Reaching the same result as former Bankruptcy Judge Steven W. Rhodes in Detroit’s municipal debt restructuring, Bankruptcy Judge René Lastreto, II of Fresno, California, concluded that the U.S. Trustee does not have authority to appoint an unsecured creditors’ committee in a chapter 9 case.
In the municipal debt adjustment of a hospital district in California, the U.S. Trustee had appointed an unsecured creditors’ committee, asserting that the power of appointment derives from Section 1102(a)(1), allegedly made applicable in chapter 9 cases by Section 901(a).
The debtor filed a motion to disband the committee, which Judge Lastreto granted in an opinion on October 2.
In some sense, the result reached by Judges Rhodes and Lastreto is counterintuitive, given the language of the two statutes.
Section 901(a) makes Section 1102 applicable in chapter 9 cases. Notably, Section 901(a) on its face seems to make all of Section 1102 applicable. In contrast, Section 901(a) makes only parts of some other sections applicable in chapter 9. For instance, only subsections (c), (d), (e) and (f) of Section 364 are applicable in chapter 9 cases.
Section 1102(a) requires the U.S. Trustee to appoint an unsecured creditors’ committee “as soon as practicable after the order for relief in chapter 11 . . . .” [Emphasis added.]
The decisions by Judges Rhodes and Lastreto turned on the italicized language.
Judge Lastreto pointed to the decision by Judge Rhodes as “the only published decision . . . the court has found confronting the UST’s authority to appoint committees in Chapter 9 cases.” In re City of Detroit, 519 B.R. 673 (Bankr. E.D. Mich. 2014).
Judge Lastreto acknowledged, however, that creditors’ committees have been appointed and served without objection in municipal bankruptcies in the Ninth Circuit and around the country. Despite the Detroit decision, he said it remains the policy of the U.S. Trustee Program to appoint unsecured creditors’ committees in chapter 9 cases except in the Eastern District of Michigan, where Detroit is located.
Judge Lastreto began his analysis by referencing the duties and powers of the U.S. Trustee in chapter 9, or, more accurately, the lack of them. For instance, Section 307 gives the U.S. Trustee standing to appear and be heard. Notably, Section 307 is not applicable in chapter 9 under Section 901(a).
Like Judge Rhodes, Judge Lastreto concluded that the critical language in Section 1102(a) (“as soon as practicable after the order for relief under chapter 11”) “effectively limits Section 1102 to chapter 11 exclusively.” It is logical for Section 1102(a) to be inapplicable, Judge Lastreto said, because other subsections in Section 1102 “clearly do not apply in chapter 9 cases, such as Section 1102(a)(3) and Section 1102(b)(2).”
Because there is no order for relief in chapter 11 in a chapter 9 case, Judge Lastreto saw Section 1102(a) as “plainly” showing there is no predicate for appointing an unsecured committee in a municipal bankruptcy.
Judge Lastreto therefore held that the U.S. Trustee “does not have authority under Section 1102(a) to appoint an unsecured creditors’ committee in a chapter 9 case.”
Since the U.S. Trustee lacked authority to form a committee, Judge Lastreto ruled that the “Committee should be disbanded.”
Reaching the same result as former Bankruptcy Judge Steven W. Rhodes in Detroit’s municipal debt restructuring, Bankruptcy Judge René Lastreto, II of Fresno, California, concluded that the U.S. Trustee does not have authority to appoint an unsecured creditors’ committee in a chapter 9 case.
In the municipal debt adjustment of a hospital district in California, the U.S. Trustee had appointed an unsecured creditors’ committee, asserting that the power of appointment derives from Section 1102(a)(1), allegedly made applicable in chapter 9 cases by Section 901(a).
The debtor filed a motion to disband the committee, which Judge Lastreto granted in an opinion on October 2.
In some sense, the result reached by Judges Rhodes and Lastreto is counterintuitive, given the language of the two statutes.
Section 901(a) makes Section 1102 applicable in chapter 9 cases. Notably, Section 901(a) on its face seems to make all of Section 1102 applicable. In contrast, Section 901(a) makes only parts of some other sections applicable in chapter 9. For instance, only subsections (c), (d), (e) and (f) of Section 364 are applicable in chapter 9 cases.