The Duties and Responsibilities of Creditors’ Committees in Crypto Bankruptcies (Video) – Insolvency/Bankruptcy

0

To print this article, all you need to do is be registered or log in to Mondaq.com.

self

In this episode of Lowenstein Bankruptcy Lowdown, André Behlmann and
Philippe Khezri discuss the role of a creditors committee in crypto Chapter 11 bankruptcy cases in investigating, preserving, and prosecuting causes of action for the benefit of general unsecured creditors.

Speakers:

André BehlmannPartner, Bankruptcy & Restructuring Department

Philippe KhezriAdvisor, Bankruptcy & Restructuring Department

Lowdown on the bankruptcy of Lowenstein
Lawyers in the firm’s Bankruptcy and Restructuring department break down recent decisions and other key bankruptcy industry news and events.

READ THE TRANSCRIPT

Philippe Khezri: Welcome to the third installment of the Lowenstein Lowdown video series on crypto bankruptcies. Today we discuss the role of a creditors’ committee to investigate, preserve, and prosecute causes of action in crypto bankruptcies.

Andrew Behman: In a Chapter 11 case, the committee is empowered to oversee and investigate the past and current activities of the debtor. The committee may request documents, file debtor management and boards of directors, subpoena records, and generally use any appropriate form of discovery to conduct its investigation.

It is imperative that the Committee understand the true causes of Chapter 11 filings by debtors and how the Chapter 11 process can maximize recovery for unsecured creditors.

Philippe Khezri: When appointed in a crypto case, the committee will likely investigate the following issues:

  • Actions of management and other insiders prior to filing for bankruptcy, including taking excessive risks, deceiving customers and other creditors about debtor’s risk profile, insider trading of coins – especially before the implementation of a client freeze – and manipulation of the crypto asset market

  • Excessive compensation of management and board members, including bonuses, raises, and other forms of compensation before – and sometimes after – the bankruptcy filing

  • Any investigation by government agencies, including the SEC, against the Debtor or its management and insiders

  • Any material business transaction that has burdened the debtor with excessive indebtedness, resulted in insufficient working capital, or exposed the debtor to significant risk

  • Any new financing or modification of financing that may have been higher than the market rate, imposed onerous covenants, or provided the lender with new collateral or better repayment priority – this investigation would include the lending of the debtor’s crypto assets as well as loans using the customer. crypto assets

Andrew Behman: The committee must be vigilant in preserving causes of action from general unsecured creditors, as there are many instances where a debtor may seek to sell, assign, or release causes of action with little or no value accruing to unsecured creditors. general warranties.

Typically, the first instance in any bankruptcy case where causes of action may be lost is debtor-in-possession financing. Almost all debt financing motions provide that the debtor will grant liens on all unencumbered assets to the proposed DIP lender, including the causes of action and the proceeds thereof. As such, one of the committee’s first essential tasks is to negotiate a revised DIP lender proposal to ensure that the liens do not attach to the causes of action or their proceeds.

Additionally, in a sale case, the committee must ensure that causes of action are excluded from the assets transferred to the winning buyer.

Finally, the Committee must be involved in the negotiation of any plan of reorganization or liquidation of a bankruptcy file in order to ensure that the causes of action are preserved for general unsecured creditors and not discharged free of charge.

Philippe Khezri: Once causes of action are identified and preserved, the Committee must implement a mechanism to obtain standing and pursue recoveries due to those causes of action.

In the Second Circuit, a committee may bring an action, even if the debtor does not unjustifiably refuse to do so, as long as (i) the debtor consents, and (ii) the court finds that the dispute is (a) at best in the best interests of the estate and, (b) necessary and beneficial to the fair and efficient resolution of the bankruptcy proceeding.

A Chapter 11 plan may also grant standing to a litigation trust to pursue a cause of action after confirmation. Therefore, in many bankruptcy cases, a committee should ensure that the causes of action are preserved for the trust that the plan provides, so that the trust has standing to pursue those claims.

Andrew Behman: Stay tuned for the future Lowenstein’s Truth videos from this special series on bankruptcy and crypto restructuring, as well as customer alerts and articles on topics of interest to the crypto community. Thank you for watching.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: Insolvency/Bankruptcy/Restructuring from the United States

What we read this week [October 14, 2022]

Mayer Brown

On October 12, Bloomberg announced that Alex Jones would join his bankrupt media production company, Free Speech Systems, in a court-supervised settlement with the families of Sandy Hook…

Share.

About Author

Comments are closed.