Posted on: June 17, 2010
As Team USA discovered in last week’s World Cup match, you can’t always assume that parties who are supposed to be impartial, will really behave that way. Perhaps we will never know the real motivation of Referee Koman Coulibaly’s decision to disallow that goal against Slovenia, but the difficulties in determining who a creditors’ committee actually represents can be just as murky.
So, when a creditor agrees to serve on a creditors’ committee, exactly whose interests are they agreeing to represent? On the one hand, the equitable eye of the Bankruptcy Code imparts a duty on committee members to act in the best interests of unsecured creditors as a whole. However, committee membership also requires the representation of divergent creditor groups, which means committee members will also be motivated by their own self interest. Bondholders, union representatives and trade creditors may all serve on the same committee, but each comes to the table with its own agenda, ready to fight for a bigger piece of the pie.
The potential tension amongst committee members recently boiled over in the Tribune Co.'s chapter 11 cases. The Tribune bankruptcy resulted from the notorious leveraged buyout orchestrated by Sam Zell, in which $11.8 billion in structurally senior debt was placed ahead of Tribune's $2.4 billion of legacy bonds, with $8.3 billion of the proceeds going to cash out shareholders, while pre-existing creditors were left unpaid. Representatives of both the pre-LBO creditors and the LBO banks were added to the creditors' committee to form a combustible mix of divergent interests within the committee. One of the committee members, an indenture trustee for certain of the legacy bonds, alleged that the committee was compromised by the appointment of committee members representing the interest of LBO banks. The indenture trustee alleged that the LBO bank members had "disabling conflicts", and no financial incentive to pursue appropriate avoidance actions against the Debtors, their lenders and advisors relating to the LBO. In a sense, the indenture trustee alleged that the committee, vested with the obligation to be the debtor's "watchdog", was beginning to look more like a lapdog.
While the potential for conflicts within a committee are inevitable, committee members are rarely disqualified. Bankruptcy Courts encourage members to resolve their conflicts internally, so as to promote negotiation and deal making, and to minimize estate costs. Nevertheless, in extraordinary circumstances, a Court may order the appointment of additional committees, subcommittees or examiners.
In the end, the conflict in Tribune caused by the imperfect nature of committee membership reached a near perfect conclusion—the allegations of "disabling conflicts" lead the parties to consent to the appointment of an examiner to evaluate the claims and causes of action related to the LBO. So while Bankruptcy Courts may generally be inclined to take a “hands-off” approach to intra-committee conflicts, committee members who lack a meaningful voice should remember that they are not without recourse. Perhaps Team USA couldn’t demand a look at the instant replay, but creditors always have recourse to the Judge.