U.S. Trustee Does Not Have Unilateral Authority to Deviate from a Bankruptcy Court’s Order, but Can the U.S. Trustee Disband a Creditors’ Committee?

Under the Bankruptcy Code, the U.S. Trustee [1] has the power to appoint a committee. [2] Section 1102(a)(1) of the Bankruptcy Code requires U.S. Trustees to appoint a committee of creditors holding unsecured claims in all cases “as soon as practicable after the order for relief....” [3]

Committees must adequately represent the diverse unsecured creditors in the case, and the appointment process should result in a committee reflective of the various interests held by unsecured creditors willing to serve, such as trade creditors, tort claimants, and unsecured lenders and bondholders.

In the chapter 11 case of LTL Management, LLC, a subsidiary of Johnson & Johnson, a committee was appointed to represent all individuals claiming injuries from asbestos-contaminated talc products sold by Johnson & Johnson. [4] The committee members were selected by the bankruptcy administrator, rather than the U.S. Trustee, because at the time the committee was appointed, the bankruptcy case was pending in North Carolina, and North Carolina does not have a U.S. Trustee Program. [5] After the committee was formed, the North Carolina bankruptcy court entered an order approving the appointment of the committee. [6]

Venue of the bankruptcy case was subsequently transferred to New Jersey, and after that transfer, the New Jersey U.S. Trustee sent a notice saying that the original tort claimants’ committee was being disbanded, and in its place, two new tort committees were being appointed. [7] The new committees were split between ovarian cancer claimants and mesothelioma claimants. [8]

The debtors and counsel for certain tort claimants filed motions objecting to the U.S. Trustee’s notice and asked the New Jersey bankruptcy court to vacate the U.S. Trustee’s notice and reinstate the original committee. [9]

The New Jersey Bankruptcy Court’s Holding

In his Jan. 20, 2022, opinion, Judge Kaplan of the New Jersey bankruptcy court vacated the U.S. Trustee’s notice seeking to disband the original tort claimants’ committee, because it violated the North Carolina bankruptcy court’s order approving the formation of the original tort claimants’ committee. [10] As Judge Kaplan explained, “[N]othing in [§ 1102] empowers the U.S. Trustee to modify a court order by unilaterally ‘reconstituting’ a committee of creditors whose composition has been established by such an order.” [11] Accordingly, the bankruptcy court was “obligated to vacate [the U.S. Trustee’s notice] and re-establish the force and effect of the” North Carolina bankruptcy court’s order approving the original committee. [12]

While Judge Kaplan’s holding made clear that the U.S. Trustee could not use § 1102 of the Bankruptcy Code to “overrule” the North Carolina bankruptcy court’s order appointing one committee, Judge Kaplan did not hold that the U.S. Trustee did not have the authority to reconstitute the original committee. [13] To the contrary, the court held that “such actions may be warranted.” [14] However, does that mean that the U.S. Trustee has the statutory authority to actually disband the original tort claimant committee?

Can the U.S. Trustee Disband a Committee?

In the LTL Management bankruptcy case, the New Jersey U.S. Trustee argued that § 1102(a)(1) vested “him with sole discretion regarding the composition of” creditor committees. [15] Nothing in that provision, however, expressly authorizes the U.S. Trustee to disband a committee. [16] In fact, as Judge Kaplan noted, “the Bankruptcy Code is wholly silent as to the disbandment of creditors’ committees appointed by the U.S. Trustee.” [17]

Other U.S. Trustees have relied on 28 U.S.C. § 586 — in conjunction with the U.S. Trustee’s authority under § 1102(a)(1) to form a committee — to support the U.S. Trustees’ authority to disband committees. [18] That statute authorizes the U.S. Trustee to “supervise the administration of cases ... under chapter ... 11 ... of title 11 by, whenever the United States trustee considers it to be appropriate — monitoring creditors’ committees appointed under title 11.” [19] But the term “monitoring,” arguably, does not encompass the judicial function of disbanding a creditors’ committee.

Ultimately, Judge Kaplan’s ruling does not speak to the U.S. Trustee’s authority to disband an official committee. Instead, relying on the court’s powers under § 105(a) of the Bankruptcy Code, Judge Kaplan held that the bankruptcy court has the authority to disband any official committee appointed by the U.S. Trustee. [20] Judge Kaplan then decided to disband the two committees, since the U.S. Trustee did not “disclose or make any record regarding his reasoning, rationale or conclusions behind his issuance of the Notice of Appointment.” [21]

Of note, other bankruptcy courts have previously concluded that the bankruptcy court lacks statutory authority to disband a committee once appointed by the U.S. Trustee because the Bankruptcy Code does not expressly say that the court has such authority. [22] But Judge Kaplan decided otherwise, relying on other court holdings authorizing the disbandment of a committee and recognizing a bankruptcy court’s inherent powers under § 105 of the Bankruptcy Code to order such relief. [23]

Conclusion

Although Judge Kaplan’s ruling does not provide clarity on the scope of the U.S. Trustee’s authority to disband a committee, other than saying that the U.S. Trustee may “reconstitute” the talc committee, it does provide additional authority to support a bankruptcy court’s powers to not only review the U.S. Trustee’s decisions concerning creditors’ committees, but also to disband an official committee formed by the U.S Trustee.