It is often surprising to me how often people are unaware of the fairly high risk of being sued in connection with a chapter 11 bankruptcy case when there is money in the case. Many times, non-debtor parties’ falsely comfort themselves with the belief they will not be sued because existing management wouldn’t want to ruin a business relationship. The reality is that in large chapter 11 cases, you are just as likely to be sued by the creditors committee as anyone else as a lender.
Bankruptcy, at its most basic, is the attempt to monetize and equitably (and constitutionally) distribute whatever assets exist of the bankrupt entity. Outside of bankruptcy, the obvious assets are normally the tangible widgets. Inside of bankruptcy, the causes of action also become value for trade.
To understand how a third party lender can be sued by an unknown entity on a cause of action which makes no business sense, a quick review of statutory committees is helpful.
Under the Bankruptcy Code a committee of unsecured creditors may be formed to represent the interests of the larger body of unsecured creditors. Importantly, this committee will have its attorneys’ fees paid by the bankrupt debtor. This committee, now funded and represented will go about to seek the best recovery for its constituents. One source of recovery is lawsuits, which are typically unencumbered.