Distressed investors often find themselves confronting the dilemma over how to best exert the influence they have at critical times in the chapter 11 process, which almost always will involve negotiations over key disputed issues, and their ability to continue to trade in claims against the debtor. As demonstrated by a recent decision of the United States Bankruptcy Court for the District of Delaware in the Washington Mutual chapter 11 cases, [1] what such investors do with the potentially inside information they gain from those negotiations, and how and when they use it, may significantly affect their bankruptcy recovery and expose them to potential liability. Additionally, the decision, which is now on appeal, suggests that a creditor who has a blocking position in a creditor class may be considered an insider of the debtor and have a fiduciary duty to act for the benefit of other creditors within that class, even if the creditor does not sit on an official creditors’ committee appointed in the case.
Editor’s Note: The following post comes to us from Douglas P. Bartner, partner in the Bankruptcy & Reorganization Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.
