A partner in the Restructuring & Insolvency Practice Group of Squire Patton Boggs, Norman Kinel is also the National Chair of the firm’s Creditors’ Committee Practice. He leverages three decades of experience as a bankruptcy attorney to represent creditors and creditors’ committees in complex chapter 11 cases nationwide. Recently, Norman Kinel represented the Official Committee of Unsecured Creditors in the chapter 11 cases of Constellation Enterprises LLC, et al.
As Mr. Kinel outlines in a recent article for the ABI Journal, the Constellation cases demonstrate the bleak fate that awaits may chapter 11 creditors’ committees and any appeals to which they are a party, if the case is converted to chapter 7. In an appeal from the bankruptcy court’s decision in Constellation, the United States District Court for the District of Delaware ruled that the conversion of a chapter 11 case to a chapter 7 case immediately and automatically dissolves a creditors’ committee. Furthermore, the court held that any pending appeal to which the committee in question is the only appellant is likewise automatically dismissed because, as of conversion, the committee no longer exists. In making this ruling, the court rejected a number of arguments from the Constellation creditors’ committee, including the contention that the dissolution of a committee is not the same as extinction and should not result in the committee’s loss of all vested rights.
In the Constellation case, the district court’s ruling meant that the creditors’ committee’s pending settlement appeal was never heard on the merits. Consequently, the noteholders in the case received a multi-million-dollar windfall, while the unsecured creditors are extremely unlikely to receive any sort of distribution. Unfortunately, as Mr. Kinel points out, this decision could have the effect of inviting unscrupulous chapter 11 debtors to use conversion to chapter 7 as a deliberate strategy to rid themselves of committees’ appeals.
