|This article is the second in a series of three articles about the basics mass tort attorneys need to know about bankruptcy and restructuring in order to best represent and maximize recovery to their individual clients.
This article will address the unexpected filing of Chapter 11 bankruptcy, the procedural flurry of activities that occur immediately following such a filing, the actual formation of a creditors’ committee, and how a firm navigates a very different course to protect its interests.
In my career as a mass tort lawyer practicing in bankruptcy, I have literally filed hundreds of applications for my clients to serve on creditors’ committees and have personally been selected to serve on over 15 very large creditors’ committees. The current cases where my clients and I, through their proxy, serve on these committees include: Purdue, Insys, PG&E, and Boy Scouts of America bankruptcies. We expect Juul and Carnival Cruise Lines to follow soon. The bankruptcy courts are running at full tilt, and the bar date has not been set for the Boy Scouts Bankruptcy. We will keep you advised of the status of that important deadline.
The Very Beginning of the Chapter 11
Most of us are well aware that Chapter 11 is a kind of bankruptcy that involves the reorganization of the debtor’s business affairs debts and assets. It is different from a Chapter 7, which is a liquidation and distribution of assets, but Chapter 11 requires a plan of reorganization, with the support of creditors’ groups, and a voting process. This version of bankruptcy gives the debtor a fresh start, but the terms are subject to the debtor’s fulfilling of obligations under the plan, including distribution of debtor’s assets to tort victims. The Chapter 11 is the most complex of all cases. It is also very expensive.
The debtor and the official committee’s professional expenses (attorneys, financial advisors, insurance counsel, and all costs of the bankruptcy) are paid for by the estate, which is the assets of the bankrupt corporation. When I say it can be expensive, I mean that in a case like PG&E, the expenses of counsel and their financial investment bankers will exceed $100,000,000.
First Things First
When you receive notice of the petition, as discussed in the earlier article, the automatic stay under section 362 is in effect stopping your trial midstream but also stopping the expense of proceeding, such as expert reports and depositions of all kinds, and the litigation screeches to a halt. The company remains in charge of its assets, but many things occur at the first day hearing. The first day filing will list a schedule of the largest creditors of the company and is available online on the docket, where you can easily see if you or other similarly situated claimants are listed in the first day filings.
Tort victims were listed in the recent first day filings of the Boy Scouts of America. You may not have filed your case yet, and if you do not see yourself there as one of the biggest single large creditors, you need not be concerned. Many large US companies have filed for Chapter 11 bankruptcy and do stay afloat. They include giant corporations, like General Motors (which actually was the subject of a lengthy litigation to include ignition switch cases), and most of us are familiar with United Airlines, retail outlets Kmart and Sears, and thousands of other corporations.
The business filing of a Chapter 11 allows the debtor to continue to operate and run the business with its executives, with the exception of fraud or dishonesty and criminal conduct, in which case, a court appointed trustee is often in place to run the company and the entire bankruptcy proceedings. This happened in the New England Compounding case where, eventually, all of the manufacturers of illegally compounded methylprednisolone drugs infected over 700 people with incurable fungal meningitis and eventually ended up behind bars.
The court has control over the assets, and there is a very comprehensive reporting period of insurance and cash, including all of the pending necessary contracts with vendors, unions, landlords, and insurance. However, there is a stranglehold on the debtor’s ability to arrange any loans or financing that the creditors’ group has a significant interest in approving (it is called DIP financing or debtor-in-possession finance) to be sure it is not overly expensive and is necessary to meet the needs of the estate.
You should check the docket daily to see what matters are being heard. It is very interesting to attend a first motion where parties show up and address the court. The debtor, the large creditors, and, in the case of mass torts, usually members of the PSC and their counsel will make appearances on the record during this interim period until committees are formed. The judge in a bankruptcy court is assigned under federal law to manage all issues involving a Chapter 11 unless an Article 3 judge and federal district court withdraws the reference, which does happen occasionally but will be discussed in another article.
The bankruptcy judge has the plenary jurisdiction over all matters involving the bankruptcy; he or she is a specialist and operates in the very closed circles of the bankruptcy bar. There are some very different practices in bankruptcy that are opposite to the traditional practice of trial lawyers in state and federal courts. We will be discussing these differences in additional articles.
US Trustee’s Role
It is often wise to get in touch with the US trustee’s office in the district where the bankruptcy is filed, in order to determine, if you cannot determine from the docket, who the United States trustee is that is assigned to the case. It is important to reach out, either by letter or phone. Most trustees are responsive, particularly if you are looking for information to get for the all-important formation committee meeting. The next important thing to your interest is the formation of official committees.
What Exactly Is a Creditors’ Committee, and What Does It Do?
There are a number of committees that are formed in a bankruptcy that operate as de facto boards of directors, making decisions in connection with the debtor. There are numerous kinds of committees, and it is important to know the differences. In the case of a company filing that has a lot of secure debt, the secured creditors will often have their own committee or since they are secured, not even need a committee. The next type of committee is an unsecured committee or UCC. A UCC will be made up of all the different kinds of creditors. In the case of a bankruptcy where there is a serious number of mass tort victims, such as New England Compounding company, PG&E, and Boy Scouts, there was a separate tort claim committee (or TCC) appointed by the US trustee. If the creditors of a committee of a company are predominately tort victims, it will likely include 9 individual tort claimants on the creditors’ committee, but it is at the discretion of the US trustee.
Once you receive notice of the formation meeting, it will be in person and in the courthouse itself or in a hotel near the courthouse where all creditors can seek to apply and be interviewed for a position on the committee.
The Role of the US Trustee
The United States Trustee is a division of the Department of Justice that is authorized to seat and select official creditors on committees, with their counsel acting as official proxy, filed with that office. The application process is very different from district to district. There are forms for it, but it should also include many things about your claim that might not be apparent from the form.
Duty of a Committee Member
This office has filed several hundred applications to serve on committees for numerous clients over the years, and the application for your client to serve has many important features that let the trustee know that your client is committed to serving, understands that in doing so he or she must represent the best interest of all creditors and not just advocate for his or her interest alone, and realizes the time commitment involved with travel and a very large number of meetings, which is often difficult for individuals to manage. We understand this process well: we are highly experienced at the application process, the meeting process, and with how to engage the US trustee in the discussion of why your client should be selected to serve.
Committees are formed of anywhere from 5 to 11 members, depending on the size of the case and again totally at the discretion of the US trustee assigned to the case. This is a fiduciary committee with all the obligations that entails. Once the committee is formed, if your client is selected, you immediately go into the formal responsibilities of adopting bylaws and selecting committee professionals–such as counsel for the official committee and financial advisors and, in some cases, investment bankers to advise you about the assets and their potential for sale or valuation inside the bankruptcy process.
Applying for a creditors’ committee can be very intimidating since it is not the usual experience of very many trial lawyers or mass tort lawyers. Navigating it successfully is something that takes years of know-how, and an understanding of what it takes to confirm a Chapter 11 plan of confirmation that the United States Trustee will value. The trustee will recognize that your firm has the capabilities and the track record of participating in the committee process and confirming a plan of Chapter 11 reorganization successfully. These are the major things USTs are looking for. They want applicants to work efficiently and effectively to wind up the business of the corporation quickly and economically so that the assets are preserved to be distributed to all creditors, including your clients.
As of now, even in the time of COVID-19, US trustees require attendance in person, except in extraordinary circumstances. It is allowable to attend your interview process by phone, but it was recommended that you be in person, showing your commitment to serve on a committee, if you want to increase your chances of being selected. I have attended application formation committee meetings where there have been hundreds of applicants, and it is the US trustee’s job to select from all those applications the people who represent the demographics of a select creditor group, the size of the claim, and the counsel involved in the claim.
I’m on the Committee…Now What?
Official committees often are formed within the first 2 to 3 weeks of the filing of the petition for Chapter 11. You and your client should commit to staying 1 to 2 nights in the venue since the committee will often have to work very late the first night after being selected and the interview of counsel can take hours. Understand that the committee must interview and vote on the selection of the official committee counsel. In another article we will go through what we think are the most important aspects of counsel to best represent tort victims in a bankruptcy.
Obviously, your client should be able to demonstrate within the committee certain leadership skills. They should be able to intelligently communicate their claim and their dedication to serve in a balanced and effective presentation that shows that they understand well the function of a committee is to serve the best interest of everyone who deserves or will be found to be owed money from the estate.
Representing a member of the bankruptcy committee is one of the most interesting things a trial lawyer can experience. Understand, however, that it is unpaid. You will be changing your representation of your client from a full-fledged litigation in a state or federal court to becoming their counsel on a committee and be guided by the committee counsel through the process. You may be uncomfortable at first, but an effective trial lawyer should be able to learn the skill set necessary to work on the committee effectively with other kinds of creditors’ groups that do not necessarily agree with or understand the complex issues of the bankruptcy court that require committees to move effectively and quickly to preserve assets for the estate. Bankruptcy cases move very fast, perhaps faster than any other court system currently. We have been known to be able to move to claw back assets, take down insurance policies, to have it be paid = to the estate, and have a process for dividing the money through an approved matrix or criteria for application to the trust in under 18 months.
We will cover more about the actual bankruptcy and committee process in the next article.
Please feel free to reach out to Andrews & Thornton if you’re thinking about applying on a committee as we are very experienced in this area. Understand that there are two bankruptcies on the horizon: the JUUL company should be filing soon, and if you have clients that are pursuing claims against JUUL, please feel free to reach out to us so that we can discuss with you the current order of things in the impending bankruptcy. Tobacco giant Altria has a substantial investment in JUUL, and we understand the financial landscape of that case very well. Also, Boy Scouts of America filed for Chapter 11 and is moving very quickly. We are seated on the creditors’ committee with Slater, Slater, Schulman LLP, representing victims of Scouting abuse and would be very happy to make a detailed report to you about that case. There is the potential for getting Boy Scouts claims and working with our firm since the bar date, which is the statue limitations, has not been set. Please feel free to reach out to us if you’d like to talk about getting Boy Scout claims.
Be safe, and stay healthy.
Anne Andrews, managing partner of Andrews & Thornton, has considerable experience navigating mass tort bankruptcies involving complicated pharmaceutical product liability, wildfire, and sexual abuse claims, including: New England Compounding Pharmacy, Chemtura Corporation, Dow Corning, PG&E, Insys, Purdue pharmaceuticals, and Boy Scouts of America. She currently chairs Insys and Purdue official committees.
Please reach out if we can help your firm in anyway.
ANDREWS & THORNTON
4701 Von Karman Ave., Suite 300
Newport Beach, CA 92660