The EOUST View

By making official committees of creditors mandatory, Congress recognized that committees can be vital to the success of a chapter 11 case.  That is why the United States Trustee Program (“USTP”) expends great effort to solicit and to appoint a “representative” group and to provide its members with a charge that explains their important fiduciary duties to act on behalf of their constituency.  Most committees operate very well and faithfully carry out their fiduciary obligations, thereby benefitting all stakeholders.  Sometimes, however, issues do arise, and the USTP addresses those issues within the confines of its authority.[1]

One issue that arises from time to time is the abuse of proxies, which are permitted under the Federal Rules of Bankruptcy Procedure.  The United States Trustee Program has long maintained that professionals holding a creditor’s proxy in conjunction with committee formation may not “pitch” to represent the committee.  Both the ethics and the optics are suspect because the proxy-holder for the newly appointed committee member must act as a fiduciary for the committee’s constituency and seeking to be hired certainly suggests self-dealing and a conflict of interest.  Whenever the United States Trustee receives complaints about misconduct in the committee’s process to retain professionals, the complaints have been and will be investigated.[2] And the United States Trustee continues to urge professionals and stakeholders to come forward whenever they may have evidence of misconduct.

The latest twist in the proxy and professional retention issue — as raised by Mr. Rosner — is what happens when a recent, but former, proxy-holder does not pitch the committee but is later retained as local counsel after the committee selected lead counsel.  A professional’s subsequent retention when no longer holding the proxy does not implicate the same self-dealing concerns, absent evidence of some quid pro quo or a “wink and a nod” deal made while the professional held the proxy.  Of course, the Rule 2014 verified statement of connections must disclose any such agreement or connection, and it is critical to the effective functioning of the bankruptcy system that the court, the parties, and the USTP be able to rely on the integrity of a professional’s statement made under oath.  Moreover, any professional who files a false or incomplete Rule 2014 statement can be subject to serious sanctions and penalties.

The easy solution to eliminate the potential for proxy abuse would be to refuse to accept proxies for committee formation meetings, but such an overreaction would create problems of its own.  Proxies serve the legitimate and important purposes of enfranchising creditor participation by letting the USTP form a committee quickly after a case is filed from the broadest creditor pool possible and of not disadvantaging creditors who are distant from the forum and who cannot travel on short notice.  Moreover, Bankruptcy Rule 9010 specifically contemplates and permits the use of proxies in bankruptcy.

The USTP will continue its efforts to form committees in every case in every district when there are creditors willing and eligible to serve.  In conjunction with that work, we will continue to investigate every allegation of improper solicitation or other misconduct by professionals seeking to represent those committees.

Nan Roberts Eitel
Associate General Counsel for Chapter 11 Practice
Executive Office for United States Trustees
441 G St., NW, Ste. 6150
Washington, DC 20530
Nan.R.Eitel@usdoj.gov