Official Committees’ of Unsecured Creditors can, and often do, have significant impacts on cases under chapter 11 of the Bankruptcy Code.  Appointed pursuant to Section 1102 of the Bankruptcy Code, creditors’ committees ordinarily consist of creditors holding large claims against the chapter 11 debtor. The Bankruptcy Code (in, for example, Sections 1103 and 1104) provides Committees with a variety of powers and duties.  For examples, the Bankruptcy Code allows creditors’ committees to hire counsel, participate in the plan of reorganization and pursue bankruptcy litigation, including fraudulent transfers and preferential transfers.

Recently, the First Circuit Court of Appeals joined the Second and Third Circuits to find that Unsecured Creditors’ Committees have an “unconditional right to intervene” in bankruptcy adversary proceedings within the meaning of Federal Rule of Civil Procedure 24(a)(1), which applies in Bankruptcy Proceedings under Bankruptcy Rule 7024.  Assured Guar. Corp. v. Fin. Oversight and Mgmt. Bd. For Puerto Rico (In re Fin. Oversight and Mgmt. Bd. For Puerto Rico), 872 F.3d 57 (1st Cir. 2017).

Aerial view of San Juan, Puerto Rico and Caribbean Sea
San Juan, Puerto Rico

In this case, the First Circuit was considering the ability of the Unsecured Creditors Committee appointed in the quasi-bankruptcy proceedings by Financial Oversight and Management Board for the Commonwealth of Puerto Rico (the “Board”) related to the Puerto Rico debt adjustment case.  In these proceedings, large portions of the Bankruptcy Code were incorporated, including the entirety of the Federal Rules of Bankruptcy Procedure. In these quasi-bankruptcy proceedings, the companies that insure certain Puerto Rico bonds initiated an adversary proceeding claiming that the fiscal plan approved by the Board violated the U.S. Constitution, among other things.  Id. at 60.

After the Creditors’ Committee was appointed, it immediately sought to intervene in this action under Bankruptcy Code Section 1109(b), which provides that “(b) A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security  holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.” 11 U.S.C. 1109(b).

The First Circuit reversed an opinion by the lower Court denying the committees’ motion for leave to intervene, following prior First Circuit precedent.  Here, the First Circuit explained that its prior precedent constituted dicta and explained that “the weight of persuasive authority has shifted considerably. ”  The Court ruled that “the UCC [unsecured creditors committee] was entitled to intervene under §1109(b) and Rule 24(a)(1),” which governs intervention as of right.  Id. at 63.  The Court found that the Committee had an “unconditional right to intervene,” but elaborated that this does not dictate the scope of participation in that proceeding.  Given that the lower court had not ruled on the scope of participation, the Court remanded that issue for further proceedings.

While Creditors’ Committees have seemingly always had substantial leverage to insert themselves in the debtor’s bankruptcy proceedings and make sure that creditors’ views are heard, this ruling provides further support for the robust rights of committees and a platform for their intervention in and pursuit of a variety of bankruptcy litigation matters to maximize recoveries.