iThis author—whose practice is heavily weighted toward representation of official committees in large chapter 11 cases—has previously penned articles relating to questions surrounding the permanency of an official committee.
First, in an article entitled Does a Bankruptcy Court Have Authority to Disband an Official Committee?,[1] two then high-profile bankruptcy cases were examined—In re City of Detroit, Michigan, 519 B.R. 673 (Bankr. E.D. Mich. 2014) and In re Caesars Entertainment, 526 B.R. 265 (Bankr. N.D. Ill. 2015)—where bankruptcy courts reached opposite conclusions regarding whether a court has the authority to disband or vacate the appointment by the Unites States Trustee (the “UST”) of an official committee of creditors. While there have been subsequent decisions addressing the issue—finding that such authority does exist—that question has yet to be answered on the circuit court level.[2]
Next, this author examined the question of whether Conversion Equals Death for a Creditors’ Committee and Its Appeal,[3] which arose from a ruling by the United States District Court for the District of Delaware (the “Delaware District Court”) in the Constellation Enterprises cases.[4] In Constellation, the unsecured creditors’ committee (the “Constellation Committee”) had appealed the bankruptcy court’s denial of a motion seeking approval of a settlement (the “Settlement”) entered into by the debtors, the Constellation Committee and an ad hoc group of noteholders, which provided for an affiliate of the noteholders to contribute substantial funds to and funding for, a trust to be established for the benefit of the debtors’ general unsecured creditors (the “GUC Trust”). The bankruptcy court denied approval of the Settlement because the distributions to be made to the GUC Trust would skip certain priority claimants and treat the deficiency claim of a group of term loan lenders less favorably than the claims of other unsecured creditors and was therefore impermissible under the U.S. Supreme Court’s then recent decision in Czyzewski v. Jevic Holding Corp.[5] The Constellation Committee appealed the bankruptcy court’s denial of the Settlement (the “Settlement Appeal”), but while the appeal was pending, the debtors moved to convert their chapter 11 cases to chapter 7, citing, inter alia, the administrative insolvency of the chapter 11 cases. The Constellation Committee objected to the motion, arguing that the debtors did not have the absolute right to convert their cases to chapter 7 and that absent success in the Settlement Appeal, the debtors’ unsecured creditors stood no chance of recovery on their claims. Nevertheless, the bankruptcy court overruled the Committee’s objection—holding that a debtor had the absolute right to convert its chapter 11 case to chapter 7—and entered an order to that effect (the “Conversion Order”).
Following the conversion of the cases, certain of the debtors’ lenders and the UST (the “Appellees”) filed motions to dismiss the Settlement Appeal, arguing that the Conversion Order triggered the immediate dissolution of the Constellation Committee. The Constellation Committee then appealed the Conversion Order, following which the Appellees moved to dismiss the Settlement Appeal and the Constellation Committee’s appeal of the Conversion Order. The Constellation Committee filed objections to both motions to dismiss, contending, inter alia, that they should be denied because they were solely premised upon the Conversion Order, the appeal of which was then pending.
The Delaware District Court in Constellation rejected the Constellation Committee’s arguments, agreeing with the Appellees that “the legal entity that was the Committee automatically dissolved and ceased to exist as of the conversion of the chapter 11 cases to chapter 7.”[6] The court found that “numerous courts have agreed that upon conversion to chapter 7, the chapter 11 committee of unsecured creditors is terminated” and concluded that it could “see no other result under the structure of the Bankruptcy Code. Once the case is converted to a different chapter, the relevant provisions of the new chapter must govern.”[7] The court also found that case law upon which the Constellation Committee relied did not support its post-conversion existence, even while its appeal was pending.
Recently, however, the United States District Court for the Western District of New York came to the opposite conclusion in the Integrated Nano-Technologies, Inc. (“Integrated”) chapter 11 cases.[8] The Integrated ruling arose from a motion to dismiss filed in two related appeals taken by the Official Committee of Equity Security Holders (the “Equity Committee”) from decisions by the bankruptcy court (a) dismissing the debtors’ cases due to their failure to retain replacement counsel,[9] and (b) denying the Equity Committee’s application to retain its own counsel as “moot, because the [C]ommittee was automatically dissolved upon dismissal of the case.”[10]
Like in Constellation, the UST moved to dismiss both appeals, because “the Committee no longer exists” and therefore has “no capacity to pursue these appeals.”[11] The Equity Committee, on the other hand, argued that “as a matter of common sense and fairness, a committee that had opposed the dismissal of the case before the bankruptcy court should be able to prosecute an appeal of the dismissal order.”[12]
Although taking note of the Constellation cases and the precedent upon which the Delaware District Court relied, the Integrated court agreed with the Equity Committee and denied the UST’s motions, concluding that “[g]iven the Committee’s interest in prosecuting these appeals on behalf of those it represents, and the broad statutory authorization of Section 1103(c)(5), the court concludes that the Committee has the capacity to pursue these appeals.”[13]
In arriving at its holding, the court noted that while the UST is mandated to appoint a committee of creditors holding unsecured claims—and may also appoint additional committees of creditors or equity security holders as deemed appropriate—there is no provision in the Bankruptcy Code specifying when a committee’s appointment terminates or, as some courts have expressed it (including the Delaware District Court in Constellation and the bankruptcy court in Integrated), when a committee “dissolves.” Those courts found that in the absence of express statutory authority for the existence of a committee to continue following the dismissal of a chapter 11 case, it has no such authority and that a committee “must be deemed to have been ‘automatically dissolved’ upon dismissal.”[14]
The Integrated court also disagreed with the Delaware District Court’s conclusion in the Constellation cases (as well as views found in certain “leading bankruptcy treatises” on the issue’), that “with [the] dissolution of the committee, its rights also expire.”[15]
The relevant question is not whether a committee has “life” post-dismissal, a term that the Code does not employ. Indeed, the Code does not reveal any concern over metaphysical questions regarding the nature or length of a committee’s “existence.” Rather, the Code speaks of appointments, the powers authorized by appointments, and the termination of appointments. See 11 U.S.C. §§ 1102, 1103, 1104, 1105. Framed in these terms, the relevant question is simply whether the Code mandates the automatic termination of a committee’s appointment upon dismissal of a Chapter 11 case. An evaluation of the text and structure of the Code leads to the conclusion that there is no rigid rule of automatic termination upon dismissal.[16]
The Integrated court found that while Section 1105 of the Bankruptcy Code expressly regulates the termination of a trustee’s appointment, nowhere in the code is there an express statement regarding when appointments of committee under Sections 1102, 1103, 1104 or 1105 terminate, even in the code section which deals with the effect of dismissal in a bankruptcy case. According to the Integrated court:
As these provisions show, Congress clearly considered the issue of appointment termination in some detail, and Congress expressly regulated it when it chose to do so. The fact that it omitted a rigid rule of automatic termination of committee appointments upon dismissal suggests that it did not intend to impose such a rule. . . . The better inference is that Congress did not call for the automatic termination of a committee’s appointment upon dismissal because it was unnecessary to do so; the Code already sufficiently limits the scope of committees’ activities. As a “creature of statute” with a defined set of powers—principally set forth in 11 U.S.C. § 1103(c)—committees’ activities are inherently limited in time and manner. Committees may consult with the trustee and debtor concerning case administration, investigate the debtor’s financial condition, assist in formulating a plan, and perform other services in the interest of those they represent. Because these powers must of necessity be exercised in connection with a bankruptcy proceeding, there is little risk that a committee can operate at a time or in a manner far removed from the Chapter 11 case.[17]
Because there is no express prohibition on the activities of a committee after confirmation of a plan, the Integrated court found that the proper analysis is whether the committee’s post-confirmation activity is consistent with its statutory powers. The court reasoned that,
[S]ome responsibilities set forth in Section 1103(c) “clearly can apply to duties and responsibilities after confirmation,” including a committee’s power to investigate matters relating to the case and perform other services on behalf of its constituents. Because “[t]here may be services in the interest of [its constituents] that are necessary or appropriate after confirmation of the plan”—for example, “the litigation of claims . . . that are not yet resolved at the time of confirmation”—Section 1103(c) authorizes committees to act “after the confirmation of a Chapter 11 plan.”. . .And . . . because the Code does not distinguish between post-confirmation and post-dismissal activities, a similar analysis ought to apply in the latter context as much as the former. Accordingly, the Court will proceed to determine whether the Committee’s appeals are consistent with the powers granted to it under the Code. The court concludes that they are.[18]
The Integrated court noted that because a committee is a party in interest that may raise and may appear and be heard on any issue in a Chapter 11 case,
[g]iven a committee’s indisputable interest in the issue of dismissal, it follows that a committee would have a similar interest in appealing what it perceives to be an erroneous dismissal order. A committee is just as much a ‘watchdog’ on behalf of its constituents when it opposes a flawed motion to dismiss in the bankruptcy court as when it later seeks to appeal the erroneous dismissal order to the district court.”[19]
While the Integrated court’s decision will undoubtedly not be the last word on the subject, its reasoning and ultimate holding represent what many would consider a more logical and equitable result than one which cuts off a committee’s legs immediately post-dismissal, even where the dismissal may have been unwarranted or improper. Accordingly, the Integrated decision represents a “win” for those who advocate for committee’s rights in the constant tug-of-war between and among debtors, lenders, various other parties-in-interest and committees.
[1] Norman N. Kinel & Philip J. Gross, Does a Bankruptcy Court Have Authority to Disband an Official Committee?, N.Y.L.J., June 3, 2015.
[2] See In re LTL Mgmt., LLC., 636 B.R. 610 (Bankr. D.N.J. 2022); In re Cont’l Cast Stone, LLC, 625 B.R. 203 (Bankr. D. Kan. 2020); In re Coalinga Reg’l Med. Ctr., 608 B.R. 746 (Bankr. E.D. Cal. 2019).
[3] Norman N. Kinel, Conversion Equals Death for a Creditors’ Committee and Its Appeal, Am. Bankr. Inst. J., September 2018, at 34.
[4] Official Comm. of Unsecured Creditors v. Constellation Enters. LLC (In re Constellation Enters. LLC), 587 B.R. 275 (D. Del. 2018). The author served as lead counsel for the unsecured creditors’ committee in the Constellation Enterprises bankruptcy cases (“Constellation”).
[5] Czyzewski v. Jevic Holding Corp., et. al, 580 U.S. 451 (2017).
[6] In re Constellation Enters. LLC, 587 B.R. at 281.
[7] Id. at 282.
[8] Official Committee of Equity Securities Holders vs. Integrated Nano-Technologies, Inc., et al., Case No. 6:23-cv-06350 & Case No. 6:23-cv-06351 (W.D.N.Y. March 5, 2024), Decision and Order [ECF Nos. 36, 39].
[9] The debtors’ original counsel’s retention application was denied for failing to disclose its connections with creditors and other parties in interest. See In re Integrated Nano-Technologies, Inc., Case No. 22-20611-PRW (Bankr. W.D.N.Y. May 18, 2023), Order Sustaining United States Trustee’s Objection to Application to Employ Barclay Damon LLP and Denying Application [ECF No. 169].
[10] In re Integrated Nano-Technologies, Inc., Case No. 22-20611-PRW (Bankr. W.D.N.Y. June 8, 2023), Order Disapproving Committee Application to Employ McCarter & English, LLP [ECF No. 217]. The Equity Committee sought the appointment of a Chapter 11 trustee, rather than dismissal of the cases, which request the bankruptcy court denied on the basis that it had not filed a separate motion requesting such relief. The Equity Committee argued that no motion was required under Section 1112(b)(1) of the Bankruptcy Code because the court—following a request for conversion or dismissal of a chapter 11 case—is first required to determine whether the appointment of a trustee or an examiner was in the best interests of creditors of the estates. See Official Committee of Equity Securities Holders vs. Integrated Nano-Technologies, Inc., et al., Case No. 6:23-cv-06350 & Case No. 6:23-cv-06351 (W.D.N.Y. March 5, 2024), Brief of Appellant, the Official Committee of Equity Securities Holders of Integrated Nano-Technologies, Inc. [ECF No. 46, 51].
[11] Official Committee of Equity Securities Holders vs. Integrated Nano-Technologies, Inc., et al., Case No. 6:23-cv-06350 & Case No. 6:23-cv-06351 (W.D.N.Y. March 5, 2024), Decision and Order [ECF No. 36, 39] at 2.
[12] Id. at 4.
[13] Id. at 9.
[14] Id. at 4.
[15] Id.
[16] Id. at 5.
[17] Id. at 6-7.
[18] Id. at 8.
[19] Id. at 9.
