Excerpt: Official Committees of Unsecured Creditors: Why You Should (Or Should Not) Serve

  • Unsecured creditor committees arise in the context of large to medium-sized Chapter 11 bankruptcies and are designed, in part, to deal with the hierarchy of creditor claims. Creditors in bankruptcy cases are sorted into different groups based on the type of claim and whether the creditor has a valid lien. Secured creditors reside near the top of the hierarchy, followed by administrative expense claimants (that is, claims related to the administration of the case such as professional fees), priority claims, and general unsecured claims.
  • The “absolute priority rule” is a bedrock principle of bankruptcy law and provides that a creditor at a particular rung of the claim priority hierarchy must be paid in full before any money flows down to junior creditors. In many bankruptcy cases, there is insufficient money to pay secured creditors in full, thus leaving general unsecured creditors with no recovery at all. In other cases, the funds flowing down to general unsecured creditors are sufficient to pay only pennies on the dollar.
  • To address this dynamic, the Bankruptcy Code provides for the appointment of a committee of unsecured creditors that appears in a bankruptcy case and advocates for the interest of the entire unsecured creditor class.
  • As part of their service, committee members take on a fiduciary duty to the entire unsecured creditor class. Committee members, therefore, are not permitted to use their service to further their interests. As an example, a committee member should not try and convince the committee to support a motion to pay one committee member’s claim in full (for example, via a “critical vendor” motion) if other unsecured claims are not receiving the same treatment. That said, committee service does not require a creditor to forget about its individual interests.
  • A committee will continue in existence throughout the bankruptcy case. If the case involves a plan of reorganization or a plan of liquidation, the committee will dissolve upon confirmation of the plan.

Source: Foley & Lardner LLP