Selection of Creditors Committee Counsel (factors to consider)
Creditors’ Committee formed at the Section 341 Meeting
Typically (at least in Dallas cases), creditors’ committee lawyers are selected in Chapter 11 cases immediately following the meeting of creditors under 11 U.S.C. § 341 (the “341 meeting”). Section 341 of the Bankruptcy Code requires the United States Trustee to “convene and preside at a meeting of creditors.” The debtor (or its officers) are required to attend and to submit to questioning under oath. After the meeting ends, those creditors who have attended and are within the group of creditors holding the 20 largest unsecured claims are invited to form and serve upon the official committee of unsecured creditors of the debtor. The committee is officially recognized by the Bankruptcy Code and has the authority to retain professionals (committee attorneys, accountants, brokers, etc.) that will be compensated by the bankruptcy estate. The United States Trustee (contrasted with a bankruptcy trustee) appoints the members of the Committee.
At the formation meeting, the committee members will select a Committee Chairman, who will typically play a large role in the path the committee (and its counsel) take. The Committee is charged with the important task of representing the interests of unsecured creditors and weighing in on case direction. See Discussion of Creditors’ Committees Duties.
The process of selecting professionals for the Official Committee of Unsecured Creditors of a debtor is as competitive as attorney selection process gets. Unlike many representations, the specific need for counsel is known in advance and publicly, so often many sets of counsel will attend the 341 meeting of creditors and put on respective “dog and pony” shows in an effort to jockey for position as the selected counsel.
Typical Reasons Advanced for Selection of Committee attorneys
Typical considerations for selecting proposed counsel include:
- Experience (typically the most important factor)
- Competence (also important)
- Firm size and access to needed related professionals in specialties other than bankruptcy/reorganization
- Cost (typically not discussed)
The “Free Lawyer” Paradigm – Selecting lawyers when you don’t have to directly pay for them.
So, the most obvious criteria for selection of counsel is similar to that in any selection of counsel. However, an interesting dynamic occurs with creditors’ committee professional selection. Because neither the committee nor the committee members directly have to pay the professionals, the dynamic of selecting the right lawyer for the size of the case is skewed towards simply selecting the most expensive lawyers.
However, often (at least in Dallas Cases) some of the more sophisticated committee members will correctly note that, in the end, it is often the unsecured creditors who are directly shouldering (as a group) the cost of the professionals in the case. Moreover, competent committee counsel will have analyzed the size of the case and its capability of supporting the cost of the professionals including debtor’s counsel. However, sometimes this calculation cannot be exact at the early stages of the case. Therefore, the motiviation to select the “right-sized counsel for the case” on both the committee members and the proposed counsel does exist.
The “Preselected Counsel” dynamic – The largest unsecured creditor typically already has “its” counsel lined up for the position
Another dynamic is that the creditors holding the largest (or very largest) unsecured claims and/or the Committee Chairperson may already have “their” counsel lined up to apply for the position as committee counsel. Selecting this counsel has caused conflicts within the committee when the larger creditor and or the Committee Chairpersons’ relationship with the counsel creates a potentially nondemocratic process of strategy/policy selection. Committee members should inquire into all prexisting relationships between proposed counsel and committee members/debtor/other parties in interest. Moreover, members should also inquire into whether prearranged votes for committee counsel have been coordinated.
Dallas Creditors Committees
The following are considerations for committees (this is from the Notice of Formation Meeting for Official Committee of Unsecured Creditors in the Centennial Liquors case) stated by the United States Trustee for the Northern District of Texas, William T. Neary:
Purpose of Unsecured Creditors’ Committees. To increase participation in the chapter 11 proceeding, section 1102 of the Bankruptcy Code requires that the United States Trustee appoint a committee of unsecured creditors (the “Committee”) as soon as practicable after the order for relief has been entered. The Committee ordinarily consists of the persons, willing to serve, who hold the seven (7) largest unsecured claims of the kinds represented on such committee. The debtor has filed a list indicating that your claim may be among the largest unsecured claims against the debtor, and for that reason, you may be eligible to serve on the Committee. There must be at least three (3) unsecured creditors willing to serve in order to form the Committee.
Powers and Duties of Unsecured Creditors’ Committees. Members of the Committee are fiduciaries who represent all unsecured creditors as a group without regard to the types of claims which individual unsecured creditors hold against the debtor. Section 1103 of the Bankruptcy Code provides that the Committee may consult with the debtor, investigate the debtor and its business operations and participate in the formulation of a plan of reorganization. The Committee may also perform such other services as are in the interests of the unsecured creditors whom it represents.
Employment of Professionals. Section 1103 of the Bankruptcy Code provides that the Committee may, subject to the bankruptcy court’s approval, employ one or more attorneys, accountants or other professionals to represent or perform services for the Committee. The decision to employ particular professionals should occur at a scheduled meeting of the Committee where a majority of the Committee is present. All professionals retained by the Committee may be compensated from assets of the debtor’s estate pursuant to section 330 of the Bankruptcy Code. Applications for the payment of professional fees may be monitored by the Office of the United States Trustee and are subject to the Court’s approval. However, the Committee should carefully review all applications and not rely on the Court or the United States Trustee to discover and object to excessive professional fees or costs.
Other Matters. The Committee should elect a chairperson and may adopt bylaws. As a party in interest, the Committee may be heard on any issue in the bankruptcy proceeding. Federal Bankruptcy Rule 2002(i) requires that the Committee (or its authorized agent) receive all notices concerning motions and hearings in the bankruptcy proceeding.
In the event you are appointed to an official committee of creditors, the United States Trustee may require periodic certifications of your claims while the bankruptcy case is pending. Creditors wishing to serve as fiduciaries on any official committee are advised that they may not purchase, sell or otherwise trade in or transfer claims against the Debtor while they are committee members absent an order of the Court. By submitting the enclosed Questionnaire and accepting membership on an official committee of creditors, you agree to this prohibition. The United States Trustee reserves the right to take appropriate action, including removing a creditor from any committee, if the information provided in the Questionnaire is inaccurate, if the foregoing prohibition is violated, or for any other reason the United States Trustee believes is proper in the exercise of her discretion. You are hereby notified that the United States Trustee may share this information with the Securities and Exchange Commission if deemed appropriate.