Presenting a live 90-minute webinar with interactive Q&A Creditors’ Committees: Navigating Disclosures, Fiduciary Duties, Attorney-Client Privilege, and Fees and Expenses THURSDAY, OCTOBER 8, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Edwin Caldie, Partner, Stinson Leonard Street , Minneapolis Janine M. Figueiredo, Partner, Hahn & Hessen , New York Steven Kortanek, Partner, Womble Carlyle Sandridge & Rice , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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I. STRUCTURING THE COMMITTEE 5
The General Rule – the Official Committee • “A committee of creditors appointed under subsection (a) of this section shall ordinarily consist of the persons, willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such committee...” 11 U.S.C. 1102 (b)(1). • Notwithstanding the language of Section 1102, the size and complexity of a case as well as the types of creditors involved should dictate the composition of the official committee of unsecured creditors . 6
Optimal Composition of the Committee • Largest Creditors vs. Diversity . The United States Trustees have put increasing focus on diversifying committees rather than simply selecting the largest creditors. • This may lead to longer and more contentious deliberations by the committee, but it also helps ensure that the committee acts to protect the interests of all unsecured creditors. 7
Optimal Composition of the Committee • The categories of unsecured creditors that are often represented include: Trade Vendors Unions The PBGC Landlords Bondholders/Indenture Trustees Employees Tort claimants/Other litigants Factors Rare: Deeply out-of-the-money secured (EFH) 8
Optimal Composition of the Committee • Not Too Big and Not Too Small . In some cases a 7 member committee is too big and in others it may be too small. • Case Considerations. The UST should take into consideration the status of the case and how certain motions may affect a creditor’s position in the case. critical vendor motions 503(b)(9) motions 9
Optimal Composition of the Committee • Special Considerations for Proxies . Depending on the circumstances and provenance of a proxy, some USTs may be less likely to appoint a creditor represented by a proxy at the formation meeting. The provenance of the proxy and candor of a proxy holder are key considerations. If possible, the creditor itself should make itself available by phone for the UST interview of the proxy. 10
Optimal Composition of the Committee • Getting Appointed to the UCC . When you’re a creditor or a proxy, you need to be prepared – Some representative UST “test questions” – part of the gauntlet to getting on the UCC: If appointed, will you personally sit and serve on the UCC? What 503(b)(9) claim do you hold? Do you have any credit insurance? Any security? A judgment? Any guarantees of the Debtor’s obligations? Are you a competitor? Do you hold any equity? Are you or anyone at your company a current or former D&O of the Debtor? Do you have any setoff rights? Have you traded or sold any part of your claim? Have you had any contact with professionals interesting in pitching committee? Have you made any promise to a professional that you would vote for them? 11
Ad Hoc and Other Official Committees • The UST may appoint additional official committees of creditors or of equity security holders as the UST deems appropriate. • Those creditors that do not believe their interests will be adequately protected by the composition of the official committees will often join forces with like creditors and form an ad hoc committee. 12
Selection of Professional Advisors • The Process Generally – Delaware, the SDNY, and everywhere else… • Ethical Considerations A few “hypothetical” scenarios: cold calls, schmoozing, and hunting in packs Model Rules 7.2, 7.3, and 8.4 – Yes on written solicitation with “Lawyer Advertising”; No on cold calls. The Wrath of Walrath 13
Selection of Professional Advisors • Proxies in action: Do’s and Don’ts in the room selecting UCC professionals: Do disclose relevant information – duty of candor. Do carefully consider and receive express direction from the principal – the creditor. Don’t advocate for a professional out of self - interest, absent a principled basis to do so, and at the instruction of the creditor. 14
II. COMMITTEE MEMBER CONSIDERATIONS 15
UCC Members Duties • Section 1103(c) outlines duties: A committee appointed under section 1102 of this title may — consult with the trustee or debtor in possession concerning the administration of the case; investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan; participate in the formulation of a plan, advise those represented by such committee of such committee’s determinations as to any plan formulated, and collect and file with the court acceptances or rejections of a plan; request the appointment of a trustee or examiner under section 1104 of this title; and perform such other services as are in the interest of those represented. 16
UCC Member Fiduciary Duties • The Official Committee of Unsecured Creditors is universally considered a fiduciary body. In re Refco ("It is well recognized that, to fulfill these roles [set forth in § 1103], the members of an official committee owe a fiduciary duty to the constituents — in the case of an official creditors' committee, to all of the debtor's unsecured creditors.") • The UCC’s constituency – and therefore its duties – run exclusively to the interests of non-priority general unsecured creditors. • Core duties: Duty of Care, Duty of Candor, Duty of Loyalty, and Good Faith. 17
Liabilities of UCC Members • First the Good: qualified immunity is the norm. If a plan gets confirmed, exculpation is typically sought and should be granted for UCC members and advisors, covering all case actions. The Third Circuit upheld such exculpation in re PWS Holding – still good law and influential in other jurisdictions. For today’s typical 363 sale case in which a plan may not be confirmable, there is still qualified immunity as a practical matter: though not developed in any known case law, the fiduciary duty construct is necessarily predicated on the Delaware corollary – if a fiduciary properly exercises its duties, it is entitled to protections of the Business Judgment Rule . 18
Liabilities of UCC Members • Then the “Bad”: Cross the self -interest line, and serious repercussions follow. Use of material non- public information (“MNPI”) for a UCC member’s self interest is actionable. For debtor-issuers with publicly-traded debt, such self-interested dealings are federal securities law violations – the SEC has investigated multiple UCC members (perhaps most famously, 11 of the 14 members in WorldCom), and has brought civil enforcement suits. 19
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