Using a Creditors' Committee To Increase Recoveries to Creditors in Chapter 11 Bankruptcy Cases

by David M. Reeder

No one likes to hear that a company which owes them money has filed a chapter 11 bankruptcy case. Following the initial frustration, however, comes the question of how to maximize recovery in the case.

Unsecured creditors are understandably hesitant to take any action that appears to be "throwing good money after bad". Conversely, without unsecured creditor participation in the bankruptcy case, the interests of unsecured creditors are left to chance. Neither the debtor, the secured creditors, nor the bankruptcy judge will consider the position of unsecured creditors unless unsecured creditors make their voice heard in the case.

In chapter 11 business reorganizations, the bankruptcy code provides for the appointment of an official creditors' committee. The code also provides for the representation of the committee by an attorney, at no cost to the creditors, with payment coming from the bankruptcy estate.

A well-represented committee can increase distribution to unsecured creditors by negotiating for a higher pay-out, and acting to block approval of any plan of reorganization that does not deal fairly with unsecured creditors. If no suitable negotiated resolution is reached in the case, the committee can press the bankruptcy judge to appoint a trustee to sell the debtor's assets.

The sooner that a committee is formed after the filing of the chapter 11 case, the greater the possibility of creditors having meaningful input in the case. Some of the benefits of a committee are the following:

• A well-represented committee will keep the debtor from dominating the case.

• The committee's knowledge of the debtor's industry will result in the bankruptcy judge being given a more realistic view of the debtor's prospects for reorganization.

• The prompt formation of a committee can keep the debtor from gaining too much momentum early in the case, and from setting the tone for the proceeding without opposition.

• The effective use of a well-represented committee can put more money back in the pockets of unsecured creditors.

Reeder Law Corporation represents creditors' committees in bankruptcy cases in the United States Bankruptcy Court for the Central District of California, including the branch courts in Los Angeles, Santa Ana, San Fernando Valley (Woodland Hills), Riverside, and Santa Barbara. Special assignments are also taken in other bankruptcy courts.

If you find that a company that owes money to you, or to someone with whom you do business, has filed a chapter 11 bankruptcy case, contact Reeder Law Corporation to find out how you can increase distributions to creditors through the appointment of a creditors committee.