Last month, this column discussed the initial steps to be taken by a creditor who learns that an account has filed for chapter 11 bankruptcy protection. Specifically, the creditor should obtain a copy of the bankruptcy petition and inspect it to see how his claim is listed and to learn what he can of the financial position of the debtor.

While the term may seem like an oxymoron, the "financial strength" of a Chapter 11 debtor can vary widely, from hopeless to salvageable. Even when the debtor appears to be weak the creditor should protect himself by seeing that he is listed as a creditor and filing a "Proof of Claim" with the clerk of the bankruptcy court.

Once these threshold steps are taken, the interested creditor should plan to attend the first meeting of creditors of the debtor. This meeting is held within thirty days of the filing of the case. The meeting is held in the Chapter 11 meeting room at the Office of the United States Trustee. The session is conducted by a specialist from the Trustee's office and the debtor appears and testifies under oath.

Only one Chapter 11 debtor is examined at a meeting and the session can take anywhere from one to several hours depending on the complexity of the case and number of parties present. All creditors and interested parties are welcome to attend the meeting.

Any creditor with concerns about the case should attend this meeting. It is not necessary to be represented by counsel at the hearing but competent counsel may be able to elicit useful information concerning the debtor and his plans. Even if a creditor has no questions to ask the debtor, it may be good policy to attend the meeting of creditors since much can often be learned from the questions asked by the U.S. Trustee and other creditors.

If a sufficient number of disgruntled creditors appear at a 341a hearing, it is not unheard of for a bankruptcy case to be dismissed by the debtor who senses that his reorganization will be a litigious and costly one.

If the bankruptcy case does proceed, the U.S. Trustee often seeks to appoint an unsecured creditors' committee. The committee is most often formed in larger bankruptcy cases and is generally composed of a group of the largest creditors. A separate committee might also contain equity security holders.

In theory, there is no limit to the number of committees that might be formed in a particular case. The test for forming a committee is whether that committee contains members holding a distinct class of claims and therefore a distinct set of interests. The decision on whether to form a particular committee is made by the office of the U.S. Trustee.

Once formed, the creditor's committee may employ its own attorneys, accountants, or other relevant professionals. These professionals are paid from the estate, with court approval, and these costs can be a substantial one for the party who is attempting to reorganize.

Creditors' committees can be a powerful force in determining the final form of the plan of reorganization and in smoothing the way for its acceptance.

Creditors should always keep in mind that a bankruptcy filing does not have to mean that their receivable is lost. They can be active and influential participants in shaping the outcome of the case.

June 1999.
Reprinted with permission of the The Orange County Register.