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Committee Capture? An Empirical Analysis of the Role of Creditors’ Committees in Business Reorganizations

Posted by on Wednesday, April 27, 2011 in Articles, Volume 64, Number 3, Volumes.

The number of businesses experiencing financial distress increased significantly during the past several years. The number of Chapter 11 reorganization cases likewise rose. And many of these business failures were spectacular, leaving little value for creditors and even less for shareholders. Consequently, how the business debtor’s limited asset pie is divided and who gets to allocate the pieces are very relevant and important questions.

The U.S. Bankruptcy Code generally contemplates the appointment of a committee of the debtor’s unsecured creditors to serve as a fiduciary for all general unsecured creditors and as a statutory watchdog over the debtor and its assets. The creditors’ committee typically includes seven to nine of the debtor’s largest unsecured creditors, and it receives access to much of the debtor’s proprietary and confidential information, as well as a seat at the plan of reorganization negotiation table. Serving as a member of the creditors’ committee often gives a creditor a say in how the asset pie is divided. Whether that creditor uses its committee seat for the benefit of all creditors or simply to further its own agenda is an open question.

This Article presents the first in-depth empirical analysis of the activities of creditors’ committees in, and their impact on, Chapter 11 reorganization cases. The primary data examine 296 Chapter 11 cases in six different jurisdictions. This analysis is supplemented by survey data collected from individuals who have served on creditors’ committees or worked as a professional to business debtors or creditors’ committees. The data support several strong associations between the presence of a creditors’ committee and, for example, whether the debtor reorganizes or pursues a sale of substantially all of its assets and the ultimate percentage recovery distributed to general unsecured creditors. Overall the Article provides critical data and analyses to help policymakers, judges, and Chapter 11 participants refine the role of creditors’ committees to maximize their utility.