Bankruptcy practitioners across the United States are all too familiar with the Chapter 11 case of Neiman Marcus Group Ltd, LLC (“Neiman Marcus”). Most restructurings under the Bankruptcy Code involve at least a few surprises, as debtors progress toward plan confirmation. Few include a committee chairman violating his fiduciary duties and serving prison time for conduct during the case. On February 3, 2021, Daniel Kamensky, founder and manager of Marble Ridge Capital, LP (“Marble Ridge”)—the former co-chair of the Official Committee of Unsecured Creditors in Neiman Marcus’ Chapter 11 case—pled guilty to bankruptcy fraud in the United States District Court for the Southern District of New York. Kamensky was sentenced to six months in prison, plus six months of supervised release under home detention and a $55,000 fine.
The ordeal stemmed from a global settlement resolving potential claims for fraudulent transfers of substantially all of the equity in the retail giant’s e-commerce unit, MyTheresa, to its parent company, Neiman Marcus Group, Inc. (the “Parent Company”). The settlement called for the Parent Company to distribute 140 million shares of Series B preferred shares in MyTheresa for distribution to general unsecured creditors. To create liquidity for unsecured creditors, Marble Ridge agreed to backstop the purchase of 60 million shares at $0.20 per share. But those shares were subject to an (unofficial) higher and better offer by Jefferies Financial Group, Inc. (“Jefferies”) for the purchase of 140 million shares at somewhere between $.30 and $.40 per share.
After discovering the competing offer, Kamensky exploited his role as Chairman of the Committee to pressure Jefferies into abandoning its bid. Within 24 hours, Kamensky contacted representatives at Jefferies, threatening to discontinue Marble Ridge’s business relationship with Jefferies if it did not cease all efforts to bid on the equity. And the rest is history.
Neiman Marcus’ Chapter 11 case illustrates an issue often faced by practitioners and their clients serving as members of a creditors’ committee. Although creditors generally share a common goal of maximizing the value of the estate, each creditor’s individual interests create an inherent conflict. Members must often wear two hats and balance competing interests between their constituencies. This begs the question, what should committee members do once they encounter confidential information in the course of their duties? The answer is simple: play by the rules. The inherent tension amongst the member’s own interests, the committee’s interests, and those of the general creditor body underscores the need for strict compliance with governance procedures. In most cases, committees will adopt bylaws through which members can resolve disputes or conflicts of interest. Counsel should ensure that the bylaws address several key aspects of committee operations, including how to resolve conflicts of interests and to handle confidential information.
Part I of this article provides an overview on the appointment of a committee and the legal authority governing a committee member’s fiduciary duties. Part II provides an overview of the pertinent facts preceding and during the Neiman Marcus Chapter 11 case. Part III summarizes best practices for committee counsel to properly manage conflicts of interest. Part IV concludes with key takeaways.
Part I: The Unsecured Creditors’ Committee: Role, Powers, Duties
The Bankruptcy Code contemplates that the Official Committee of Unsecured Creditors (“Committee”) plays a critical role in a bankruptcy case. Section 1102(a) of the Bankruptcy Code requires the United States Trustee to appoint the Committee and, in appropriate cases, additional creditor or equity committees: “[A]s 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 of creditors or of equity security holders as the United States Trustee deems appropriate.” The bankruptcy court may, however, order the appointment of additional committees of creditors or of equity security holders if necessary to assure adequate representation of creditors or of equity security holders. If the court orders the appointment of an additional committee, “the United States trustee shall appoint any such committee.”
Once appointed by the trustee, the Committee functions as the proverbial “watchdog” on behalf of the body of creditors it represents. Section 1103(c) of the Bankruptcy Code sets forth the powers and duties of committees appointed under Section 1102, including: “consult[ing] with the trustee or debtor in possession concerning the administration of the case” and “investigat[ing] the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan.”
The Committee advances the interests of the class of creditors at each stage of the bankruptcy process “to arrive at a plan that can be confirmed under section 1129.” In that regard, the Committee serves as a fiduciary for the class of creditors as whole. Courts have long recognized that members of the Committee assume a fiduciary obligation to other members, the creditors whom they were elected to represent. In exercising that fiduciary duty, the committee must “guide its actions so as to safeguard as much as possible the rights of minority as well as majority creditors.” The Committee must be “honest, loyal, trustworthy and without conflicting interests.”
But that duty is not limitless. The Committee’s fiduciary obligations create constant tension with an individual member’s right to advance its own interests. A Committee member’s fiduciary obligations do not render its own interests meaningless. Creditors’ individual interests are not required to perfectly align with the interests of the class as a whole. Committees often include creditors with differing or even conflicting interests. Unlike a debtor-in-possession, the committee is not a fiduciary of the estate. Courts generally recognize that “[n]o two creditors have identical interests.” Committee members are “hybrids who serve more than one master. Every member of the Committee is, by definition a creditor. Thus, she is in competition with every other creditor for a piece of a shrinking pie. She may assert her rights as a creditor to the detriment of the creditor body as a whole without running afoul of her fiduciary obligations.”
Individual members may act in their own best interest as long as the action does not injure other creditors. Committee members must avoid conflicts of interest that might compromise their loyalty to the creditor class and cannot use their positions on the Committee to further their own self-interest to the detriment of the class. Should a conflict arise and its constituents, the majority of courts will not necessarily require that the classes’ interest take priority as a matter of law if the members does not use his position to the detriment of other creditors.
Part II: Neiman Marcus
Kamensky’s misconduct was the bitter finale of a longstanding dispute between Marble Ridge and the sole owners of Neiman Marcus’s Parent Company, Ares Capital and the Canadian Pension Plan Investment Board (collectively, the “Sponsors”). The dispute centered on a stock transfer of the retail giant’s relatively profitable e-commerce unit, MyTheresa. In 2018, Neiman Marcus disclosed that it transferred substantially all of its equity in MyTheresa to the Parent Company at the behest of the Sponsors.
The transaction sparked outrage amongst Neiman Marcus’s creditors. Marble Ridge believed that Neiman’s bankruptcy was inevitable and that Neiman Marcus fraudulently transferred the shares to the Parent Company to divert a valuable asset away from Neiman’s creditors. The transaction was subject of two state court lawsuits filed by or on behalf of Marble Ridge.
The state litigation continued for over a year until Neiman Marcus filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of Texas on May 7, 2020. Shortly thereafter, the United States Trustee appointed the Official Committee of Unsecured Creditors. Marble Ridge served as a member on the Committee and Marble Ridge managing partner, Daniel Kamensky, was subsequently elected as one of three co-chairs.
In hindsight, it seems that Marble Ridge’s appointment was the root of Kamensky’s problems. The parties eventually agreed to a global settlement under which the Parent Company would contribute preferred equity in MyTheresa to the estate for the benefit of unsecured creditors. Marble Ridge initially offered to play the role of white knight, agreeing to purchase 60 million shares at $.20 per shares. But on July 31, 2020, Jefferies expressed an interest in placing a higher bid on the preferred equity to the Committee’s financial advisor. The unofficial bid would have topped Marble Ridge’s offer at somewhere between $.30 and $.40 per share.
Kamensky was outraged. Within minutes of learning that Jefferies was the competing bidder, Kamensky contacted representatives of Jefferies through a series of texts and Bloomberg chat messages to “stand DOWN,” “DO NOT SEND IN A BID, ” and even threatened to use his position as co-chair of the Committee to prevent Jefferies from bidding on MyTheresa’s shares. Worse, Kamensky leveraged Marble Ridge’s ongoing business relationship with Jefferies to provide the investment bank’s representatives an ultimatum: Cease all efforts to bid on MyTheresa’s equity, or Marble Ridge would cease doing business with Jefferies and they would no longer be partners moving forward. Jefferies never placed a bid on the preferred equity and disclosed to the Committee that its decision was a result of Kamensky’s demands.
Unfortunately, that disclosure prompted Kamensky to make a bad situation even worse. On July 31, 2020, Kamensky contacted a Jefferies’ representative and demanded to know why the investment bank disclosed their discussions to the Committee. Kamensky stated that if Jefferies continued to cooperate with the Committee, “I’m going to jail, okay? Because they’re going to say that I abused my position as a fiduciary, which I probably did, right? Maybe I should go to jail. But I’m asking you not to put me in jail.” He then urged Jefferies to take part in the bidding process, and in an apparent attempt to undo the harm, stated to the representative that the “conversation never happened.”
The end of the story did not bode well for Marble Ridge or Kamensky. On August 5, 2020, the bankruptcy court charged the United States Trustee with conducting an investigation. The bankruptcy court found that “the substantial evidence collected to date clearly demonstrates that … Kamensky breached his fiduciary duty to unsecured creditors on July 31 … After being told of the existence of a rival bid and the identity of the bidder, Mr. Kamensky sought to exploit that information for his benefit by contacting Jefferies and pressuring them to withdraw their initial bid, to the likely detriment of all other creditors.”
On August 20, 2021, Marble Ridge notified investors of its plan to wind down its funds and liquidate over $1 billion in assets under management. On September 3, 2020, Kamensky was arrested and charged for fraud during the offer or sale of securities, bribery, and obstruction of justice. On February 3, 2021, Kamensky pled guilty to one count of bankruptcy fraud and thereafter was sentenced to serve six months in prison.
As for MyTheresa, the preferred shares were distributed directly to unsecured creditors, and on January 25, 2021, MyTheresa had an initial public offering. Since then, the shares have traded in excess of $35 a share—a far cry from the $0.20 offer that Marble Ridge initially made.
Part III: Conflict—You Cannot Avoid It
Kamensky’s fate could have been avoided. And this article is in no way intended to suggest that Committee counsel did anything wrong here. The reality is that Kamensky simply failed to play by the rules and failed to follow what the committee bylaws likely required. Kamesnky could have disclosed his intentions to the committee counsel before taking any action in connection with the bidding process. Better yet, as soon as Kamensky determined he had an interest in potentially participating, he could have resigned from the Committee altogether. Of course, we know he did neither.
Plainly, the role of Committee counsel can be very challenging. In order for a Committee to effectively fulfill its duties in a case, members should have full and complete access to information concerning the debtor’s affairs. That information invariably includes confidential information that could be misused for competitive or operational reasons. In this regard, the role of Committee counsel contemplates the identification, management, and resolution of conflicts of interest in real time and on a proactive basis. This requires counsel to anticipate, identify, and resolve conflicts in the ordinary course. This challenge in turn requires counsel to have in place restrictions and procedures to mitigate the temptation for possible self-dealing by members.
The interests of an individual member, the Committee, and the creditor class as a whole may not always align. While the collective goal of value maximization will generally encompass the interests of members, participation on a committee is generally driven by self-interest. Committee counsel must be mindful of these competing interests, as the engagement will often extend far beyond the normal role of an advocate. Counsel will wear a number of hats as an educator, advisor, and intermediary of Committee and inter-creditor disputes. And to succeed in this regard, counsel must effectively anticipate and manage potential conflicts, including the following best practices.
Committee Governance. Committee counsel should immediately draft and implement Committee bylaws to address and manage conflicts of interest. The bylaw provisions should:
- impose upon each member a continuing obligation to disclose any and all prior connections with the debtor and other parties in interest, all economic interests related to the Debtor, including claims, ownership interests, competitive interests, and contracts, as well as any actual or potential conflicts that may arise;
- include limitations on access to information that may potentially serve any of the potential conflicts or competing interests;
- delineate procedures to vet and select a chairperson; and
- provide for exclusion of a member from Committee participation on any matter on which the member is determined to have an actual or potential conflict of interest, provided that the member can take independent action that does not result in a breach of any fiduciary obligation as a Committee member (in which case that member should resign from the Committee).
Under the guidance of counsel, the Committee must insist upon complete disclosure of the nature and components of each member’s claims and other interests related to the debtor. Should the Committee fail to provide a procedure for members to assert their individual positions and differentiate those actions from measures undertaken by the Committee, the fiduciary duties of all of the members may be compromised.
Voting Procedures. Bylaws of the Committee should also address voting procedures as soon as possible after committee formation. These procedures should include vehicles for breaking ties, particularly where one or more members must abstain. The challenge is anticipating what changes will occur of the course of the case. In many instances, the dynamics of the Committee can quickly shift. For example, with larger committees appointed in cases that run longer, some members may become less active or entirely inactive as the case progresses. The potential for misconduct or abuse of the Committee process can increase as inactive members are asked to vote on critical issues, perhaps regarding plan formulation, about which they may be less informed and more reliant on other members or counsel. As a safeguard to limit this potential for abuse, most creditors’ Committees prohibit voting by proxy and may implement a minimum quorum to vote on substantive matters at meetings.
Protective Orders. In most cases, the debtor requires the Committee and its members to execute a confidentiality agreement or protective order concerning the disclosure of non-public information. Protective or confidentiality orders generally prohibit disclosure, use or dissemination of non-public information obtained through Committee membership. The information provided to the Committee, either from non-public sources or from analyses by the debtor’s or Committee’s professionals, as well as the deliberations of the Committee, must be kept in strict confidence. And the level of scrutiny and restriction must be heightened in the circumstance of a committee member conflict. It is not enough to simply have the member abstain from voting; the bylaws should require the withholding of confidential information, deliberations, and even the final votes from those committee members who are forced by conflicts to abstain. Strict compliance with confidentiality restrictions encourages the free-flowing production and sharing of information between the debtor and Committee, which is necessary to facilitate a successful and ideally consensual reorganization.
Moreover, a confidentiality agreement or protective order may heighten the members’ awareness of the appropriate (and inappropriate) uses (or misuses) of information and the need for limiting disclosure to properly conduct the tasks of the Committee. The confidentiality agreement or protective order will generally restrict the members’ use of confidential information acquired only through the Committee membership. But cases can move quickly, and thus members who fail to sign the confidentiality agreement must be excluded from disclosures and discussions involving confidential Committee information until they sign. The early stages of a committee appointment are ripe for lax enforcement and abuse, but the beginning is the best time to make clear the importance of strict compliance.
Part IV: Key Takeaways
The representation of Committees in bankruptcy proceedings will almost always involve the management and control over a free flow of information between and among the debtor, Committee members, and the Committee’s professionals. For Committee counsel, that information should include early and ongoing disclosure by all members of their interests and connections in the debtor and the proceedings. In the course of service on the committee, members will invariably encounter confidential information that could be used to their own benefit or to other’s detriment. Committee counsel must anticipate and implement appropriate safeguards to manage and resolve these potential conflicts before they occur. Practitioners representing Committees should be acutely aware of the inevitability of the conflicts that arise when members receive proprietary information during the course of a case. Under those circumstances, Committee counsel and members should look to their governance documents and conscience for guidance. Put clear procedures in place, enforce those procedures strictly, and always, always err on the side of caution.
In re Neiman Marcus Group LTD, LLC, et al., No. 20-32519 (DRJ) (Bankr. S.D. Tex. Aug. 19, 2020) (Jointly Administered). ↑
Statement of the Acting United States Trustee Pursuant to Court Order Regarding the Conduct of Marble Ridge Capital LP & Dan Kamensky at 22, In re Neiman Marcus Group LTD, LLC, et al., No. 20-32519 (DRJ) (Bankr. S.D. Tex. Aug. 19, 2020), ECF No. 1485 (the “Report”). ↑
Id. at 11. ↑
The Report, pg. 10. ↑
Id. at 29. ↑
Jefferies was Marble Ridge’s ninth largest trading partner. The Report, pg. 10, at fn. 7. ↑
See, e.g., 11 U.S.C. § 1103(a). ↑
11 U.S.C. § 1102(a). ↑
11 U.S.C. § 1102(a)(2). ↑
11 U.S.C. § 1103(c). ↑
See James White & Raymond Nimmer, Bankr. Cases and Mat. 65 (3d ed. 1996); see also In re STN Enter., 779 F.2d 901, 905 (2d Cir. 1985) (granting committee standing to sue); In re A. C. Williams Co., 25 B.R. 173, 177 (Bankr. N.D. Ohio 1982) (stating committee should be active in arriving at plan). See generally 11 U.S.C. § 1129 (1994) (providing for prerequisite for confirmation of restructuring plan). ↑
See Westmoreland Human Opportunities, Inc. v. Walsh, 246 F.3d 233, 256 (3d Cir. 2001). ↑
In re Enduro Stainless, Inc., 59 B.R. 603, 605 (Bankr. N.D. Ohio 1986) (stating that member of creditors’ committee undertakes to act in fiduciary capacity and may not act as to promote only that creditors’ interest); In re Bohack Corp., 607 F.2d 258, 262 n.4 (2d Cir. 1979) (“[T]he committee owes a fiduciary duty to the creditors, and must guide its actions so as to safeguard as much as possible the rights of minority as well as majority creditors”). ↑
Shaw & Levine v. Gulf & Western Indus. (In re Bohack Corp.), 607 F.2d 258, 262 n.4 (2d Cir. 1979). ↑
In re Johns-Manville Corp., 26 B.R. 919, 925 (Bankr. S.D.N.Y. 1983); see also In re Tucker Freight Lines Inc., 62 B.R. 213, 216 (Bankr. W.D. Mich. 1986) (“At a minimum, this fiduciary duty requires that the committee’s determinations must be honestly arrived at, and, to the greatest degree possible, also accurate and correct.”). ↑
Official Unsecured Creditors’ Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1317 (1st Cir. 1993) (citation omitted). ↑
See, e.g., In re Plabell Rubber Prods., Inc., 140 B.R. 179, 181 (Bankr. N.D. Ohio 1992) (stating that all committee members need not have parallel interests); In re Texaco, Inc., 79 B.R. 560, 567 (Bankr. S.D.N.Y. 1987). ↑
In re Microboard Processing, Inc., 95 B.R. 283, 285 (Bankr. D. Conn. 1989). ↑
SPM Mfg. Corp., 984 F.2d at 1317 (citation omitted). ↑
In re Rickel & Associates, Inc., 272 B.R. 74 (Bankr. S.D.N.Y. 2002). ↑
Johns-Manville, 26 B.R. at 925 (“Conflicts of interest on the part of representative persons or committees are thus not [to] be tolerated.”); In re Haskell-Dawes Inc., 188 B.R. 515, 522 (Bankr. E.D. Pa. 1995) (committee members have a fiduciary duty that prohibits them from “using their position to advance their own individual interests”). ↑
The Report, at pg. 5. ↑
Id. at pg. 9. ↑
Id. at pg. 10. ↑
Id. at pg. 11. ↑
Id.at pg. 13. ↑
Id. at pg. 13-14 (capitalizations original). ↑
Id.at pg. 16. ↑
See id. ↑
Id. at pg. 21-22. ↑
Id. at 22. ↑
Id. at 21. ↑
Id. at 24. ↑
Id.at pg. 29. ↑
CNN Business, Jazmin Goodwin, Hedge Fund Founded Charge Over Fraud Connected to Neiman Marcus Bankruptcy Bid, https://www.cnn.com/2020/09/03/investing/neiman-marcus-marble-ridge-bankruptcy-fraud/index.html (September 3, 2020). ↑
See, e.g., In re Channel Master Holdings, Inc., 309 B.R. 855, 862 (Bankr. D. Del. 2004) (holding that creditors’ committee was entitled to review and oppose debtor’s Key Employee Retention Plan). ↑
See In re Microboard Processing, Inc., 95 B.R. 283, 285 (Bankr. D. Conn. 1989) (describing inherent conflict of interest of unsecured creditors as axiomatic). ↑
See Texas Extrusion Corp. v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1163 (5th Cir. 1988) (authorizing attorney for creditors’ committee to consult with creditors); In re Wire Cloth Prod., 130 B.R. 798, 812 (Bankr. N.D. Ill. 1991) (stating that attorneys for creditors’ committee must further economic interests of unsecured creditors); In re Pettibone Corp., 74 B.R. 293, 309 (Bankr. N.D. Ill. 1987) (delineating counsel’s functions necessary to creditors’ committee performance). ↑
See generally Carl A. Eklund & Lynn W. Roberts, The Problem with Creditors’ Committees in Chapter 11: How to Manage the Inherent Conflicts Without Loss of Function, 5 Am. Bankr. Inst. L. Rev. 129, 138 (1997). ↑