In large chapter 11 cases, the diffuse interests of a large number of creditors may be at stake. Bankruptcy law addresses potential collective action problems (see the brilliant  Mancur Olsen, Jr., The Logic of Collective Action: Public Goods and the Theory of Groups (1965)) by providing that the U.S. Trustee may appoint the membership of an official committee of unsecured creditors (often called “the committee”) having a fiduciary duty to all such creditors. The committee is usually composed of an odd number of the largest unsecured creditors that are willing to serve.  The committee hires lawyers (and sometimes financial advisors or other professionals) in order to monitor and challenge DIP activities, including by objecting to DIP financing arrangements proposed by the DIP and, in some circumstances, by proposing a plan of reorganization in competition to the DIP’s plan.   Committee expenses, including professional fees, are paid by the debtor’s estate.  An active committee can play a major role in the outcome of the case.  Sometimes other official committees will also be appointed (to represent specific kinds of creditors [retirees, bond-holders, warranty claimants] or even holders of equity).   Other groupings of parties, sometimes called “unofficial committees,” may also form and be active, though entirely on their own dimes.

For more information, read Dealing with Corporate Distress 02: These Are the People in Our Neighborhood: An Overview of Parties in Chapter 11.

« Back to Glossary