Creditor's Committee Member Inaction: Any Liability?

Co-written by Mr John J. Voorhees Jr.

In the context of Chapter 11 cases, bankruptcy courts uniformly agree that creditor committee members owe a fiduciary duty to their constituents, but they also recognize that unfettered committee member liability would make creditors reluctant to serve on committees. The policy of promoting creditor participation on committees is embodied in Bankruptcy Code 1103(c), which courts have held confers limited immunity upon committee members that prevents a committee member from being held liable for actions taken within the scope of its statutory authority, as long as those actions do not constitute "willful misconduct" or "ultra vires" conduct. Pan Am Corp. v. Delta Air Lines Inc., 175 B.R. 438, 514 (S.D.N.Y. 1994); Luedke v. Delta Air Lines Inc., 159 B.R. 385, 392-93 (S.D.N.Y. 1993). According to the court in Pan Am:

"(Willful misconduct' requires a showing of either 'the intentional performance of an act with knowledge that the performance of that act will probably result in injury' or 'the intentional performance of an act in such a manner as to imply reckless disregard of the probable consequences.' (citation omitted). 'Ultra vires actions' require a showing that the conduct was engaged in 'without any authority whatever.'"

175 B.R. at 514 n.66 (citations omitted).

By defining the scope of a committee member's limited immunity in terms of which affirmative actions can give rise to liability, however, courts have failed to take into account the possibility that a committee member's inaction could also give rise to liability. Courts and commentators have observed that many committees are inactive, ineffective and add little to the reorganization process. In re Gusam Restaurant Corp., 32 B.R. 832, 834 n.1 (Bankr. E.D.N.Y. 1983) ("in too many cases where creditors' committees are formed, the creditors' committees exist in name only and are completely ineffectual") rev'd on other grounds, 737 F.2d 274 (2d Cir. 1984); Robert C. Aronoff, Appointing and Organizing Official Creditors' Committees with Model By-Laws, 20 Cal. Bankr. J. 289, 290 (1992) ("studies have shown the creditors' committees are often ineffective"). There currently appear to be no reported decisions, however, that directly hold a committee member liable for failure to perform the member's statutory duties. Two commentators have suggested that "[p]erhaps the same apathy and sense of hopelessness which often result in inactive committees...