January 1, 1900

by Meridith F. M. Mason

If you are a creditor receiving a bankruptcy notice on one of your customers, it is one of the most undesirable notices one can receive in the business industry, particularly if the debtor is one of your largest customers. And as is generally the case with most creditors, the customer, now debtor, owes a large sum of money. To make things worse, the debt may not be secured. It is a situation which initially seems hopeless, but in reality may not be the case.

A business may file under Chapter 7 of the Bankruptcy Code and usually does for liquidation of its assets when its debts outweigh its assets. In that event, a trustee is appointed by the Bankruptcy Court to oversee the bankruptcy process and monitor the bankruptcy estate. However, a business may also choose to file under Chapter 11 for reorganization in a situation when the business has an ongoing cash flow which can accommodate a reorganization and scheduled payments to creditors.

Appointment of Unsecured Creditor

In the case of a Chapter 11 filing, the United States Trustee must appoint a minimum of one committee of creditors holding unsecured claims, but may appoint additional committees of unsecured creditors at his/her discretion. The committee typically consists of the seven largest unsecured creditors of the debtor, but it must remain representative of the entire unsecured creditor body. If it is not, an unsecured creditor, having an interest in the matter, has the ability to request that the committee be reconstituted.

Therefore, although the debt may be unsecured, it is the very nature of that debt which enables such creditor to become a member of a "creditors' committee". Once on the committee, there are certain statutory powers which can directly influence the bankruptcy proceeding, including but not limited to:

consulting with the trustee or debtor-in-possession regarding the administration of the case itself;

investigating the acts, conduct, assets, liabilities and financial condition of the debtor and the operation of its business, including the desirability of whether continuation of its operations is viable; and

participation in formulation of a plan, including acceptance or rejection of any debtor proposed plans.

Plan of Reorganization

Further, committee members have a fiduciary duty to the unsecured creditors being represented and not the debtor or the estate generally. This is so because the purpose of the committee is to ensure the viability of the plan of reorganization so that the interests of the unsecured creditor body are protected. As a committee member, you are intimately involved in effectuating the debtor's plan of reorganization.

Membership on the committee affords the ability to investigate the status of the debtor and its business and to determine a poor plan of reorganization. Moreover, based on the investigation and case administration processes, the ability to make plan proposals and vote on an effective plan of reorganization will hopefully include payment of the debts of all unsecured creditors. As such, what previously seemed like an account which may have begrudgingly been considered a "write-off", may turn out to be one that at least is partially satisfied.

The Bankruptcy Code also allows the members of the unsecured creditors' committee to retain professionals to represent the committee itself. Such professionals can include, among other professionals, attorneys. Moreover, in the event the committee chooses to retain the services of an attorney to represent it in the proceeding, the Code provides for the attorney's compensation. In such a case, the Code requires that legal counsel have no interest in the matter. Notably, the court has the power to deny compensation and reimbursement to a professional person who is not disinterested, who at the outset may have been disinterested, but ceases to be disinterested at any time during the pendency of the matter.

Therefore, not only does the Code provide that a committee of unsecured creditors must be appointed in a Chapter 11 proceeding who have the ability to influence the bankruptcy proceeding, the committee may hire professionals to assist it in that process. The unsecured creditor has thus not been abandoned by the Code, but rather has been given some hope for satisfaction of its outstanding debt.

With this in mind, in the event you receive notice of a Chapter 11 bankruptcy filing relating to a large customer whose debt is unsecured, the bankruptcy department at Hill Wallack can assist with the process by which such unsecured debt may, at least, be partially satisfied.

Meridith F. M. Mason is an associate of Hill Wallack where she is a member of the Real Estate Division and Creditor's Rights/Bankruptcy Practice Group.