Committees Don’t Dissolve Automatically on Chapter 11 Dismissal, District Judge Says

An official committee does not automatically dissolve on dismissal of the chapter 11 case, for reasons explained in an opinion on March 5, 2024, by District Judge Frank P. Geraci, Jr., of Rochester, N.Y.

A corporate debtor filed a chapter 11 petition pro se. The U.S. Trustee was unable to appoint a creditors’ committee but did appoint an official committee of equity security holders. The U.S. Trustee moved to dismiss the petition because the debtor was without counsel. The equity committee opposed dismissal, imploring the judge instead to appoint a chapter 11 trustee.

The bankruptcy court dismissed the petition and denied a motion by the committee for retention of counsel, saying that the committee had automatically dissolved on dismissal and required no counsel following dismissal. The committee appealed both the dismissal order and denial of the motion for retention of counsel.

In district court on appeal, the U.S. Trustee moved to dismiss the appeal, reasoning that the committee no longer existed after dismissal and thus had no capacity to appeal. Judge Geraci bucked the weight of authority and denied the motion to dismiss the appeal.

Judge Geraci said “there is no provision in the Bankruptcy Code identifying when a committee’s appointment terminates — or, as some courts have expressed it, when a committee ‘dissolves.’” He cited “some courts” for “reason[ing] that the absence of express statutory authorization for the post-dismissal existence of a committee suggests that a committee has no such post-dismissal existence.”

Judge Geraci said that “the apparent consensus” about dissolution of a committee automatically on dismissal was “built almost entirely on one case, Unsecured Creditors Committee of Butler Group, Inc. v. Butler (In re Butler), 94 B.R. 433 (Bankr. N.D. Tex. 1989).” However, he said that “the Butler court failed to tether its reasoning to the text of the Code itself, which is where the analysis must begin.”

For Judge Geraci, “the relevant question is simply whether the Code mandates the automatic termination of a committee’s appointment upon dismissal of a Chapter 11 case.” From the text of the statute, he found “no rigid rule of automatic termination upon dismissal” when it comes to committees.

In the Bankruptcy Code, Judge Geraci found only one provision that automatically terminates appointment: Section 348(e) expressly terminates trustees and examiners on conversion. Otherwise, he said, the Code “does not expressly set forth any other circumstances under which these appointments terminate.”

From the paucity of statutory authority explicitly ending appointments, Judge Geraci decided that “[t]he better inference is that Congress did not call for the automatic termination of a committee’s appointment upon dismissal because it was unnecessary to do so.”

To buttress his conclusion, Judge Geraci cited “several courts” that allowed committees to continue functioning after confirmation of chapter 11 plans. Those courts, he said, “analyze[d] whether the post-confirmation activity is consistent with the committee’s statutory powers.”

In the case on appeal, Judge Geraci looked at whether the appeals were “consistent with the powers granted to [the committee] under the Code.”

“Given a committee’s indisputable interest in the issue of dismissal, it follows that a committee would have a similar interest in appealing what it perceives to be an erroneous dismissal order,” Judge Geraci said.

Judge Geraci denied the motion to dismiss the appeals, “[g]iven the Committee’s interest in prosecuting these appeals on behalf of those it represents, and the broad statutory authorization of Section 1103(c)(5).”