Serving on a Creditor Committee

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Information on current issues involved with serving on a creditor committee. Topics include committee formation, pros, duties, areas of involvement, etc.

Information on current issues involved with serving on a creditor committee. Topics include committee formation, pros, duties, areas of involvement, etc.

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  • 1. CMA/NACM Oregon Webinar Presentation SERVING ON A CREDITOR COMMITTEE: Current Issues October 29, 2009 Jonathan P. Friedland, Esq. Hamid R. Rafatjoo, Esq. Levenfeld Pearlstein, LLC Pachulski, Stang, Ziehl & Jones LLP 2 North LaSalle Street, Suite 1300 10100 Santa Monica Boulevard, 11 th Floor Chicago, Illinois 60602 Los Angeles, California 90067 (312) 476-7528 (310) 277-6910
  • 2. Committee Formation
    • Why (or why not) serve?
    • How do you serve on a Committee?
    • Governance?
  • 3. Why A Committee?
    • Balance.
    • Economic reality.
  • 4. Pros of Sitting on Committee
    • Access to Information Not Available to General Creditor Body
    • Ability to Retain Counsel at Debtor’s Expense
    • Instant Credibility with the Court on Issues
    • Ability to Influence the Outcome of the Case
    • Increased Attention From Debtor on Individual Issues
  • 5. The Committee’s Duties
    • Information sharing obligations.
    • Standing.
    • Fiduciary duties, generally.
  • 6. Committee Professionals
    • Attorneys.
    • Financial advisors.
    • Others.
  • 7. Major Areas of Involvement
    • First day motions.
    • Cash collateral and debtor- in-possession financing issues.
    • Critical vendor motions.
    • Employee retention motions.
    • Sale motions.
    • Plan negotiation.
  • 8. Strategies and Tactics
    • Move to appoint a trustee?
    • Move to appoint an examiner?
    • Seek dismissal or conversion?
  • 9. Strategies and Tactics (cont’d)
    • Challenge exclusivity?
    • File a competing plan?
  • 10. Three Critical Stages For Committee Involvement
    • DIP Financing.
    • 363 Sales.
    • Post-Confirmation Estate.
  • 11. DIP Financing
    • Committee review and input critical.
    • Debtor often beholden to or constrained by the DIP lender.
    • DIP Financing motion often contains provisions that are heavily tilted in favor of DIP lender.
    • DIP Financing order sets the tone (and budget) for the case.
  • 12. Things Committee Should Scrutinize in DIP Financing Motions:
    • The economic terms of the deal (interest rates, facility fees, etc...) should be carefully scrutinized to confirm that they are consistent with market rates in comparable situations.
    • The Committee should investigate what, if any, efforts the debtor undertook to obtain competing bids from other lenders and to compare the terms of any competing offers received.
    • The Committee will want to ensure that any restrictions imposed on the debtor’s ability to use cash collateral are flexible enough to permit the continuation of its operations without interruption.
    • In addition to reviewing the economics of the deal, the Committee will also want to conduct a thorough review of the noneconomic terms of the debtor’s proposed financing arrangements.
    • Carve-outs, for both debtor and committee professionals.
  • 13. 363 Sales
    • Early involvement of Committee in sales process is critical:
      • debtor's marketing efforts
      • financial analysis and valuation conclusions
      • proposed sale procedures
      • stalking-horse protections
      • disposition plan
  • 14.
    • Appropriateness of any proposed break-up fee for the size and kind of transaction considered.
    • Whether bid protections, including overbid requirements and eligible bid restrictions will unfairly chill the bidding process.
    • Whether the assets sold pursuant to the sale motion include or exclude causes of action that might otherwise be pursued by the Committee.
    • Whether the proposed purchase price is sufficient to provide a measure of recovery to unsecured creditors.
    Committee Considerations Regarding 363 Sales
  • 15. Additional 363 Sales Issues
    • To the extent a Committee is not satisfied with the terms or the financial impact of the proposed sale, the Committee may challenge the sale on the grounds that the proposed sale is not in the best interest of the debtor's estate.
    • Committee may negotiate certain carve-outs from the transaction, including the retention of specified causes of actions in the estate, for the benefit of the debtor's unsecured creditors.
  • 16. Post-Confirmation Estate
    • Confirmation is not the end of a Chapter 11 case, as there is usually a need to collect, administer, and distribute estate assets of a Chapter 11 debtor after the confirmation of the plan.
    • Post-confirmation, the unsecured creditors are the only party left with an interest in maximizing the estate (assuming that secured lender is out).
    • Traditionally, control of the post-confirmation estate is ceded to the Committee, and the Debtor retains no control.
    • Appropriate for the unsecured creditors to analyze claims objections and/or potential avoidance actions.
  • 17. Post-Confirmation Estate (cont’d)
    • However, in some cases, the Debtor does not gracefully concede control of the post-confirmation estate.
      • Debtor designates plan administrator
      • Debtor’s counsel continues representation
      • Limited Committee input and/or oversight
    • Committee can fight this by opposing a plan that would leave control of the post-confirmation in Debtor’s hands.
  • 18. Summary
    • Active involvement by the Committee on these critical issues keeps proceeding balanced.