The Power to Disband Committees: A Difference of Opinion

In chapter 11 cases, the U.S. Trustee’s power is prominently showcased throughout the process of appointing official creditors (and equity) committees. The Code instructs that the U.S. Trustee “shall appoint a committee of creditors holding unsecured claims and may appoint additional committees ... as the United States trustee deems appropriate.”[1] While the U.S. Trustee controls much of the appointment process, bankruptcy courts do retain some statutory authority over the formation and monitoring of committees. Specifically, § 1102(a) provides that bankruptcy courts may (1) order the appointment of additional committees to ensure adequate representation,[2] (2) order that a committee not be appointed in small business cases[3] and (3) modify the membership of a committee.[4]

Absent, however, in § 1102 is any suggestion that bankruptcy courts may order the disbandment of an official committee. Three high-profile cases have recently published opinions exploring this very issue: In re Dewey & LeBoeuf, In re City of Detroit and In re Caesars Entertainment Operating Co. The fact that each court arrived at different answers provides further intrigue. In addition to diverging on the construction of § 1102, the opinions evidence differing views concerning the nature of bankruptcy courts’ equitable powers.

In re Dewey & LeBoeuf LLP

In Dewey, the U.S. Trustee appointed a second official committee to represent the interests of former partners of bankrupt law firm Dewey & LeBoeuf.[5] The debtor motioned the court to disband the second committee because it was too expensive and counterproductive.[6] The debtor contended that even though such power is not specifically enumerated in the Code, the power to disband is implicit in the court’s power to order the appointment of additional committees.[7] The U.S. Trustee responded that the Code does not grant bankruptcy courts such authority and that it may not be implicitly derived by negative statutory inference.[8]

Side-stepping the issue, the court concluded that it was unnecessary to determine the scope of its power under § 1102.[9] The court reasoned that even if it did possess such authority, it would not exercise it because the second committee continued to serve a critical purpose.[10] Notwithstanding the court’s deferral on the issue, it stated that the portion of § 1102 providing that the U.S. Trustee may appoint additional committees “as the United States trustee deems appropriate” would seem to leave little or no role for any court to review that decision.[11]

In re City of Detroit

In City of Detroit, a chapter 9 case, the court granted the debtor’s motion seeking an order vacating the appointment of a committee of unsecured creditors.[12] The court reasoned that § 1102(a)(1), the provision dictating that the U.S. Trustee “shall appoint” a creditor’s committee, did not apply to chapter 9 cases.[13] Although the court could have granted the relief requested based solely on this statutory construction, it proceeded nonetheless to consider whether courts retain the authority under § 105(a) to disband a creditors’ committee.[14] The court answered in the affirmative.

The court relied on Sixth Circuit precedent for the proposition that a bankruptcy court’s equitable powers are only constrained by actions “not inconsistent with the Bankruptcy Code.”[15] It then concluded that disbanding a committee is within its equitable powers because such a determination is not inconsistent with any title 11 provision.[16] Rather, the only limitation on the power to disband was whether it is “necessary or appropriate” under § 105(a).[17] As the Caesars opinion presents, not all courts espouse such an unconstrained understanding of a bankruptcy court’s equitable authority.

In re Caesars Entertainment Operating Corp.

In Caesars, the debtors sought to disband the second of two official committees appointed by the U.S. Trustee at the beginning of the chapter 11 cases.[18] The debtors argued (citing City of Detroit) that even absent express statutory authorization, the court’s broad equitable powers under § 105(a) permit disbandment.[19] The court disagreed. The court first held that § 1102 “does not itself” authorize bankruptcy courts to disband committees appointed under § 1102(a)(1).[20] The court reasoned that its powers under § 1102 are limited to those expressly enumerated therein.[21]

Next, the court considered whether the power to disband arises from § 105(a) and concluded that the subsection “confers no such power.”[22] Instead, the court held that § 105(a) only “gives bankruptcy courts the power only to implement existing Code provisions. It is neither an independent source of rights, nor a source of substantive authority.”[23] In no uncertain terms, the bankruptcy court rejected the breadth of power ascribed to § 105(a) in City of Detroit: “The approach suggested in City of Detroit — that section 105(a) authorizes the exercise of [the power to disband an official committee] because the Code does not ‘expressly prohibit’ it — is consequently incorrect.”[24]

Conclusion

The Dewey, City of Detroit and Caesars decisions offer a sharp contrast regarding the manner in which courts approach the issue of committee disbandment; however, a closer examination of the opinions lead to additional notable distinctions. For instance, some courts avoid creating new law if the issue presented could be adjudicated otherwise. For instance, the Dewey court suggested that it lacks the power to disband a committee; however, it narrowly tailored its holding around the facts presented. In stark contrast, the City of Detroit court created new law on the disbandment issue even though its first holding (that § 1102(a)(1) does not apply in chapter 9 cases) adequately supported granting the relief requested. Different interpretations of § 105(a) were also evident. On one end of the spectrum, the “anything not inconsistent with the Code” standard applied in City of Detroit. The Caesars court, on the other end, adopted a more narrow, “implementing existing Code provisions” approach. As more courts are confronted with the issue of disbandment, it will be worth monitoring whether the approach adopted in Dewey, City of Detroit or Caesars proves most influential.