UCC Members Duties

• Section 1103(c) outlines duties: A committee appointed under

section 1102 of this title may—

• consult with the trustee or debtor in possession concerning the

administration of the case;

• investigate the acts, conduct, assets, liabilities, and financial condition
• f the debtor, the operation of the debtor’s business and the

desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan;

• participate in the formulation of a plan, advise those represented by

such committee of such committee’s determinations as to any plan formulated, and collect and file with the court acceptances or rejections of a plan;

• request the appointment of a trustee or examiner under section 1104
• f this title; and
• perform such other services as are in the interest of those

represented.

16

UCC Member Fiduciary Duties

• The Official Committee of Unsecured Creditors is

universally considered a fiduciary body.

• In re Refco ("It is well recognized that, to fulfill these roles

[set forth in § 1103], the members of an official committee

• we a fiduciary duty to the constituents — in the case of

an official creditors' committee, to all of the debtor's unsecured creditors.")

• The UCC’s constituency – and therefore its duties – run

exclusively to the interests of non-priority general unsecured creditors.

• Core duties: Duty of Care, Duty of Candor, Duty of

Loyalty, and Good Faith.

17

Liabilities of UCC Members

• First the Good: qualified immunity is the norm.
• If a plan gets confirmed, exculpation is typically sought and

should be granted for UCC members and advisors, covering all case actions.

• The Third Circuit upheld such exculpation in re PWS

Holding – still good law and influential in other jurisdictions.

• For today’s typical 363 sale case in which a plan may not

be confirmable, there is still qualified immunity as a practical matter: though not developed in any known case law, the fiduciary duty construct is necessarily predicated

• n the Delaware corollary – if a fiduciary properly exercises

its duties, it is entitled to protections of the Business Judgment Rule.

18

Liabilities of UCC Members

• Then the “Bad”: Cross the self-interest line,

and serious repercussions follow.

• Use of material non-public information (“MNPI”)

for a UCC member’s self interest is actionable.

• For debtor-issuers with publicly-traded debt, such

self-interested dealings are federal securities law violations – the SEC has investigated multiple UCC members (perhaps most famously, 11 of the 14 members in WorldCom), and has brought civil enforcement suits.

19

Liabilities – UCC and Ad Hoc Members

• The “WaMu Overhang”: UCC Members and Ad Hoc

Members

• A creditor with MNPI could be considered to be engaged in

insider trading even after the MNPI restriction period ends – highly criticized.

• Even more controversially: There is a “colorable” case that

members of an Ad Hoc Committee owe fiduciary duties to the other creditors in their class, based on a “temporary insider” construct. Still an open issue.

• In particular for Ad Hoc Committee members, the WaMu
• verhang is today’s Sword of Damocles - the specter of

self-dealing risks flowing from such a fiduciary duty imposition, coupled with the increasing hurdles of getting AHC fees paid, make pursuit of a UCC role more attractive.

20

Risks and Disadvantages of Participating

• Time Consuming.
• Membership on an official committee can be very

time consuming especially in the beginning of the case and during times of high activity (363 sale, plan development and solicitation).

• Fiduciary Duties and Liability.
• Members have the obligation to act in the

interests of all unsecured creditors and breach of this duty can lead to liability.

21

Rewards and advantages of Participating

• Seat at the table.
• The committee and its members are typically involved in discussions and

negotiations regarding all major case issues, giving its members increased visibility into significant case issues.

• Ability to direct the case.
• In most jurisdictions, the Courts give substantial consideration to the views of

the committee and will often look to the committee to bless actions being proposed by the debtor.

• Access.
• Members of the Committee have access to sophisticated professionals that

are paid by the estate.

• Post-confirmation involvement.
• After confirmation of the plan, a plan administrator or liquidating trustee is
• ften appointed to carry out the provisions of the plan. A committee is

typically formed to oversee such administrator/trustee and the members of the post-confirmation committee are most often chosen from among the members of the official committee.

22

Conflicts of Interest and Self-Dealing

These issues are a natural extension of committee members’ fiduciary duties – possible scenarios:

• Committee member wishes to take adverse

action against the estate

• Committee member holds more than one kind of

claim (lien disputes, administrative claims, etc.)

• Committee member wishes to buy assets of the

estate

23

Conflicts and Self-Dealing (continued)

Solutions:

• Disclosure of issues (nearly always advisable)
• Construction of ethical walls and/or non-

participation in analysis and voting

• Resignation

24

Disclosure Obligations

• UCC members have disclosure obligations generally

that fall under the fiduciary duty of candor.

• Externally to the privileged work of the UCC, the

Bankruptcy Code imposes certain information-sharing

• bligations on UCCs.
• Since these new provisions in 2005, the associated

motions to modify and clarify (ie limit) these obligations are such commonplace that the current trend is to bypass such a motion altogether.

• UCC advisors, and in many case court-appointed noticing

agents, simply carry out the disclosure obligations by maintaining an Official Committee information page with links to publicly available information about the case.

25

• III. Committee Responsibilities

26

Goals of the Committee

• One of the main goals of the committee is to

maximize the value of the estate for all creditors.

• Find the assets
• Renegotiate the debtor’s deals where necessary
• Keep costs and professional fees down
• Ensure a fair and transparent process

27

Monitoring the Case

• The official committee of unsecured creditors

has the responsibility to monitor the general administration of the case.

• Depending on the members of the committee,

as well as their professionals, some committees tend to be more active than

• thers in keeping involved in the day to day

administration of the case.

28

Investigations

• In a Chapter 11 case, the committee has the

authority and responsibility to perform investigative functions, such as reviewing the debtor’s assets, liabilities, and past conduct.

• Standing to sue.
• While not expressly provided for in the

bankruptcy Code, the official committee may seek court approval to bring derivative actions on behalf of a debtor’s estate.

29

Seat at the Table

• A Committee can have an uphill battle in getting a

seat at the table if the Debtor and its professionals are uncooperative.

• Certain Courts are more favorable than others in

seeing the value of full Committee participation.

• The Committee is critical to driving value in a 363

sale.

• The Committee should work closely with the

Debtor to develop a plan of reorganization/liquidation that is in the best interests of the creditors.

30

Reporting to Unsecured Creditors

• Section 1102(b)(3)(A) of the Bankruptcy Code requires that the Committee

“provide access to information” to its constituent creditors.

• However, this section does not provide a Committee with any guidance

regarding the extent of information it is required to make available to its constituents.

• Accordingly, the lack of specificity under § 1102(b)(3)(A) of the Bankruptcy

Code can create significant issues as it is often necessary for a debtor to share confidential and other non-public proprietary information with a creditors’ committee.

• The committee and debtor often enter into a confidentiality agreement to

facilitate the exchange of information between the parties, as well as restrict the use of certain sensitive information

• The committee will often seek an order clarifying and limiting

requirements of section 1102.

• Committee will often retain an information agent to fulfill its reporting
• bligations.

31

• IV. Entitlement to Fees and Expenses

32

Fee Applications

• The process generally
• US Trustee Guidelines
• US Trustee and Fee Examiner Issues
• 80/20 arrangement (new trends?)
• Lodestar reigns supreme

33

Committee Member Reimbursement

• 11 U.S.C. § 503(b)(3)(F): reasonable expenses of committee

members can be reimbursed if incurred in the performance

• f committee duties.
• Can members’ legal fees be paid? Usually not, and

historically once a global plan deal was cut, plans could provide for payments…

• That is, until the Lehman decision of 2014 which reversed

the bankruptcy court’s approval of just such a plan

• provision. 508 B.R. 283 (S.D.N.Y 2014)
• Now these provisions call for added protections and a

showing of the administrative claim standard.

34

Committee Member Reimbursement

• After Lehman, in at least one large case, a hybrid approach

has been used for plan-based reimbursement for an ad hoc committee’s professional fees.

• In the Exide case, there was a consensual plan provision

that provided fees and expenses would be paid as administrative expenses pursuant to § 503(b) of the Bankruptcy Code.

• There was also a motion for allowance and payment of its

professional fees and expenses under 503(b).

• Neither the plan provision nor the motion were

challenged – so no substantial contribution showing was

• required. In re Exide Technologies, Case No. 13-11482

(KJC) (Bankr. D. Del.)

35

Thank You

Edwin Caldie Stinson Leonard Street ed.caldie@stinsonleonard.com Janine M. Figueiredo Hahn & Hessen jfigueiredo@hahnhessen.com Steven Kortanek Womble Carlyle Sandridge & Rice skortanek@wcsr.com

36