Creditors Committees by jennyyingdi


									                                                                                                     2 0 0 9
                                                                                                     M AY
T H E P U B L I C AT I O N F O R C R E D I T & F I N A N C E P RO F E S S I O N A L S     $ 7. 0 0

                         credit column
                                                                                     Sandra Schirmang, CCE, CICE, Deborah Thorne, Esq. and Valerie Venable, CCE

                                                                                                 Creditors’ Committees
                                                                   What You Should Consider Before Deciding to Serve

                                         W                    ith the rapid increase in Chapter 11 filings,
                                                              creditors are likely to receive invitations to
                                                  organizational meetings for creditors’ committees.
                                                  The question arises again and again — should a busy
                                                                                                                      ndo, Flo


                                                                                                                                    NACM’s 113th
                                                                                                                                                   Join Deborah for this
                                                                                                                                                   great session:
                                                                                                                           Credit Congress         17068. Creditors’ Rights Forum
                                                  credit professional take the time to participate in the                      & Expo

                                                  committee when, after all, their company is already
                                                  out a great deal of money and service on a committee                                             Join Deborah and Val for:
                                                  could be an exercise in throwing good money after                                                17089. Out-of-Court Liquidations
                                                  bad? Will membership in a creditors’ committee ben-
                                                  efit your company? Should one spend the time, espe-
                                                  cially in light of the slight chance the case will result in
                                                  reorganization? If the debtor is just liquidating, what
                                                  good is a committee anyway?
                                                                                                                 The Selection Process
                                                                                                                 The UST in each bankruptcy court appoints the offi-
        Should a busy credit professional take the                                                               cial committee of creditors. A questionnaire is usually
                                                                                                                 sent to the 20 largest creditors in most cases, but the
        time to participate in the committee when,                                                               UST may reach out to the 50 largest creditors in order
        after all, their company is already out a                                                                to draw a more representative sampling. Any creditor
                                                                                                                 may request a form from the UST and make applica-
        great deal of money and service on a                                                                     tion prior to the naming of the committee. The UST
                                                                                                                 generally attempts to appoint creditors representing
        committee could be an exercise in throwing                                                               diverse interests, including union members, trade ven-
        good money after bad?                                                                                    dors, bondholders, national creditors, those with more
                                                                                                                 local interests and the Pension Benefit Guaranty Cor-
                                                                                                                 poration (PBGC). Recent amendments to the Bank-
                                                  This article will discuss the pros and cons to consider        ruptcy Code even provide a creditor with a small claim
                                                  prior to accepting the invitation from the Office of the        who is suffering disproportionately by the debtor’s fil-
                                                  United States Trustee (UST). It will also describe some        ing to be appointed to the bankruptcy court upon
                                                  of the common issues that committees are facing in             motion. If a creditor feels they possess unique skills or
                                                  today’s economic climate. The authors include two              knowledge of the debtor or industry that would benefit
                                                  experienced committee members and one attorney.                the committee in their efforts to get a plan confirmed,
                                                  Together, we hope to discuss both the legal and practical      the creditor can include details of their qualifications
                                                  considerations that may help in your deliberations.            with their questionnaire.

   1   B U S I N E S S C R E D I T M AY 2 0 0 9
The UST’s questionnaire seeks to determine and filter out            avoidance actions. Because many of these causes of action do
creditors who have conflicts of interest which would prohibit        not exist outside of bankruptcy and may be the only assets
them from being able to act as a fiduciary to the unsecured          that are not subject to the liens of secured creditors prior to
creditor body. For example, if the creditor is interested in        the bankruptcy, these are actions which the committee will
purchasing the debtor’s assets, it should not serve on the          want to retain.
committee. Similarly, if the creditor intends to sell or has sold
its claim, it does not belong on the committee, just as a cred-     Selection of Professionals
itor who owes money to the debtor should not be selected. If        One of the first tasks a committee will undertake is to select
a creditor has a large 503(b)(9) claim for goods shipped            professionals, who will be paid by the debtor’s estate to assist in
within 20 days of the date of the filing, it may cause a conflict     its work. The selection process generally begins within minutes
with the actions of the committee to maximize recovery to           of the committee’s formation. The committee will most cer-
general unsecured creditors because of the priority status of       tainly employ attorneys to represent it in court and in negotia-
this portion of their claim. Some questionnaires are now ask-       tions with the debtor’s attorneys. Later, it will need to deter-
ing for this information prior to being considered for the          mine whether it should hire accountants or financial advisors.
committee. Each committee member must be capable of act-
ing as a fiduciary to all creditors — and not act only in its        As the committee selects an attorney or firm to represent it,
own self-interest.                                                  the committee should consider the firm’s experience in repre-
                                                                    senting other committees and its knowledge of the industry.
Committee Powers and Responsibilities                               Another consideration will be whether the attorneys pitching
Sophisticated committee members bring a business context            really have the time to devote to the case. Other consider-
to the negotiation process between the debtor and creditors.        ations include:
It is important to have members with knowledge about the
industry in order to judge whether the debtor’s plans are pru-      •   Does the firm send in its “heavy hitters” to the
dent. In order to evaluate the debtor’s business plans and              committee pitch and then, once it is employed, let
course of action, committee members will have access to a               others in the firm tend to the case?
great deal of financial, production and marketing informa-           •   Does the firm possess knowledge of the judge and
tion. As a result, they are generally required to sign a confi-          the debtor’s professionals?
dentiality agreement prior to receiving any of the debtor’s         •   Does the firm have offices in the jurisdiction where
proprietary information. The members, with the assistance               the debtor filed, or will local counsel be required?
of their professionals, will need to be able to investigate the     •   Will the attorneys be able to act independently, or are
debtor’s affairs, evaluate the ability of its management to con-        they part of the “club” and be unwilling to listen to the
tinue operations or, in the case of liquidation, work to obtain         particular needs and interests of the committee?
the greatest value for the assets.                                  •   Is the attorney’s style (aggressive/passive) in line with
                                                                        the needs of the case? To be overly combative when the
The committee must look for additional assets that the debtor           case does not warrant such actions could alienate other
may not disclose or be interested in sharing with the creditors         parties and incur unnecessary fees.
of the bankruptcy estate. For example, a debtor may not want        •   Will the professionals act efficiently and be mindful
to pursue recovery of transfers made to its management dur-             that all fees mean less for creditors down the road and
ing the last year or more prior to the bankruptcy filing. The            that their representation should really benefit the
committee should evaluate claims against management and                 creditor body?
other insiders, including the board of directors. In the event
that the debtor refuses to bring an action against these indi-      It is helpful to have a checklist with these key elements handy
viduals or entities, the committee can ask the court for            to record the answers of the professionals as they are making
authority to bring the action. In cases where the secured lend-     their presentation and to make sure that all questions are
er is under-secured, these may be among the most valuable           answered. This will allow for side-by-side comparison of the
assets that will bring value to the creditors. One of the first      firms presenting.
things the committee will want to investigate are the liens of
secured lenders to make sure that there were no errors in           The effective attorney will be able to work well with the
obtaining or perfecting those liens. Although it is not often       committee chair to set an agenda for committee meetings,
that a committee is able to “pull the rug” out from under           explain options to the committee and communicate effec-
secured lenders, it does sometimes happen. The committee            tively with the debtor’s professionals. Depending on the
will most certainly want to direct its professionals to review      case’s size and complexity, many meetings can be conducted
relevant bank documents.                                            telephonically so the creditors do not incur additional travel
                                                                    expense. Counsel for the committee should provide suffi-
Another value that a committee nearly always brings is to           cient background on the issues to be discussed prior to each
limit the additional collateral that the debtor in possession       meeting so the committee members will be prepared for the
(DIP) lender or pre-petition lender may seek. Often these           issues to be discussed. Likewise, if the committee hires finan-
lenders will ask to obtain a lien on preferences and other          cial advisors, regular reporting should be provided in advance

                                                                                                                          B U S I N E S S C R E D I T M AY 2 0 0 9   2
                      of meetings and calls. This information is key in helping the      should contain a provision for requesting a member to abstain
                      committee understand the debtor’s condition and reorgani-          from discussions or voting, or in severe instances removal
                      zation options.                                                    from the committee, when such a conflict is identified.

                      Committee Governance                                               Committee Role Prior to Confirmation
                      Once the committee is formed, it will select a chairperson to      As soon as the committee is organized, it will immediately
                      conduct the meetings and to facilitate communication with          need to evaluate the “first day orders” which have most likely
                      the professionals and perhaps directly with the debtor. The        been entered only on an interim basis. Specifically, it needs to
                      committee will generally discuss how it will be governed and       examine the cash collateral and DIP lending orders. If prefer-
                      adopt bylaws and operating procedures. The bylaws should           ences and avoidance actions have been given as a part of the
                      clearly define any rights awarded the chair to make decisions       collateral to the lenders, the committee will want to object to
                      on behalf of the committee, the mechanism for resolving a tie      these and retain those claims for the estate. If the debtor has
                      vote, the process for resolving a conflict of interest, and the     agreed to waive all claims against the secured lender, the com-
                      extent and duration of confidentiality concerning any infor-        mittee will want time to investigate prior to agreeing that
                      mation disclosed by the debtor.                                    there are no claims against the lenders. If the debtor has asked
                                                                                         to establish a “critical vendor” or other program that favors
                      The committee should discuss its objectives. What does it          certain vendors, the committee will want to determine whether
                      think should happen to the debtor — liquidation or reorgani-       this is necessary to reorganization, or perhaps only a method
                      zation? Are there specific investigations that should be com-       to favor certain creditors with payment of their pre-petition
                      menced immediately? What happened to the debtor to cause           claims. The committee will need to evaluate if the value to be
                      the filing? If members have been part of a pre-petition ad hoc      provided by such an arrangement is proportionate to the cost
                      committee, what knowledge and insight do they bring to help        to the debtor’s estate.
                      shape committee goals?
                                                                                         In the event the debtor received a great number of deliveries
                                                                                         of goods on the eve of the petition date, the committee will
    Credit managers serving on the                                                       want to determine the extent of 20-day administrative claims
                                                                                         under Section 503(b)(9) of the Bankruptcy Code. These
    committee will bring valuable insight by                                             claims must be paid in full at confirmation. If it appears at the
    providing background information on                                                  outset of the case that it is unlikely that there will be enough
                                                                                         cash to pay these claims in full, perhaps the case should not
    the debtor’s business. This will be useful                                           proceed under Chapter 11, and the committee should con-
                                                                                         sider a motion to convert it to Chapter 7 before more admin-
    in evaluating the debtor’s assumptions                                               istrative claims are incurred. Additionally, the committee will
    made in its business plan.                                                           want to determine whether the debtor is asking to pay the
                                                                                         individuals who it believes are key employees bonuses or
                                                                                         incentive payments for staying on during the Chapter 11 pro-
                      Committee Dynamics                                                 ceeding. The cash that would be used to pay such bonuses is
                      Committees are generally composed of five to seven of the           cash out of the pockets of creditors. The committee will want
                      largest creditors in the case. Some members will bring their       to examine whether this is in the best interest of all stakehold-
                      own attorneys to meetings. Sometimes a member will be a            ers, including the unsecured creditor body. At some point
                      “professional member” who holds proxies of certain creditors       during the case, the committee may want to explore the
                      and sits on many committees. They may have no first-hand            option of seeking recovery from the debtor’s D&O policy
                      knowledge of the debtor’s operation or industry. Members           (directors and officers liability insurance) if the committee
                      come with many different levels of committee experience and        has reason to believe that management may have committed
                      often represent diverse interests, ranging from the union to       any illegal or fraudulent acts.
                      supplier/vendors to bondholders or unsecured note holders.
                      Thus, each member may represent an entirely different indi-        As the case progresses, it may become evident that the debtor
                      vidual agenda while charged with acting in a fiduciary man-         will be unable to reorganize. This is an all too frequent occur-
                      ner with the best interest of the entire unsecured creditor        rence in the current economic environment. The committee
                      body at heart. Credit managers serving on the committee will       will need to evaluate the possible sale of various assets and the
                      bring valuable insight by providing background information         procedures suggested to bring the highest value to the estate.
                      on the debtor’s business. This will be useful in evaluating the    Will the debtor’s management remain in control, with the
                      debtor’s assumptions made in its business plan.                    attendant costs, and bring financially worthy buyers to the
                                                                                         table? Would a sale be better facilitated by the appointment of
                      It is possible that a committee member may come with a “secret     a trustee or the conversion to a Chapter 7 case? Are there other
                      agenda” which can become evident as the case evolves. Com-         parties that might be interested in purchasing portions of the
                      mittee members will need to determine how to maintain the          debtor’s assets, or the entire firm, that the committee or their
                      best interests of the creditor body in spite of this. The bylaws   professionals can bring into the process? Is the debtor operat-

3   B U S I N E S S C R E D I T M AY 2 0 0 9
ing as frugally as possible under the circumstances to preserve     committee and the debtor negotiate the selection of a trustee
value for all creditors, not just the secured lenders?              who will be in charge of the assets which are placed in a post-
                                                                    confirmation liquidation trust. The trust is often given wide
Ultimately, the committee will be involved in negotiating           discretion to negotiate settlements of the preference actions
either a plan of reorganization or one of liquidation. This is      and usually with minimum court supervision. The committee
frequently the most difficult decision that the committee has        will want to assure itself that the litigation of these actions
to make. In most cases, unsecured creditors will hold out the       actually benefits the beneficiaries of the trust (i.e., the general
hope they will ultimately receive a better recovery in reorgani-    unsecured creditors). It is not unknown for committees to
zation. Maintaining the debtor as a source of future sales, for     negotiate away the preference actions in return for other items
example, may mean more to the creditors than a high per-            the debtor or other parties wanted in return. A committee
centage recovery on the pre-petition debt, especially if the        without trade vendors would be unlikely to include this in a
debtor plays a unique role in the marketplace. Or creditors         list of important negotiation points. If the litigation of prefer-
may believe that if the company can emerge from Chapter 11          ences will not benefit anyone but the attorneys prosecuting
and deliver one or two years of good performance, a competi-        them, then perhaps they should not be placed in the trust and
tor will be willing to pay a higher price to purchase the com-      should be abandoned. In a liquidating Chapter 11 case, the
pany than they would be willing to pay if they believe the          committee should ensure that a post-confirmation commit-
debtor might just liquidate. Additionally, in reorganization, it    tee is created to monitor and support the trustee’s actions to
is usually possible to negotiate a waiver of preferences, since     maximize value.
the debtor, coming out of bankruptcy, will rely on goodwill,
and future extensions of credit, from its suppliers.

If the distribution to creditors is based on future profits, the
                                                                              One of the most important issues
credit manager’s knowledge of the industry is invaluable, in                  that the committee will consider,
order to validate the debtor’s assumptions about their future
growth and performance. Frequently, a plan is predicated on               especially in a liquidation proceeding,
the sale of part of the debtor’s business. It is important to             is who will administer the assets after
determine if this will generate the funds anticipated, or if defi-
ciency claims of the secured lenders will further dilute any                             the plan’s confirmation.
potential recovery. The committee can sometimes negotiate
the waiver of secured creditor deficiency claims. Committee
members should also weigh in on the value of patents and            In one of the most successful negotiated liquidation cases, the
other intellectual assets. What good is it to fight for and win      committee representing the reclamation claimholders was
the proceeds from the sale of any patents, when they represent      able to negotiate a significantly higher dividend than antici-
aged or expiring technology?                                        pated due to its selection of a very qualified trustee; the nego-
                                                                    tiation of a common sense plan allowed creditors to resolve
What type of distribution will be made to unsecured credi-          reclamation, unsecured claims and preference cases in an effi-
tors? Will the unsecured creditors receive cash, stock or debt?     cient manner. The committee negotiated for the oversight and
A committee heavily loaded with bondholders or claims con-          support of a four member post-confirmation “board” made
solidators may be satisfied with stock or debt, while a trade        up of representatives of the trust’s beneficiaries. Had the
creditor will typically want a cash payout. It is possible for      unsecured trade creditors not been carefully monitoring this
these different classes of unsecured creditors to receive equiv-    case, this result would not have occurred.
alent, but differently structured, distributions. This can
become a negotiating point between committee constituen-            Conclusion
cies, as a cash payout is generally structured, due to the cer-     When deciding whether to offer to serve on a creditors’ com-
tainty of its value, at a discount versus stock or debt. The com-   mittee, a credit professional must consider the issues of time
mittee will also need to understand the timing of how such          and cost, which are paramount. Although some jurisdictions
payments will be made. In the case of liquidation, the com-         still require the creditor to attend the organizational meeting
mittee will want to work for a carve-out from the proceeds of       in person, many are allowing telephonic attendance. Costs
the sale of the debtor’s assets, which would otherwise go to the    incurred by a creditor as part of their participation on the
secured creditor. Will there be a recovery from the proceeds of     committee are classified as a priority claim, are reimbursed as
preference and other avoidance actions or other litigation?         incurred and take priority over bankruptcy claims. While
How certain can the committee be that there will be a distri-       these payments require court approval, the committee’s coun-
bution if it is based solely on litigation proceeds?                sel will submit the expenses to the debtor for court approval
                                                                    on behalf of the committee.
Post-confirmation Issues
One of the most important issues that the committee will            Serving on a committee provides the opportunity to impact
consider, especially in a liquidation proceeding, is who will       the direction of a case for the benefit of your own company,
administer the assets after the plan’s confirmation. Often the       all other creditors and even your customer, the debtor. For a

                                                                                                                         B U S I N E S S C R E D I T M AY 2 0 0 9   4
                      fairly small investment of your time, the unsecured creditors
                      can have a strong voice at the table while providing you with a
                      unique experience which will enhance your professional
                      development and leadership profile. ●

                      Sandra Schirmang, CCE, CICE is the senior director of credit for
                      Kraft. Ms. Schirmang holds an MBA and can be reached at ss-
             Valerie Venable, CCE is the CFS manager–
                      Americas for SABIC Innovative Plastics. Ms. Venable is the past
                      chairman of NACM and speaks and writes frequently for NACM and
                      other organizations. She also serves as co-chair of the ABI Unsecured
                      Trade Creditors Committee and can be reached at valerie.venable@
             Deborah Thorne, Esq. is a partner with the law firm of
                      Barnes & Thornburg LLP and the administrator of the Finance
                      Insolvency and Restructuring Department in its Chicago office.
                      Deborah writes frequently for Business Credit and can be reached at

                      *This is reprinted from Business Credit magazine, a publication of the
                      National Association of Credit Management. This article may not be
                      forwarded electronically or reproduced in any way without written
                      permission from the Editor of Business Credit magazine.

5   B U S I N E S S C R E D I T M AY 2 0 0 9

To top