Hannah Stubbs

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Since bankruptcy proceedings are “designed to function by informed participatory, and self-interested constituent democracy,” the committees in chapter 11 cases are an important fixture of the proceedings given their oversight role.[1]In Official Comm. of Equity Sec. Holders v. Integrated Nano-Techs., Inc., the Official Committee of Equity Securities Holders (“Committee”) for Integrated Nano-Technologies, Inc. (“INT”), was deemed “automatically dissolved” by the Bankruptcy Court for the Western District of New York since it had “dismissed the bankruptcy case due to INT's failure to obtain counsel.”[2]  The Committee appealed the dismissal of the case, and the United States Trustee moved to dismiss the appeal, reasoning that because the “Committee ‘no longer exists’ it ‘has no capacity to pursue these appeals.’”[3]  The District Court denied the United States Trustee’s motions to dismiss.[4]

The United States Trustee appoints the committees that will later have oversight roles in chapter 11 bankruptcy proceedings.[5]  The United States Trustee must appoint a “committee of creditors holding unsecured claims” and also may “appoint additional committees of creditors or of equity security holders as he deems appropriate.”[6]  A committee’s role is to “investigate the debtor, oversee the administration of the case, participate in negotiating the plan of reorganization, and exercise other general supervisory functions.”[7] Committees, as “parties in interest,” have a right to “raise and appear and be heard on any issue in a chapter 11 case.”[8] Title 11 of the United States Code (the “Bankruptcy Code”), particularly section 103(c), outlines a committee’s “powers and duties,” but is notably silent as to “when a committee’s appointment terminates.”[9]

Courts have taken different approaches to determine when a committee is terminated.  One approach is to treat a committee like a “private corporation” that can “exist only under the express law of the sovereignty by which it was created.”[10] Without express statutory authority allowing for its post-dismissal existence, these courts reason that the committee has no post-dismissal existence, and is therefore dissolved upon dismissal.[11] Under this rationale, a committee’s dissolution terminates its rights, including the right to appeal.[12] This reasoning was the basis for the United States Trustee who “assert[ed] that the Committee ‘automatically dissolved’ upon the dismissal of INT’s case, and consequently ‘has no capacity to pursue these appeals.’”[13]  

Here, the Court took a different approach when ruling whether the Committee had the right to appeal.[14] The Court agreed with the Committee’s argument that “as a matter of common sense and fairness, a committee that had opposed the dismissal of the case before the bankruptcy court “‘should be able to prosecute an appeal of the dismissal order.’”[15] To come to this conclusion, the Court relied on the express language of the Bankruptcy Code. Specifically, the Bankruptcy Code provides for the “appointment of several different actors in connection with a Chapter 11 case.”[16]This includes the termination of appointments, such as “expressly terminat[ing] the appointments of trustees and examiners upon conversion.”[17] Because Congress considered and chose to regulate when appointments were to be terminated,[18] the Court reasoned that if Congress wanted to include language about a committee’s termination in the Bankruptcy Code, it would have.[19] Courts in the past have also recognized that flexibility is needed “in the related context of a committee’s post-confirmation activities.”[20] Accordingly, the Court concluded that the Committee could pursue the appeals and denied the Trustee’s motion to dismiss.[21]

The Court departed from the majority position taken “by a number of lower courts and ‘leading bankruptcy treatises.’”[22] First, in departing from the majority, the Court found that the majority view rested almost entirely on one case that failed to cite a single section of the Bankruptcy Code in finding that a committee is automatically dissolved upon the dismissal of a bankruptcy case, Unsecured Creditors Committee of Butler Group, Inc. v. Butler (In re Butler), 94 B.R. 433 (Bankr. N.D. Tex. 1989).[23] Second, the Court found that a better inference as to Congress’ intent is to allow a committee the right to appeal, after dismissal, because “automatic termination of a committee’s appointment upon dismissal [would be] unnecessary.”[24] This is especially true in light of the Bankruptcy “Code [which] already sufficiently limits the scope of committees’ activities.”[25] Despite these limitations, the committees play a “robust and flexible role” in chapter 11 proceedings, fitting into the “overarching ‘policies of flexibility and equity built into Chapter 11 of the Bankruptcy Code.’”[26] With this philosophy in mind, the Court recognized its decision instituted a “functional approach [that] better accords with the text and policies of the Code than an approach based on general corporate-law principles.”[27]

This novel approach appreciates the functionalism that Congress intended which is present “in the broad statutory authorization of Section 1103(c)(5)” of the Bankruptcy Code.[28]  Its impact will be wide-reaching as the Committee exercises its newfound capacity to pursue future appeals.