Official committees can play an important role in a bankruptcy case, and chapter 9 municipal bankruptcy is no exception. Committees can ensure efficient, adequate representation of large stakeholder groups, including retirees, equity owners, and of course creditors. They bring together similarly situated parties, allowing the group to develop ideas and take positions that are representative of multiple parties with important interests at stake. Committee ideas and positions can thus be more powerful and persuasive than the views of any one stakeholder in a case.
Some recent decisions may threaten the appointment of official committees in chapter 9, however. Two bankruptcy judges have held that section 1102(a)(1) of the U.S. Bankruptcy Code does not authorize a committee’s appointment in chapter 9 and that, therefore, the committees the U.S. Trustee had appointed in each case should be disbanded.[1]
Section 1102(a)(1) provides, in relevant part, that “as soon as practicable after the order for relief under chapter 11 of this title, the United States trustee shall appoint a committee of creditors holding unsecured claims and may appoint additional committees . . . as the United States trustee deems appropriate.”[2] It is found in chapter 11 of the Bankruptcy Code but is incorporated in chapter 9 cases through section 901(a).[3] Even though section 1102 as a whole is incorporated into chapter 9, the courts in In re Coalinga Regional Medical Center and In re Detroit each found that section 1102(a)(1)’s reference to chapter 11 relief necessarily precluded that provision from applying in chapter 9 cases because there is no “order for relief under chapter 11” in a chapter 9 case. Both courts reached this conclusion based on the idea that it is important to give effect to every word in a statute.
Although both the Coalinga and Detroit courts disbanded the committees formed under section 1102(a)(1), both left the door open to the possibility that they could order the U.S. Trustee to appoint an official committee under section 1102(a)(2).[4] Under this provision, “[o]n request of a party in interest, the court may order the appointment of additional committees . . . if necessary to assure adequate representation. . . .”[5] However, the idea that a court could use section 1102(a)(2) to order the appointment of an initial committee does not give effect to every word of the statute: the word “additional” in that provision implies that there has already been a committee appointed in the case—a committee that the courts in Coalinga and Detroit have now held cannot be appointed. Coalinga and Detroit have thus raised the possibility that a court could hold that a chapter 9 committee cannot be appointed at all—not even with the consent of all parties.
However, this possibility is not an inevitable outcome. First, courts could adopt the U.S. Trustee’s position that Congress intended to incorporate section 1102 in its entirety into chapter 9 and knew how to exclude particular subsections if it wanted to.[6] Alternatively, courts could look to section 105(a) of the Code, which allows the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”[7] Both Coalinga and Detroit contended that section 105(a) gave the court the power to disband committees[8] in that the Code does not explicitly prohibit this action.[9] Following this reasoning, a court could arguably interpret section 105(a) to accept committee appointments because the Code does not explicitly prohibit the court from ordering or allowing the appointment of committees, either.
Given the valuable role committees can play in a case, it is troubling that some courts have seemingly found a route to prohibit committee appointments in chapter 9 outright. To some extent, this is a statutory drafting issue that Congress should address, but courts may also have the statutory tools to fix the very problem they have created.
[1] In re Coalinga Regional Medical Center, 608 B.R. 746, 747–48 (Bankr. E.D. Cal. 2019); In re City of Detroit, Mich., 519 B.R. 673, 675 (Bankr. E.D. Mich. 2014).
[2] 11 U.S.C. § 1102(a)(1).
[3] 11 U.S.C. § 901(a) (“Section[] . . . 1102 . . . appl[ies] in a case under this chapter.”).
[4] Coalinga, 608 B.R. at 759 (continuing creditor’s motion to appoint a committee under section 1102(a)(2)); Detroit, 519 B.R. at 678 (“The U.S. Trustee’s authority to appoint committees in chapter 9 is therefore limited to the authority granted in subsection (a)(2) of § 1102.”).
[5] 11 U.S.C. § 1102(a)(2).
[6] Coalinga, 608 B.R. at 750. See, e.g., 11 U.S.C. § 901(a) (incorporating five out of sixteen subsections of section 1129(a)).
[7] 11 U.S.C. § 105(a).
[8] The U.S. Trustee’s arguments in Coalinga suggest that this would be an expansive reading. Coalinga, 608 B.R. at 750 (arguing that, when section 1102 was amended, it “eliminat[ed] the court’s role in committee formation and limit[ed] court review of committee composition.”).
[9] See Detroit, 519 B.R. at 680 (“[N]owhere does the bankruptcy code explicitly prohibit the bankruptcy court from disbanding an unsecured creditors’ committee.”).
