On the creditors’ committees: don’t forget to change your hat when you sit as a member of the committee – Insolvency / Bankruptcy / Restructuring


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In a recent criminal case stemming from the bankruptcy of Neiman Marcus, the founder of a hedge fund serving on the unsecured creditors committee was sentenced to six months in prison for committing bankruptcy fraud and breaching his fiduciary duties. In seeking profits for his hedge fund, the founder did not act in the best interests of all unsecured creditors as required by all members of an unsecured creditors committee. The case provides a warning and a reminder of the importance of respecting fiduciary obligations when appointing to an unsecured creditors committee (“Committee”). Our firm often represents Committees. We focus the attention of our Committee members on the particular role they play and the responsibilities that flow from it.

A business may seek to deal with its financial difficulties by using the United States Bankruptcy Code provisions for reorganization. Typically, the three most important parties in a Chapter 11 case are the debtor, its secured lenders, if any, and its unsecured creditors. Recognizing that the debtor and its secured lenders will be represented by counsel, Congress has provided for the representation of unsecured creditors as a group through a committee. A committee may be represented by professionals, including legal advisers, financial advisers and investment bankers, each of whom is paid out of the debtor’s estate and not by individual creditors.

A committee is appointed by the Office of the United States Trustee (“American Trustee“) in accordance with Section 1102 (a) (1) of Title 11 of the United States Code (the”Bankruptcy CodeA committee is usually composed of seven to nine members holding the most significant claims, but may vary from case to case depending on the circumstances. 11 USC § 1102 (b) (1) (providing that a committee “usually consists of[s] of the people, willing to serve, who hold the seven biggest claims against the debtor of the types represented on this committee. . . . “).

After filing a bankruptcy case, the US trustee will send a questionnaire to the top 20 unsecured creditors asking them if they are ready to sit on a committee and asking them to complete a questionnaire indicating the nature of their claim. By appointing the creditors to the committee, the US Trustee seeks to create a representative committee reflecting the various types of unsecured debt. Insiders and other special creditors may be excluded from the Committee.

Unsecured creditors are encouraged to serve on the Committee for a variety of reasons, including the experience and networking opportunities it offers. Committee members also have the ability to play a central role in influencing the outcome of the Chapter 11 case. In addition, the Committee is aware of confidential information which may not be available to the general body of the parties. creditors.

The cardinal rule for serving on a committee is that members act on behalf of all creditors and not on behalf of their own interests. See 11 USC § 1103 (c) (5) (providing that a committee may “perform such other services as are in the interest of the people represented. “) (underlining); In re Adelphia Commc’ns Corp., 544 F.3d 420, n.1 (2d Cir. 2008) (“[A] committee has a fiduciary duty to the group it represents, but not to the debtor, other groups or the estate. As such, when problems arise when a committee member’s fiduciary duty to all creditors conflicts with the best interests of their own business, they may be asked to withdraw from the deliberations and decision-making While sitting on a committee, members must “act with undivided loyalty for the benefit of all unsecured creditors.” Regarding ABC Auto. Prods. Corp., 210 BR 437, 441 (Bankr. ED Pa. 1997).

A recent case stemming from the bankruptcy of department store chain Neiman Marcus in the Southern District of Texas provides a vivid lesson in the importance of meeting your fiduciary obligations while serving on a committee. A copy of the complaint (“Complaint“) in United States of America v. Daniel Kamensky (SDNY Case No. 20-mj-09381) is available at https://www.justice.gov/usao-sdny/press-release/file/1312746/download.

Neiman Marcus filed for Chapter 11 in May 2020. Complaint, 12 (b). A nine member unsecured creditors committee was appointed, including creditor Marble Ridge (“M“), one of Neiman Marcus’ largest unsecured creditors.
Username., § 12 (c). MR, a hedge fund that invested in distressed stocks, including bankruptcy, was headed by Daniel Kamensky (“Kamensky“). Username., ¶ 7. The US trustee appointed MR to the committee only after Kamensky signed an acknowledgment that he understood that the committee members are trustees representing all unsecured creditors as a group. Identifier., 12 (d).

As usual, the committee participated in negotiations with the debtor and the debtor’s shareholders and other creditors. As part of the resolution of an alleged fraudulent pre-petition transfer, the committee negotiated for shares in a profitable subsidiary, one of Neiman Marcus’ most valuable assets.
Username., § 12 (e). As part of this settlement, the committee was also considering possible “opt-out options” for its creditors. Under this option, any unsecured creditor who preferred to receive cash rather than shares could sell the shares. Identifier., 12 (f).

The “opt-out options” being considered included a proposal from Mr. R. who also sat on the committee. At the end of July 2020, MR, through Kamensky, proposed that MR buy the shares in question for twenty cents per share from any unsecured creditor wishing to sell them. Username., § 13 (a). During ensuing negotiations, an investment bank informed committee professionals that its client was prepared to offer a higher price for the shares. Username., 13 (b) – (c). At around 3:15 p.m. on July 31, 2020, committee professionals informed Kamensky that a competitor was bidding more for the shares.

Shortly thereafter, Kamensky exchanged chat messages and calls with employees of the investment bank handling the competing offer and urged her to withdraw and not submit a competing offer.
Username., 13 (e) – (g). MR was also a client of the investment bank and Kamensky allegedly threatened the investment bank with losing future business. Identifier., 13 (g). At around 3:45 p.m., in what was an obvious conflict of interest, fighting for the best interests of his own company against those of the committee, an allegedly “very agitated” Kamensky demanded the resignation of the investment bank. Username., § 13 (g).

About an hour after informing the committee that its client was interested in making a competing offer, the investment bank agreed not to make the offer and informed the committee’s legal advisers that it was withdrawing from the offer. because Kamensky had asked him to. Identifier., § 13 (i). After the committee’s lawyer informed MR’s lawyer of the reason for the investment bank’s withdrawal from the offer, Kamensky, compounding his wrongdoing, contacted an employee of the investment bank at around 8:00 p.m. and asked the employee to say that “it was a misunderstanding”. Identifier., 13 (j) – (k). Notably, Kamensky was well acquainted with bankruptcy law as he trained as a lawyer, practiced bankruptcy law at a well-known international law firm, and worked as a distressed debt investor in leading financial institutions before moving on. open MR. Username., 7. As such, he was familiar with the rules. Putting pressure on the investment bank employee, Kamensky noted that he could go to jail for what he had done. Username., 13 (l).

Kamensky’s actions were “in breach of his fiduciary duties” and he “engaged in a scheme to defraud the unsecured creditors” of the debtor. Identifier., 1. Bankruptcy offenses can be prosecuted by the United States Department of Justice, and Kamensky has been charged with, among other things, fraud and obstruction of justice.

Kamensky pleaded guilty in February 2021. See Press Release, United States Department of Justice, Founder of New York Hedge Fund Convicted of Bankruptcy Fraud (May 7, 2021) (“DOJ press release“), https://www.justice.gov/usao-sdny/pr/new-york-hedge-fund-founder-sentenced-bankruptcy-fraud. In convicting Kamensky, the district court judge admitted that she found Kamensky “deeply remorseful” but noted that he “betrayed his profession, his duty to others, his relations”. New York hedge fund founder Kamensky sentenced to prison for fraud Neiman Marcu, Reuters (May 7, 2021), https://www.reuters.com/article/usa-crime-kamensky-idCNL1N2MU1PQ. Kamensky was sentenced to six months in prison and fined $ 55,000. See DOJ press release.

American lawyer Audrey Strauss said: “Daniel Kamensky committed bankruptcy fraud – undermining the integrity of the bankruptcy proceedings and violating his fiduciary responsibility – with the aim of taking additional profits for himself and his family. hedge fund. As he himself predicted, this fraud has now landed Daniel Kamensky in jail. ” See DOJ press release.

Thus, within hours, due to a lack of common sense and otherwise inexplicable professional ethics, the importance of respecting the fiduciary role of committee members was emphasized.

Every day brings developments in the law. We look forward to your questions and will bring you more news on these matters as the law continues to develop.

Originally posted Jun 3, 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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