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Official Committee Members: Fiduciary Duty Liability

By William R. Baldiga and John C. Elstad
February 09, 2004

Members of official creditors' committees in Chapter 11 cases owe a fiduciary duty to the entire body of unsecured creditors. See Woods v. City National Bank, 312 U.S. 262, 268-69 (1941). As fiduciaries, committee members should have undivided loyalty to those they serve, free of any conflict of interest. Id. The imposition of such a broad duty to unsecured creditors generally might be otherwise unremarkable, except that committee members themselves obviously have significant selfish interests in the outcome of the bankruptcy case. See 11 U.S.C. ' 1102(b)(1) (committee shall ordinarily consist of the persons, willing to serve, that hold the seven largest claims against the debtor). In brief, bankruptcy law puts committee members in a contradictory position: They owe their membership on the committee to the magnitude of their self-interest in the case, yet they seem to be legally required to put the interests of others ahead of their own interests.

Accordingly, conflict of interest questions often arise in the committee setting. The following are not atypical:

Scenario 1: There are proposed competing plans of reorganization. Plan A would provide unsecured creditors with a 10% cash dividend. Plan B would provide reorganization securities to unsecured creditors, the value of which are very probably less than the 10% dividend offered by Plan A. However, an advantageous business relationship with the reorganized debtor would continue only under Plan B for a trade creditor member of the committee, but not for the bondholders whose claims constitute much of the unsecured debt in the case. May that trade creditor member vote in favor of a committee resolution to favor Plan B?

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