Sometimes the smallest bankruptcy cases give rise to the most interesting legal questions.  One such case was that of ScripsAmerica, Inc., which gave rise to the question of whether the Office of the United States Trustee (the “UST”) has the statutory authority to disband a committee of unsecured creditors once a committee is appointed, or whether that authority resides with the Bankruptcy Court.

By way of background, ScripsAmerica was a publicly-traded holding company whose primary assets were its ownership interest in a compounding pharmacy known as Main Avenue Pharmacy, Inc., 90% interest in a pharmaceutical wholesaler, and indirect control over another compounding pharmacy.  Substantially all of ScripsAmerica’s revenues, however, were derived from Main Avenue.  Main Avenue was forced to shut down its operations, depriving ScripsAmerica of any meaningful source of revenue.  ScripsAmerica had its own problems as well, including protracted litigation with an entity known as Ironridge Global IV, Ltd., which had paid off certain debts in return for the issuance of shares of ScripsAmerica and the resignation of the CEO and President of the company under a cloud of suspicion.

ScripsAmerica filed for bankruptcy protection on September 7, 2016.  See In re ScripsAmerica, Inc., Case No. 16-11991 (LSS).  On November 3, 2016 the UST appointed a committee (the “Committee”) consisting of two members: the former CEO and Ironridge.  Almost immediately, on November 4, 2016, the debtor filed a motion to disband the Committee, to which both the UST and Committee objected on November 21, 2016.

In its motion to disband the Committee, the debtor relied heavily on the fact that there were only two members of the Committee, one of which was a party against whom the debtor had been engaged in protracted pre-petition litigation and the other being the former CEO (an insider) of the debtor against whom the debtor alleged it had various claims (including, inter alia, claims related to the CEO entering into the Ironridge agreement in the first instance).   The debtor took the position that the Bankruptcy Court had the authority to disband the Committee pursuant to sections 105(a) and 105(d) of the Bankruptcy Code and relied upon case law in which a bankruptcy court had done so, albeit after appointment of a chapter 11 trustee.  See In re Pacific Ave., LLC, 467 B.R. 868, 870 (Bankr. W.D.N.C. 2012).

In their objections, the UST and Committee argued, among other things, that the Bankruptcy Court lacked statutory authority to disband a committee (except where a chapter 11 case is a small business case) because section 1102 is silent on the authority of a Bankruptcy Court to do so and section 105(d) cannot be deployed to expand the Bankruptcy Court’s authority beyond what it is statutorily granted.

The issue of disbandment languished for a time but revved up again when the debtor and Committee could not reach agreement on a plan of reorganization, at which point the debtor re-noticed its motion.  On January 11, 2017, the UST filed a notice of disbandment of the Committee.  The Court directed the Committee to file an adversary proceeding in order to resolve the question of whether the UST had statutory authority to disband the Committee.

In its brief notice of disbandment, the UST asserted that it had the statutory authority to disband the committee under 28 U.S.C. § 586(a)(3)(E), which authorizes the UST to “supervise the administration of cases … under chapter … 11 … of title 11 by, whenever the United States trustee considers it to be appropriate – monitoring creditors’ committees appointed under title 11.”

In its motion for summary judgment, the committee argued in the first instance that the UST’s purported disbandment of the committee violated the careful separation between administrative powers (vested in the UST) and judicial powers (vested with the Bankruptcy Court) inherent in the Bankruptcy Code.  The crux of the Committee’s argument, however, was that the UST simply has no statutory authority to disband a committee.

The committee first looked to section 1102 of the Bankruptcy Code, pursuant to which the UST is directed to appoint a committee and given authority to appoint additional members to a committee.  Nothing in that provision, however, expressly authorizes the UST to disband a committee.  See 11 U.S.C. § 1102.  The committee invoked the doctrine of expression unius est exclusion alterius, noting that Congress’s failure to include within section 1102(a)(1) the power to disband a committee once appointed precluded the UST from doing so.  On the other hand, the committee pointed out that section 1102(a)(4), added by BAPCPA, provides that the Court may order the UST to change the composition of the committee.   With regard to 28 U.S.C. §  586(a)(3)(E), the committee pointed out that the term “monitoring” was consistent with the administrative functions delegated to the UST, but did not encompass the judicial function of disbanding the committee.

The debtors—who had originally argued that the Bankruptcy Court had the authority to disband the committee in their motion requesting that it do so—argued in their opposition that the power to disband a committee is “inherent” in the UST’s authority under section 1102(a)(1) to form a committee, in conjunction with the UST’s power to “monitor” the committee under 28 U.S.C. § 586(a)(3)(E).  The debtors claimed that, prior to BAPCPA and the addition of section 1102(a)(4), the UST’s ability to remove committee members was not subject to Court review, although the debtor never actually pointed to any basis upon which that unfettered authority existed.  The debtors then relied heavily upon the case of In re VentureLink Holdings, Inc., 299 B.R. 420 (Bankr. N.D. Tex. 2003).  While VentureLink did contain similar facts to those in ScripsAmerica, the opinion largely proved the Committee’s point: the composition of the committee in VentureLink was modified, not by an edict of the UST (which had refused to remove the member in question), but by an order of the Bankruptcy Court.  See 299 B.R. at 424.  The VentureLink decision suggests that the UST has the authority to remove members of a committee in the first instance, but final authority rests with the Bankruptcy Court.

The UST never submitted a brief in support of its notice of disbandment because, before it was required to do so, ScripsAmerica’s chapter 11 proceeding was converted to a chapter 7, largely because the estate was administratively insolvent, in no small part because of the litigation over disbandment of the Committee.

Predicting where the Bankruptcy Court might have come out on the issue is impossible because, in the end, neither the Bankruptcy Code nor title 28 clearly grant anybody—either the Court or the UST—the authority to disband a committee.  Logic would seem to dictate that some mechanism for eliminating a committee under the right circumstances should exist, but Congress does not appear to have given statutory expression to that logical observation.

Nor does the case law provide clear guidance.  In a relatively recent decision, a Bankruptcy Court concluded that it lacked statutory authority to disband a committee once appointed, but did not find that the UST had the authority to disband a committee.  See, e.g., In re Caesars Entm’t Operating Co, Inc., 526 B.R. 265 (Bankr N.D. Ill. 2015) (in fact, the UST shared the moving debtors’ concern that the committee in question would engage in duplicative activities that would increase fees, yet the court did not suggest the UST had the power to disband the committee); cf. Credit Suisse AG v. Appaloosa Inv. L.P., 2015 WL 52570003 at *5 (S.D.N.Y. Sep. 9, 2015) (discussing court’s earlier order denying motion to disband on grounds that court lacked statutory authority).  In another case, the Bankruptcy Court declined to rule on whether it had the authority to disband a committee because it concluded on the facts that doing so was not appropriate, though the court also did not conclude that only the UST had the authority to disband a committee.  See In re Dewey & Leboeuf LLP, 2012 WL 5985325 (Bankr. S.D.N.Y. Nov. 29, 2012).  However, counsel seeking to have a committee disbanded may take heart in the fact that in at least one case a court allowed the fees of the movant.  See In re Keene Corp., 205 B.R. 690, 704-05 (Bankr. S.D.N.Y. 1997).

Unfortunately for those seeking clarity on the scope of the UST’s authority, the conversion of the ScripsAmerica case mooted the issue of the disbandment of the committee.  Thus, the bankruptcy bar will have to wait until the next time the UST seeks to disband a committee for case law on whether the UST has that authority.

Disclosure:  Cole Schotz P.C. represents a significant unsecured creditor of ScripsAmerica, Inc. and advocated for the conversion of the case to a chapter 7 proceeding.  Neither Cole Schotz P.C. nor its client took any position on the authority of the UST to disband the Committee.