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Dispensing With a Creditors Committee in a Small Business Bankruptcy, What is the "Cause?

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By Scott Blakeley
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

Under the Bankruptcy Reform Act of 1994, Congress established a fast track for small business reorganizations for the purpose of making a reorganization less complex and less expensive in Chapter 11. These provisions provide that a debtor must elect to be considered a small business debtor. A small business is defined as one whose aggregate, noncontingent liquidated, secured and unsecured debts are less than $2 million as of the date of the bankruptcy filing. The plan confirmation process is expedited for small businesses. The small business exception also may affect how unsecured creditors may protect their interests. On request of a party in interest, and for "cause, the court may order that a creditors, committee not be appointed. In In re Haskell-Dawes, Inc., 188 B.R. 515 (Bankr. E.D. Pa. 1995), Judge Diane Weiss Sigmund considered whether "cause existed to dispense with the appointment of a creditors, committee under the small business exception in chapter 11.

The debtor, a manufacturer of textile machines with scheduled liabilities of less than $2,000,000, elected to be treated as a small business debtor under section 1121(e) of the Bankruptcy Code. Within 45 days of the Chapter 11 filing, the debtor filed a motion asserting cause existed for the court to order that a creditors, committee not be appointed pursuant to recently enacted section 1102(a) (3). The debtor asserted three bases for establishing "cause to dispense with the statutory creditors, committee:

1. Additional costs of the committee and its professionals would unduly burden the reorganization.
2. The type of plan proposed by the debtor did not require committee participation.
3. Creditors opposed to dispensing with the committee could adequately protect their interests acting individually.

Three creditors holding the largest unsecured, non-priority claims against the debtor opposed the debtor,s request to dispense with the appointment of a committee. An unsecured creditor supported the debtor,s motion, asserting that the appointment of a creditors, committee would diminish the funds available for unsecured creditors and anything detracting from the debtor,s ability to operate its business was not desirable.

The court considered the traditional role and duties of a statutory creditors, committee in Chapter 11. Those duties include consulting with the debtor regarding the administration of the estate; investigating the acts, conduct and financial condition of the debtor, and the desirability of having such business continue; participating in the formulation of a plan; and employing counsel. The court analyzed the statute and found that there was no definition for "cause in dispensing with a creditors, committee, nor was there legislative history analyzing "cause, nor were there reported decisions interpreting this definition. The court considered the debtor,s grounds for dispensing with the committee.

Costs to the estate.
The debtor contended that the committee would add costs that would unduly burden the reorganization. However, the court noted that the debtor failed to provide any evidence of this fact. Additional costs of the committee by itself does not justify dispensing with appointment of a committee, the court noted, as "the truism that the appointment of a creditors, committee may result in additional costs to the debtor could be advanced by every small business. . . 188 B. R. at 520. The court looked to section 1102(a)(3) of the Bankruptcy Code and reasoned that Congress could have crafted the provision to exclude the debtor from paying such costs, but did not. Rather, Congress conditioned dispensing with a creditors, committee upon a showing of cause. A general assertion that the appointment of a creditors, committee may cost the debtor money does not establish such cause.

Form of plan of reorganization.
The debtor proposed a pot plan, e.g., a pot of money would be turned over to creditors to satisfy a portion of their unsecured claims. Because attorneys, fees of the committee would reduce the amount of money available to the unsecured creditors in the pot, the debtor contended that cause existed to dispense with a committee. The court noted that the benefits gained by unsecured creditors through the committee,s efforts could outweigh the cost of their fees. The court noted that the debtor was proposing a new value plan. The committee could be effective in negotiating a larger new value contribution. That contribution alone could offset the costs of appointing a committee. The court also noted that the committee could aid in negotiating a consensual plan of reorganization.

Protecting Creditors, Interests The debtor complained that the only creditors that opposed the debtor,s motion to dispense with the committee were creditors who sought to further their own particular interests and thus should be required to hire counsel at their own expense. The court disagreed. Members of the committee have a fiduciary duty to act for the benefit of their constituency, the unsecured creditors. This duty prevents them from acting to benefit their particular interests. These safeguards ensure that committee members do not act to the detriment of unsecured creditors.

The Haskell-Dawes court seems to establish a fairly heavy burden on a party in interest attempting to establish "cause to dispense with a creditors, committee in a small business Chapter 11. The debtor failed to present evidence on how the additional costs of a creditors, committee might adversely impact the debtor,s rehabilitation. However, the court notes that a creditors, committee may confer value to creditors in a number of ways in a Chapter 11. Thus, the court seems to suggest that, generally, the benefit a creditors, committee confers to the creditors and the estate outweighs the cost of their involvement.

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