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A Better Guard for the Henhouse:
Should Creditors' Committees Control Estate
Litigation?
Justin Ellis,t Ryan Yehtt
Introduction
In October 2021, Senator Elizabeth Warren and several cosponsors
introduced a revised version of the Stop Wall Street Looting Act.' First
introduced in 2019, the proposed legislation targets a range of perceived abuses
by private equity firms ranging from the carried interest tax loophole to the
lack of risk-retention requirements for securitized debt.2 Among several new
proposals to stop the looting of portfolio companies is one of particular interest
to bankruptcy practitioners: giving unsecured creditors' committees the
exclusive right to bring or settle certain lawsuits in bankruptcy.
Senator Warren's proposed bill marks the latest turn in a long-running
debate about whether creditors' committees should control litigation for
bankruptcy estates.3 Under the current Bankruptcy Code, when a corporation is
a debtor-in-possession in a Chapter 11 reorganization, the corporation's board of
directors maintains the authority to make decisions on the corporation's behalf.
This includes decisions about whether to prosecute litigation claims.4 If a
creditors' committee wants to take over litigation where the bankrupt
corporation's board has declined to bring claims, it normally must persuade the
bankruptcy court that the debtor's refusal to pursue that litigation is unjustifiable.
But the bill's proponents argue that this arrangement favors corporate insiders5
t Partner, MoloLamken LLP.
tt Associate, MoloLamken LLP.
1. Alexander Saeedy, Elizabeth Warren Floats Expanded Powers for Bankruptcy Creditors
Against Private Equity, WALL ST. J. (Oct. 20, 2021), https://www.wsj.com/articles/elizabeth-warren-
floats-expanded-powers-for-bankruptcy-creditors-against-private-equity- 11634750237
[https://perma.cc/5FH3-MJT6].
2. Warren, Baldwin, Brown, Pocan, Jayapal, Colleagues Reintroduce Bold Legislation to
Fundamentally Reform the Private Equity Industry, ELIZABETH WARREN (Oct. 20, 2021),
https://www.warren.senate.gov/newsroom/press-releases/warren-baldwin-brown-pocan-j ayapal-
colleagues-reintroduce-bold-legislation-to-fundamentally-reform-the-private-equity-industry
[https://perma.cc/A8CW-HU8V].
3. For articles advocating for creditors' committees to prosecute derivative claims, see, for
example, Daniel J. Bussel, Creditors' Committees as Estate Representatives in Bankruptcy Litigation, 10
STAN. J. L. Bus. & FIN. 28, 30-31 (2004). For articles taking the contrary view, see, for example, Keith
Sharfman, Derivative Suits in Bankruptcy, 10 STAN. J. L. Bus. & FIN. 1, 3 (2004).
4. Jared A. Ellias, Ehud Kamar & Kobi Kastiel, The Rise of Bankruptcy Directors, 95 S. CAL.
L. REV. (forthcoming 2022) (manuscript at 3), https://ssrn.com/abstract=3866669
[https://pema.cc/M5RQ-GPKE].
5. As explained below, the term insiders is defined broadly in the proposed legislation. We
use the term generally to refer to officers, directors, or controlling stockholders.](ViewImageLocal?handle=hein.journals/jregb40&div=1&collection=&method=preview&ext=.png&size=3)
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