Hands Off My Creditors' Committee

Examining the Trend of Reconstituting and Disbanding UCCs In chapter 11 cases, the Office of the U.S. Trustee (UST) is required to appoint an official committee of unsecured creditors (UCC) to consult with the debtor; investigate the acts, conduct and financial condition of the debtor; and participa...

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Bibliographic Details
Published in:American Bankruptcy Institute journal 2023-08, Vol.42 (8), p.12-58
Main Authors: Lieberman, Seth H, Alifarag, Sameer M
Format: Article
Language:English
Subjects:
Bankruptcy
Bankruptcy laws
Bankruptcy reorganization
Federal courts
Fiduciary responsibility
Litigation
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Summary:Examining the Trend of Reconstituting and Disbanding UCCs In chapter 11 cases, the Office of the U.S. Trustee (UST) is required to appoint an official committee of unsecured creditors (UCC) to consult with the debtor; investigate the acts, conduct and financial condition of the debtor; and participate in the formulation of a reorganization plan.1 In fact, 1102 of the Bankruptcy Code mandates that, absent certain circumstances, the UST undertake this appointment. According to milestones established in a restructuring-support agreement entered into among the company, its first-lien noteholders and second-lien term loan lenders, confirmation of the Lannett plan should have occurred no later than 40 days after the petition date, and that plan was to have gone into effect no later than 45 days after the petition date.6 Yet, notwithstanding these milestones, the UST distributed committee questionnaires to Lannett's unsecured creditors, some of whom expressed interest in sitting on a creditors' committee. [...]on May 19, 2023, the UST filed its notice of appointment of a committee of unsecured creditors.7 The following business day, Lannett filed an emergency motion pursuant to 105(a) and (d) of the Bankruptcy Code to disband the UCC, arguing that there was no justification for the UST's formation of the UCC (and payment of UCC professionals) given that holders of general unsecured claims (excluding unsecured holders of convertible notes claims) were unimpaired.8 Holders of general unsecured claims would be paid in full or have their claims reinstated by virtue of a gift from the debtors' first-lien noteholders and second-lien term loan lenders (collectively, the "crossover group").9 This group joined in the motion to disband, emphasizing that holders of general unsecured claims were already adequately represented because they were receiving the maximum recovery possible under the plan, and the bankruptcy court undoubtedly had the authority to disband the uCc.10 The UCC disagreed with the debtors' and the crossover group's characterization of the alleged factual circumstances, arguing that unsecured creditors were not being paid in full and thus were not receiving the maximum possible recovery under the plan.11 According to the UCC, its members and their constituents consisted of (among others) the indenture trustee for $86.25 million in unsecured convertible notes, whose noteholders would receive no recovery under the plan.12 Discovery disputes related to the mo
ISSN:1931-7522