The Office of the U.S. Trustee (UST) appoints the official creditors' committee (OCC). As a prerequisite for committee service, the top 20 (or so) of the debtor's largest unsecured creditors are asked to fill out a one-page questionnaire.

Question 5.1.1 asks whether the creditor may have a reclamation claim. Although many factors go into the decision of which creditors to appoint to the OCC, Question 5.1.1 may play a significant (yet little understood) role in the selection process.

It is my experience that U.S. Trustees are reluctant to appoint to the OCC any creditor that may assert a reclamation claim. The logic goes something like this.

OCC members have a fiduciary responsibility to their constituencies. By seeking a reclamation claim, the individual creditor demands the return of the goods sold or, alternatively the acknowledgment by the debtor of an administrative claim. The latter, of course, provides improved odds of maximizing the reclaiming creditor's distribution in the debtor's reorganization.

Moreover, by asserting a reclamation claim, the individual creditor essentially elects to break away from its constituency...and can no longer properly carry out the individual creditor's fiduciary responsibility to its constituency.

At the time of a bankruptcy filing, unsecured credit managers usually have a dearth of information available. Almost always, credit managers are taking some heat from their employer, which is very upset over the likelihood of a bad debt loss. At the very least, the loss is embarrassing to the credit manager and upsetting to his/her employer.

Depending on the circumstances, the usual result is that the credit manager tries to take any and every action, which may possibly improve the situation, including, when appropriate, asserting a reclamation claim.

The dilemma is that, by asserting the reclamation claim, the unsecured creditor may be unknowingly deselecting itself from consideration for appointment to the OCC. Also, the timing could not be much worse. Due to the "time window" requirements for making the reclamation demand, the credit manager has only a short period of time within which to make this decision. Added is the usual dearth of information available with regard to the debtor's chances of successfully reorganizing.

The result is that the odds of making a good decision are slim at best, with little or no time available to improve those odds. My impression is that most large corporations somewhat automatically "fire off" reclamation demands upon learning of the bankruptcy filing. If so, then these creditors may be foregoing the opportunity to serve on the OCC.

Why Serve?

That leads us to this question: Why would an unsecured creditor wish to serve on the OCC?

The answer varies widely due to the circumstances of the case. In general, the creditor wishes to be placed on the mailing matrix in order to be kept abreast of information and not lose out on any opportunities (such as filing a proof of claim prior to the bar date). The need for information is particularly true in cases where the OCC and its counsel adopt bylaws with confidentiality clauses (virtually without exception in large public company cases).²

Other issues to consider in making the decision of whether or not to serve on the OCC include:

• Is the amount of the debt sufficiently high to warrant the creditor's time and efforts?
• Is the creditor one of the debtor's 20 largest creditors? (If not, the decision has likely been decided in the negative by the UST.)
• How critical is the debtor to the creditor's business plan? (In the event that the debtor makes up a substantial portion of the creditor's sales, then the creditor may have strong interest in serving on the OCC.)
• Does the creditor wish to try to continue to sell to the debtor during the bankruptcy process, and possibly post-reorganization?
• Is the creditor viewed to be a "critical supplier?" (If so, the debtor may seek court approval to pay the pre-petition obligations. If so, the creditor may cease to have an interest in serving.)
• In the event that the creditor sells to a specialized industry (e.g., retail), then everyone involved should possess the specialized knowledge. A creditor may wish to serve on the OCC in order to voice its specialized concerns, including the employment of professionals who have this specialized experience.

The decision on whether to serve will also depend upon the relationship of the creditor and the debtor. For example, a manufacturer of widgets will usually have a pre-petition claim for goods produced and shipped. By contrast, a maker of specialty goods may have (a) specialized inventory that has been already paid for and cannot be returned for credit, (b) complicated equipment with long production times, such as one or more pieces of specialized equipment that can only be sold to the debtor and not anyone else, or (c) a combination of both.³

A further consideration is whether the debtor is the end-user of the specialized equipment. If not, then the end-user may step in and pay the unsecured creditor directly. An example of this would be in the event of a bankruptcy of a general contractor, when a project owner pays a subcontractor directly in order to avoid a mechanics lien.

In general, serving on the OCC almost always improves the bankruptcy process and, ultimately, the maximum possible distribution to unsecured creditors as a constituency. Hopefully, serving on the OCC also maximizes the "flow down" of the distribution to the individual creditor.

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Footnotes

¹ Mr. Fox's opinions are his alone and not necessarily those of his employer, its affiliates nor any other party. Mr. Fox's background is more than 20 years of business credit management experience, and he presently serves as co-chair of ABI's Unsecured Trade Creditors Committee (UTCC). Return to article

² From the perspective of an unsecured creditor not appointed to the OCC, it appears a bit ironic that the very committee entrusted to protect the individual unsecured creditor won't discuss the case. Talk about frustration! Return to article

³ Therefore, the unsecured creditor may experience a pre-petition claim for specialized inventory...followed by shipment during the bankruptcy process...followed by either payment or non-payment during the bankruptcy process or post-confirmation. Return to article