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Creditors' Committees under Bankruptcy Reform: More Representative?

By Warren Graham

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), attempted to redress what was perceived to be a failing under prior law. In Chapter 11 Cases (especially larger cases), smaller “trade” creditors and smaller interests were often frozen out of the process and of qualification for Committee membership, by the mere presence of huge bondholder representatives, pension funds, and the like. The intention, under earlier law, was to create a Committee, generally of seven members, consisting of the largest unsecured creditors, with claims generally representative of the types of debt extant in the case. This, of course, proved easier in theory than in practice, as large cases tended to be replete with public debt, managed by institutional holders. The result, often, was that smaller trade creditors, or “mom and pop” businesses were simply not given a seat at the table, and were effectively not afforded the advantages of participation in the reorganization negotiation process.

Under prior law, a conflict developed in the Courts as to whether the bankruptcy court had the power to direct the U.S. Trustee to increase Committee size so as to redress this imbalance of power. It is clear now under BAPCPA that it does, if the creditor seeking membership can satisfy a two-part test: The first part requires that the creditor be a “small business concern,” as that term is defined under the Small Business Act. The definition of that test is beyond the scope of this article, and counsel should be consulted for additional detail. The second requirement, is that the creditor hold a claim or claims which, in the aggregate, “in comparison to the annual gross revenue of that creditor, is disproportionately large.” The term “disproportionately large” is not defined, and will be left to judicial development. The term has been used in certain other bankruptcy contexts, but such use is, in the judgment of this author, of dubious applicability.

It seems obvious, for example, that if 50% of the annual revenues of a “Small Business Concern” is tied up in a bankruptcy case, the provision would apply, but as one goes further down the scale, the cases are likely to reach different results. In any case, in those courts in which the Courts had the power to direct changes in Committee size and composition to provide for adequate representation of types of debt, that discretion does not appear to have been taken away.

In summary, the question of whether “Mom and Pop” have been given a “seat at the table” in large reorganization cases has yet to be tested by the application by the Courts of the new BAPCPA provisions, and only time will tell whether Committees will become “more representative” of types of debt in those situations. Any creditor representative who finds himself or herself in a situation calling for legal analyis in this area is, or course, urged to consult competent counsel.

About the Author

Warren R. Graham is a New York attorney with the Firm of Cohen Tauber Spievack & Wagner LLP. He is a frequent writer on a variety of topics, including legal matters, political and religious affairs. His opinions are his own and do not necessarily reflect the views of his firm or its members. Additional information on him may be found at either http://www.ctswlaw.com/templates/page3_attorney.asp?docid=667

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