By Edward Neiger

Law360 (April 7, 2020, 4:44 PM EDT) --

Edward Neiger

I read with interest Ken Rosen's article, "How US Trustees Can Deter Chapter 11 Proxy Abuses," that published on Law360 last week. Over the last 10 years, I have taken part in over 300 organizational meetings, both in person and telephonic. While Rosen's suggested questions for U.S. trustees to ask are indeed useful, there is only one foolproof way to prevent the abuses he described: conducting organizational meetings telephonically.

For those who have not seen the article, Rosen states that people cold-call creditors who are interested in sitting on the committee but don't want to, or can't, incur the expense or devote the time necessary to attend the organizational meeting in person. These cold callers then offer to find a proxy for the creditor to attend the organizational meeting on its behalf, without informing such creditor that "there could be an arrangement between the cold caller and the proxy holder to vote to hire a particular professional firm, which likely will handsomely reimburse the cold caller."

The unfortunate pandemic caused by COVID-19 has shut down business and travel around the United States and forced U.S. trustees, or USTs, to hold organizational meetings telephonically. I submit that conducting organizational meetings telephonically is the only way to prevent the abuses described by Rosen. 

The primary reason that a free proxy holder is so attractive to creditors is that it will save them the time and expense of traveling to the organizational meeting. Attending an organizational meeting in person usually requires the creditor to take off at least a day from work, something many cannot afford to do. In addition, many creditors are located in China and other foreign countries and the only way for them to get on the committee is through a proxy. 

However, holding telephonic organizational meetings makes the need for a proxy completely obsolete. Creditors who wish to serve on the committee will have the opportunity to do so from the convenience of their homes or offices.

Several U.S. trustee regions already form creditors committees telephonically, such as Region 12 (Minneapolis) and Region 7 (Houston). In these regions, instead of interviewing potential creditors at the organizational meeting, the UST arranges a telephonic interview at a time that is mutually convenient for the UST and the creditor, something creditors appreciate. 

After the telephonic interviews are completed, the UST decides on the committee's composition and arranges an initial telephone call with all committee members — no proxies needed. The members are then free to decide which professionals they would like to interview and are not limited to the professionals who show up to the organizational meeting. 

In my experience, committees formed by phone have not suffered as a result of not meeting in person. To the contrary, the committee members usually attend the calls personally, each can suggest professionals to interview, and the committee benefits from a more robust group of professionals to choose from. 

Most importantly, the professionals are selected by the committee members themselves, not proxies or even their attorneys, because the creditors are able to actively participate in the pitches and post-presentation deliberations. 

With the advent of Zoom and other videoconferencing technology, the committee members can even follow along with the presenter's presentation, which is displayed on the screen alongside the presenter and the fellow committee members. If a member does not use videoconferencing, it can still follow along with the presenter's "pitch book," which was sent by email to the committee ahead of time. This also gives committee members more time to digest the materials than they otherwise would have at an in-person meeting. 

At an in-person meeting, committee members casually peruse the pitch materials for the first, and only, time while the presenter gives its pitch, which is usually limited to 10-15 minutes because of the time constraints of the day. Once a pitch is done, it is on to the next presenter and that presenter's materials, also for 10-15 minutes. 

Incidentally, providing more time for committee members to read and digest the pitch books ahead of time not only benefits the committee members, but rewards the professionals who have worked hard, researched the case, and devised a strategy for recovery, because the committee members will actually have the time to read the materials and make a more informed decision.

In addition to preventing proxy harvesting, telephonic meetings also provide additional benefits and efficiencies. As mentioned above, by not limiting the pool of committee members to those who are able to attend the meeting in person, the UST has a broader pool of creditors to choose from. The UST's office has not made it secret that creditor diversity is something it values on a committee.

In addition, the committee meetings are often held in hotels at the expense of the debtor. Where a debtor is already strapped for cash and not paying its vendors, renting a hotel room for a day is an expense that it could do without. 

Similarly, given the economic climate in many sectors (retail, energy, food and beverage, etc.), the creditors themselves would be suffering financially even before the debtor filed for bankruptcy. The last thing they should have to do is spend their ever-shrinking supply of money and time just for a shot at getting on the committee.  

We must remember, when Congress devised the concept of a creditors committee, rewriting the Bankruptcy Code in 1978, there was no such thing as email. Teleconferencing capability was in its infancy, videoconferencing was nonexistent, and a "tablet" was something you took for heartburn. And while USTs rightfully formed committees in person because, at the time, it was the most efficient way to conduct them, times have changed, and so should the format of organizational meetings. 

The only exception to my suggestion is in the case of mass tort or other bankruptcies where the debtor has victimized its creditors. In these cases, victims appreciate the opportunity to tell their story to a U.S. Department of Justice official in person. 

Since most victims will not be appointed to the committee or appear in court, the organizational meeting is the only opportunity for them to have a say. For many victims, it is an emotionally difficult experience, but one that gives them a sense of closure, or at the very least, allows them to take back some power. 

I have witnessed this in the bankruptcies of The Weinstein Company, PG&E, Purdue Pharma, and, most recently, the Boy Scouts of America. In each of these cases, the UST went to great lengths to make themselves available to speak with each and every victim, even those who were not officially "interviewed."

This compassion, graciously extended by UST professionals, is something that is best done in person and should continue to be done in person. However, if a victim cannot be present in person, they should not be prejudiced from being appointed to the committee.

In sum, the coronavirus has taught us to adapt to our changed environment and not just trod along as we had in the past because "that's just how it's always been done." Being forced to conduct organizational meetings telephonically may shed light on the benefits of doing so, and the UST should consider making it the norm.

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Edward E. Neiger is co-managing partner at Ask LLP. 

Disclosure: Neiger represented a member of the official committee in the Weinstein Company bankruptcy case. He currently represents a former member of the tort committee in the PG&E bankruptcy, the ad hoc committee of personal injury victims in the Purdue Pharma bankruptcy, and a member of the tort committee in the Boy Scouts of America bankruptcy case. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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