Restructure This! Podcast Ep. 12
Current Topics Related to Unsecured Creditors’ Committees
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Listen to the original podcast released June 1, 2022 here: https://www.sheppardmullin.com/multimedia-399
Sheppard Mullin’s Restructure THIS! podcast explores the latest trends and controversies in chapter 11 bankruptcy, commercial insolvency, and distressed investing. In this week’s episode, Matthew Dundon, Principal of Dundon Advisors, LLC, joins us to discuss current topics related to unsecured creditors’ committees. In doing so, Matt shares some of his most memorable experiences serving as an advisor and investor in the restructuring industry.
Guests:
Matthew Dundon
Matt founded Dundon Advisers, LLC in 2016. He and his team manage complex credit and credit-linked assets for institutional clients, provide restructuring advice to creditors, debtors, financiers, and distressed asset purchasers, and act as broker and counterparty advisors in non-securities credit originations and secondary transactions.
Matt has been a global credit, litigation, and distressed investment leader for over 13 years. Prior to founding Dundon Advisors, he served as research head at Miller Tabak Roberts Securities (2006-2010) and portfolio manager at Pine River Capital and Advent Capital (2010-2016). From 1998-2006, he held roles as a corporate finance lawyer and analyst 1998-2006. Matt attended the University of California at Berkeley as an undergraduate before earning his law degree at the University of Chicago.
Transcript:
Justin Bernbrock:
On this installment of Restructure This, we welcome Matt Dundon the founder of Dundon Advisors, a financial advisor and asset manager among other things. Matt and his firm have been engaged by numerous unsecured creditors’ committees in the last several years, including, for example, in the chapter 11 cases of Pipeline Foods, Studio Movie Grill and Mallinckrodt. As part of today's conversation, Matt and I will discuss current topics related to unsecured creditors’ committees, including with respect to the committee formation process, the benefits of a committee and for cause UCC appointments in sub chapter five cases. As always stay tuned after the interview for a quick rundown of current restructuring news and notable stories.
Justin Bernbrock:
All right, as mentioned, the guest on today's episode of restructure, this is Matt Dundon founder of Dundon Advisors. Matt, thank you so much for your time and willingness to come onto the podcast and really looking forward to hearing about what I understand is a pretty long and pretty illustrious career in the restructuring industry. So thank you at the top. Do you want to start us out by giving the listeners a flavor for your background, how you came to be interested in the restructuring practice and sort of what got you to where you are today?
Matt Dundon:
Thanks for having me. It's a pleasure to be with everybody on the team. So I, like a lot of people in the industry, started off as a lawyer in the distant past. I went to the University of Chicago law school and came out to New York to be a transactional lawyer. And as often happens, after a few years, ended up on a bond trading desk as a credit analyst. When I went into law school, I didn't know there was such a thing as bond trading to say the least of credit analysts on trading desks. But you certainly learned, I took to it and became the head of research of a boutique brokers firm, then known as Miller Tabak Roberts, it's now the credit group of StoneX Financial. And after a few years as running the research group, there I was brought over to a hedge fund Pine River Capital Management based in Minnetonka, Minnesota, but working in the New York office as a portfolio manager for distressed debt. And let's call it allied investments so reorganized equities, deep value equities, high yield bonds, when they got a little stressed.
Matt Dundon:
I did that for about six years. The last year and a half, I'd moved over to Tracy Maitland's firm, Advent capital management, to do something similar. In early 2016, I sort of had a revelation that the business of being a bond and loan portfolio manager was really trying to be in the smartest 10% of a very smart group of people looking at the same Bloomberg streams and talking to the same salesman and saleswoman at 20 or 30 different brokerages. And it was extremely hard to get edge. I think my performance as a portfolio manager was pretty good, but nevertheless, it was one of those things where the nature of the competition and the shared information meant that you were always rowing the boat upstream to really deliver alpha to your clients.
Matt Dundon:
And I was like, maybe there's a better way or at least a better way for me to deliver value to clients. And so with one client, I opened up Dundon Advisors with the sort of proposition that we were going to be looking for value in the credit and distress space, but in more illiquid paper, in paper that had inherent difficulties, that was disputed. Could be litigation claims, disputed trade claims, held by people who didn't really understand their risk or weren't well positioned to try to take the best of it.
Matt Dundon:
And basically try to have an edge in the process, be able to make some of our own luck as opposed to being at sort of the mercy of the markets and corporate management and revenue and EBITDA, and what we always like to call tape bombs, where just a press release goes out, a new story goes out and it comes across the Bloomberg wire and then everything that was bid $0.90 is immediately offered at $0.85 cents and you just lose, and then by the end of the day, it's trading at $0.75 and you just lost 15% or 18% of your investment with something that you had no control over.
Matt Dundon:
We built that business slowly over a couple of years, adding in additional clients who sort of saw that as something they wanted to do. And then we realized early on, and getting to the topic of this discussion, that because we were acquiring non-tradable instruments and often things where we were in it to win it, that we didn't have the obstacle of sitting on official committees of unsecured creditors that a bond and loan PM does. Because when you sit on a committee you're restricted from trading by agreement with the US trustee, maybe by law. And then you also have non-public information so you can't just like, even like, hey, I want to sell out my position, I'm going to quit the committee.
Matt Dundon:
You have non-public information and you would have to have some unspecified and amorphous, cooling off period that someone could always sue you for violating and that's just not really acceptable in managing a portfolio, and that's one of the reasons why you see relatively few credit portfolio managers sitting on unsecured creditor committees. It certainly does happen, but a lot of special sort of box ticking situations need to fall into place for people to be willing to do that.
Matt Dundon:
So we started to sit on creditor committees relatively routinely when we'd be positioned in these things. And we sort of got to get a sense of how that element of the process worked and where value got created for those kind of claims. I, of course, had been sat on many ad hoc committees of first and second lien creditors and many different bankruptcies and had lead roles in any number of those processes in very large cases but I hadn't seen this side of the world. And after a couple of years of doing it, I said, hey, the business of being a financial advisor to creditor committees and other parties in bankruptcy, that's an interesting business. And it has a certain level of stability of revenue that having specula of positions in very challenging and complex claims doesn't have.
Matt Dundon:
And I said, let's be open to some situations where perhaps somebody would hire Dundon advisors as a financial advisor to a committee. And we got the first such mandate in a case called Woodbridge, which was a large real estate Ponzi scheme in early 2018. And that was for a number of reasons, very lined up with some of the expertise we had around litigation exposure in bankruptcies. And we added the next few committees. We also were sort of more intimately tied into what we do on the asset management side.
Matt Dundon:
And then, we started to branch out and I brought in my now partner, Peter Hurwitz, who convinced me to launch a media and entertainment restructuring group. We'd had no investment activity in that space, but he thought we'd be an interesting platform to do that and that group has gone on to be extremely successful and is the heart of a pretty well established TMT practice here. And now, we relatively quickly became one of the most frequently engaged advisors to official committees of unsecured creditors and have stayed in that spot. We are a little more disproportionately oriented to the middle market, a lower middle market. So where we stand in the revenue league tables on restructuring versus the sort of the deal count is a little lower for better or worse, but it's a robust practice and we do a smaller amount of advisory work for debtors, for ad hoc committees of secured creditors and things like that.
Matt Dundon:
But the restructuring practice remains pretty heavily oriented to official committees and ad hoc committees of unsecured creditors across a bunch of different industries. And we now have just about 30 people. And so we have a lot of capabilities and are working on a lot of things simultaneously. We continue to sort of build and grow that original asset management business. That's a very healthy business and has had some by far its best results ever last year. So it can sometimes be in the shadow of the restructuring business, which is just a little inherently more public and conspicuous to other people in the industry but it remains very successful on its own and it has some very major growth initiatives tied into it. So it might even sort of take back the glory internally and externally in the firm in the next year or two of those growth initiatives bear fruit.
Justin Bernbrock:
It's fascinating candidly to get that full background and story. One of your comments about the revenue league tables reminded me of a, and I forget who said it, but that there is a quantity that has quality of its own. And I think you guys are doing remarkable and it's just really, really fascinating to see and exciting, I think for our industry to have people like you and firms like yours.
Matt Dundon:
I agree that the right quantity has quality all of its own. For me, the best part about having a lot of engagements and being busy across a lot of industries is it has given me the ability to hire a lot of amazingly smart people, right? And you know, one of the real challenges of small credit firms or credit investing firms is your baseline revenue. Let's call it your management fees instead of your performance fees are pretty low and so people will run a very tight ship in terms of overhead and staffing. And when you have only three or four investment professionals, you can miss things and you don't have the breadth of relationships and insights and past experiences, and we love to hire people with a ton of experience. I just have a lot of people with 20 and 30 years plus of experience across a bunch of different spaces.
Matt Dundon:
And that quantitative element of just being in a lot of cases has enabled me to have that force. And each one of those people adds insight and capability and just, hey Matt, I was at lunch with somebody yesterday and they mentioned this and that sets us off a month later, that's a big engagement for us. And so I do love that. And I absolutely think, well qualitatively, everyone we have is great. The quantity of having a lot of people, which is made possible by having figured out ways to win trust and get a pretty high volume of engagements has been great.
Justin Bernbrock:
And I want to get into this specifically, I don't know, maybe this is some degree of perception and some degree of reality, but the committee formation, creation, appointment questionnaire, hiring advisors, I think for a lot of people, myself included, perhaps it does seem like a bit of an enigma and how to sort of figure out how to position clients for roles on a committee and then otherwise how to get retained or hired as an advisor to a committee. So what, and certainly you've had a lot of its success in that capacity. So what is the US trustee generally looking for? What do UCC members look for when hiring advisors? Very interested in your perspectives there.
Matt Dundon:
So let's talk about the first question: getting on committees and what the trustees are looking for. I think the trustees do a really amazing job and they take it really seriously. And for a process that has a lot of potential to be flawed. I think they do a really great job. And I think most of my peers and competitors would tend to agree that it is an exemplary thing. It's not perfect, but they do as good as they can and they devote a lot of resources and burn a lot of IQ points, I think making it work.
Matt Dundon:
My perception is that they look for two things. They look for diversity and they look for size. I think every US trustee and trial attorney would say, if we want to have a committee that is representative of the varieties of unsecured creditors in a situation, and then to the extent that we have multiple applicants, they'd also like to have, regional diversity, I think they certainly appreciate racial, ethnic, and gender diversity among the sort of people who are going to be sitting on the calls and I think these are factors they, they weigh in but with diversity among kind of creditors, you're always going to stand a much higher chance of being appointed to a committee if you are the only applicant of a certain significant subset of the unsecured claims.
Matt Dundon:
Whereas if there's 12 applicants from another subset and the trustees are going to form a seven member committee, he, or she's just going to have to only pick two or three of them. And there's also going to be sort of seats that sort of customarily just are automatic. So a bond indenture trustee is going to be appointed to a committee almost without exception, and you need a very unusual circumstance where they're not going to appoint a bond trustee.
Matt Dundon:
The Pension Benefit Guaranty Corporation will almost always be appointed. And in fact, they're basically, it's my perception that the PBGC is the judge of whether or not they should be on a committee. So if they think there's enough pension exposure for them to apply, their government colleagues at the trustee’s office accommodate them. And then if they don't think there's enough exposure, they don't apply. And once again, I actually think that's a very commendable thing for the PBGC because it demonstrates they're not just trying to take committee seats to have influence and pile up a favor bank to the extent that's a thing, a government, and you would care about they're thoughtful about when there's enough potential exposure to the PBGC funds to go on. There's usually, in a retail case, you'll often see this, three landlords, three vendors and a tiebreaker.
Matt Dundon:
We've sat on a lot of retail cases because we often had an interest in a class action litigation brought by employees against a retailer. And so that was a natural tiebreaker and we'd see three vendors and three landlords and our client, or we'd see two vendors and two landlords and our client. And that raises a really important point, right? In a lot of cases, people talk about how I can get on a UCC? I don't want to be rejected, but I'm here to tell you that more often than not the official committee struggles to get applicants. We've seen in the past 12 months, especially a lot of big complex chapter elevens go without a UCC because there were not three qualified applicants, which is usually the minimum, right? And certainly the trustees are always willing to form a seven member committee and so between zero and seven, that's a huge portion of chapter 11 exposure.
Matt Dundon:
And one thing people should realize is that for every one committee where there's 20 applicants, there are three or four where there's between zero and seven. And so being on a committee is something that if you're unfortunate enough to have a lot of clients, customers, and borrowers file for bankruptcy, you can certainly do it. If it's something you want to add for people who are bankruptcy lawyers with a practice representing corporate creditors, it's something that you should get to the GC or the head of collections, like not for a specific case, but as a general matter, saying, hey, getting on creditor committees is an interesting angle and committee members get a lot of access. We should set up an internal discussion and talk about the merits of you doing this so that when in the next year a case comes along, you put in an application and if that's a middle market bankruptcy, the chances of that being put on, if they're owed any meaningful amount of money are pretty good.
Matt Dundon:
Now in the biggest of cases with the greatest of interest, then size is going to matter. So once they've ticked the box, when they're saying, okay, we're going to put three landlords on this seven member committee, even though eight landlords applied, they're going to almost certainly pick the three landlords with the most stores, right? The vendors who are owed the largest amount of money, the largest holders of the bonds, if there were three different series of bonds or three different indenture trustees, and they didn't want to accommodate them all which bond had the largest amount outstanding. And that's pretty straightforward. And I think that there's some thought that's mandatory on the trustees. I think the trustees don't feel it's mandatory and there will sometimes be some frustration where people will feel the trustees jumped around and that might have been in service of diversity that might have been because they had an interview with somebody and they came across as very well informed.
Matt Dundon:
And so you will expect most of the time to be interviewed by the US trustee. And it's really important to have the creditor himself or herself be on the call, be articulate, express an understanding of what a creditor committee does and doesn't do, and what a member of a creditor committee should and shouldn't do while wearing their committee hat. And we have certainly seen people fail to get seats in competitive environments where they weren't able to do that. And it's important for professionals to understand that the trustee does not view themselves as appointing professionals, but they're appointing creditors.
Matt Dundon:
And so when you have a lawyer or a banker for a creditor, be on the interview and dominate the interview and talk about the bankruptcy case and how smart they are about the bankruptcy case, the trustee can develop the impression that the actual creditor isn't really going to be very involved in the case. And that is a strike against appointing that person. So having an animated and engaged actual creditor, if an individual or somebody who carries a corporate creditor's business card, as opposed to one of their outside professionals can be very helpful.
Justin Bernbrock:
It's I think great advice and it's probably advice that most lawyers don't want to hear. They probably need to hear it the most. I was thinking, as you mentioned, the PBGC, and maybe your memory is better than mine, but is the PBGC unique in terms of the arm or tentacle of the federal government in sitting on committees? Because like, does the SEC do it, like other-
Matt Dundon:
No. So the code prohibits government agencies of any level from sitting on official committees, but makes a specific exception for the PBGC. So this indeed is something that came up a lot in the opioid mass tort cases where, at least initially the super majority of the apparent unsecured claims were the claims of states, counties, municipalities, hospital districts, native American, tribal corporations, and tribal nations. And the US trustees took a very strong view that none of those were eligible to sit on any official committee. And so they had to sort of form ad hoc committees.
Matt Dundon:
And so this has always been the rule and it was always known to be the rule and the trustees felt strongly about it, but it didn't really become decisive in large chapter 11 cases until the last few years where the sort of the intentional prohibition became an issue where very high powered plaintiffs and creditors, and with very high powered lawyers with good relationships with the trustee's office, had clients that on many prior committees were just told flat out it is not going to happen. And that was something that Andy Vera, who's the US trustee for among other places Delaware, took a very strong stance on in 2019 and I think if other of his colleagues in the trustee program were wavering on that, they were not wavering by the end of 2019 and I think that's been vindicated. But the PBGC just wrote an exception to the law that lets them sit.
Justin Bernbrock:
So switching gears slightly here I guess staying with the same broad theme, what role really should a committee play in a case? I think people generally get the sort of legal, philosophical concepts of collective action and broad based representation, but more nuts and bolts, more actual facts on the ground, what ought committees be doing in these cases?
Matt Dundon:
I would say largely what they're doing now. Obviously I'm a partisan and I advise a lot of committees every year. So I wouldn't be saying they should be doing a lot of things differently. The job of a committee really depends on where the fulcrum lies in the waterfall, right? If there is secured debt trading at $0.40 on the dollar, unsecured creditors, sort of the default position of an unsecured creditor is a zero recovery, because of the rule of absolute priority. If there are unsecured bonds trading at $0.75 and most unsecured creditors are pari-passu with those bonds, then you are the fulcrum. You are the one where the change in value tips the scale for you or not. And so the most important thing is to determine where the committee sits vis a vis recovery at the beginning of the case. Usually in a large case, you'll have financial markets to give you some strong indications of where that is. In smaller cases, you won't, but the math is not very hard to run, right?
Matt Dundon:
You can understand what a company's EBITDA would be in a good year, in a typical year, apply a market drive multiple to that. That's what the company is worth. And then let's look at the secured debt and let's look at us and let's look at what might be below us preferred stock or something like that. Subordinated debt. If you're below the fulcrum, you're looking to just create trouble, right? You're looking to identify weaknesses in the secured debt, identify weaknesses with private equity sponsors, things they did wrong, things they failed to do, things they didn't perfect, things like that and use that to extract a deal. And you're going on both a track of here's what we could win and then here's what it could cost you to beat us. And so there's some amount north of what it cost you to beat us that is an appropriate settlement value. And then you strike those deals whenever you can and the better people are at the process, the more that they don't have to repeat the same lines back and forth to one another, the faster that can go and then you save administrative expenses.
Matt Dundon:
And so committees that are below the fulcrum, when they do a good job, oftentimes they can strike a deal within a few months and say, okay, we're going to get a pot of recovery dollars for unsecured creditors. And certain critical vendors are going to get paid a hundred cents on the dollar. And, these treatments will be acceptable to everybody and we'll have a liquidating trust. But it is very much driven by finding and exploiting weaknesses in a capital structure that might, on its face, tend to have all the value reside in secured debt.
Matt Dundon:
When you're at the fulcrum, it's a completely different exercise. You're now looking at value maximization across a lot of dimensions, sale process restructuring, pursuance of preference actions, avoidances, because every dollar that comes in is directly going to increase your recovery because there's no secure debt or the secured debt is clearly paid off and in the money. And so while you might have some policing efforts around making sure you are the fulcrum, you're going to have that primary responsibility. The great challenge there is that a hedge fund or a private equity fund that's at the fulcrum, they look at a bankruptcy and they say, I want to deploy capital here. I want to be the debtor in possession lender. I want to be an exit investor. I want to acquire some high quality assets at a good price.
Matt Dundon:
An official committee doesn't have its own capital. So it has to struggle to exploit the opportunities. It has a reduced set of opportunities to make money at the fulcrum. And that's one of the challenges, is you can be sitting in a situation where you're like these assets are trading at too low price and all a committee do is try, it can go out and try to find an institutional investor to come into an auction and bid at a higher price, but we can't do it ourselves. And typically the committee members, in some cases, committee members are well enough capitalized. They can do that and certainly in the retail space, we saw a number of acquisitions made by commercial landlords who had been sitting on a creditor committee at the outset of the case, and by the end of the case, they bought the whole company. But that's an extreme exception to the rule that committee members generally are either not deeply capitalized or they don't have any of their decapitalization available for making distressed investments in their customers.
Matt Dundon:
When we sit on a committee advising or when we advise a lead plaintiff of a class action, sitting on a committee, that lead plaintiff might be a busboy. He's not making any investments. The plaintiff law firms that are coordinating our work with the lead plaintiff, they're not a hedge fund. So that world is that the committee has to do a lot with less than the tools that they might have if they were an ad hoc group. There are occasionally committees that sit above the fulcrum, where you're getting to a 100% recovery quickly because the value is there in the case. You don't get a lot of those. Usually you get to a hundred percent recovery, at the end of a hard effort to climb up from the fulcrum but if you come in above the fulcrum, usually your main job is just to sort of keep things from falling apart to sort of have a watchful eye on everyone in the process and make sure that they go there.
Matt Dundon:
Most of the time, many of the times that company debtors don't have creditor committees, it's because they have led the people who would tend to be on the creditor committee to believe that they're getting a hundred percent. And in my opinion once again, it's not a disinterested one by any means most of the time you should still have a creditor committee in that circumstance to keep your eye on it, to make sure things don't fall apart, to have standing in the case of, to intervene and run a regular process if things do fall apart. But typically there won't be three creditors willing to serve on a committee in that context because you're not paid to serve on a committee. And their view is if I'm being told by the company whom I trust that I'm getting paid in full, then that's all I have to hear.
Matt Dundon:
I think that there has been lately, some people on the debtor side who have perhaps walked up to a certain line, maybe even put a little toe on that line of telling people you're going to get paid in full, unless there's a committee or unless you sit on a committee, in which case maybe we don't get paid in full. I consider that to be deeply inappropriate, but we certainly feel that there are probably one or two people out there who are flirting with that line in their conversations with prospective committee members.
Matt Dundon:
And once again, I think they shouldn't do that and frankly, they don't need to do that and it's unwise because the last thing you want to do is tell a creditor, hey, we need this thing to be smooth sailing, don't put in for the creditor committee, because that may be, that will result in you not getting paid in full and then that something bad happens in the bankruptcy, perhaps having nothing to do with anything the committee could have fixed and that creditor gets paid $0.50 on the dollar, $0.20 cents in the dollar. Who do you think that the creditor is coming after in the worst possible way? That person who made those representations that somehow not being on the committee was a good thing for their recoveries.
Justin Bernbrock:
Right, which probably spirals into its own heaping pile of trouble for that debtor, that advisor. I want to pull on this thread a little bit more because, and I'm not sure how closely you've followed this world, but the sub chapter five approach to the chapter 11 process. I think people are fairly closely watching to see what happens in the Infowars case, which seems to me, at least that part of the primary strategy and may even be explicit in that case was really to avoid, or at least deprive the putative classes of plaintiffs from sitting on an official committee. And curious as to your thoughts on that approach.
Matt Dundon:
So we are very, very close to the sub chapter five issues and 100% every substantial sub chapter five filing of a company that is let's call it exploiting the problematic definition of what a small company is under the sub chapter five statute, they are doing it to avail themselves of two critical benefits the sub chapter five gives them. One is no official committee, unless a good cause is shown. And the other much, much bigger is the payment plan where you get to write a plan that has a three or five year payoff. The creditors don't get to vote on the plan. And then if at the end of those three or five years, you haven't paid off the debts they're forgiven. And by the way, that plan gives you the ability to say, we'll pay you from our cash flow, but it doesn't guarantee you that you're going to get the cash flow because you still control the company. You can choose to make marketing investments. You can choose to make pay bonuses to your staff. You can make sure that the earnings are very low.
Matt Dundon:
So it's a system designed beginning, middle, and end to permit equity and secured creditors to gang up on unsecured creditors and zero them out and give them no say in the process and worse, a high probability of no, or de minimis recovery while the secure creditors get paid in full, without anybody investigating any problems with their liens because you don't have a creditor committee. And then the equity can own a hundred percent of their company without paying off their debts instead of under a conventional chapter 11, you retain 0% of the ownership of your company if you don't pay off your unsecured debts in full. So Congress I think was frankly misled about the impact of the statute and there's been a number of sub chapter five cases that have demonstrated this.
Matt Dundon:
And then of course the increase in the debt limit made a small problem, even worse because the way this turns on the definition, this definition was very artfully done in a way to, by saying it's non-contingent debt, excluding debt owed to an insider. So if equity lent their company $50 million, that counts as zero in the sub chapter five limitation. If as in Alex Jones, you're being sued for horrifically egregious conduct and a jury has only already found you liable, but there's not been a damage award yet or you might appeal it, it's contingent, it's a zero liability. So the definition of what makes it a small business gets manipulated. And the beauty from the perspective of someone who, as you can tell, I think is a severe critic of sub chapter five, is that it's demonstrating that the Alex Jones, it’s not an abuse of sub chapter five, it's what sub chapter five wasn't designed to do.
Matt Dundon:
And so the people who think sub chapter five is being abused by Alex Jones, don't understand that sub chapter five was made to be abused. It is an instrument of abuse and unfortunately a lot of people have the wool pulled over their eyes in the statute and continue to have the wool pulled over their eyes in Congress about understanding how these provisions work together to not in any way, shape or form, create something that helps mom and pops easily reorganize. If it does that, it's by accident. And you can see that the way Alex Jones is playing out is that while we started off whatever a month ago with, well we're going to get this case dismissed, we're going to get it forcibly converted to a regular chapter 11, what's happening is the creditors have said, we're going to give up our case against the debtors, we're going to actually, in a sense, if the debtors had any assets, the debtors would win.
Matt Dundon:
They're actually going to dismiss their cases against the debtors to deprive the debtors of the right to extend the automatic stay or the argument to extend the automatic stay to other Alex Jones non debtor entities that have more assets. So it's actually demonstrating the malignancy of that relatively elegantly. Now what we are doing in a number of situations is where we've seen these things that we believe sub chapter five is setting up creditors should be treated poorly as we are coming in and leading the way to make motions to form an official committee for cause, there have only been a couple. We are involved in one that actually I think is being settled, knock on wood today by the time this podcast airs, it will have been resolved.
Matt Dundon:
That's the Lear Capital case in Delaware, which we thought was a clever use of sub chapter five in the way it was actually intended, which is to screw unsecured creditors. And I'm not going to say that, if you're someone whose clients would need to screw unsecured creditors, they were doing their job well. So I'm not criticizing the lawyers or anybody else, but we stepped up and organized some creditors to fight back. And I believe we're going to get a result that is going to enable us to proceed effectively in the case. We're also involved in some efforts in another jurisdiction to sort of look at other things around sub chapter five eligibility. There is one sort of saving grace that there's this thing about affiliates that can restrict eligibility. So we're trying to get a sub chapter five case converted back to a regular 11 because we argue that they have understated their debts, even within the very bad definition of eligible debts or countable debts, I would say under the statute.
Matt Dundon:
But overall I think that sub chapter five Congress absolutely has to redefine what a small business is and make the definition of small business and assets test or a revenue test or some combination of an asset and revenue test that has nothing to do. And it has to absolutely do away with the payment plan concept. It's absolutely terribly prone to abuse, it's designed to be abused, it has to go away.
Matt Dundon:
I feel less strongly about the creditor vote. I think bankruptcy judges can see if you take away the abusive forgiveness at the end of a payment plan, maybe a creditor vote can be dispensed with. And I'll actually say that, and maybe I'm talking against my own book here, I will say that the provision to limit creditor committees to for-cause I can live with that, right? Creditor committees are very expensive. If you honestly define small business with reasonable assets or revenue tests and you include all affiliates, so it really is legitimate small businesses, a creditor committee, a UCC can be overkill in those instances. And when you don't give the debtor the right to not pay off their debts, then there'll be a small number of these cases that need UCCs and then you can make a for cause motion. So I actually think the thing that people would think someone like me finds worst in sub chapter five, I actually consider to be like probably the least bad provision of it and the one that could most easily survive into a reform statute.
Justin Bernbrock:
I think it's a good idea of changing the test to revenue or assets. And it's so interesting how just the restructuring industry and community writ large is just so heavily focused on how much debt is on a company or in a particular situation. But here as you've highlighted, we're sort of seeing the downside of being so debt focused. Well, so let's sail past the choppy waters of sub chapter five and I'm interested in hearing thoughts that you might have on the traditional chapter 11 committee formation and appointment process. Do you think that there are other opportunities within that space for improvement of the process?
Matt Dundon:
As I said, I think that the trustees do a good job in forming committees. It's an imperfect process. I think creditors really need to do a better job of applying to be on committees, to avoid bad situations that don't have the intervention of a committee. I would say that professional hiring, once again, maybe talking against my book, it's a very frustrating thing. I sit on creditor committees in some very large cases and we had to hire our lawyers with one day's notice on the basis of 20 minute interviews, lawyers who would go on to earn $30, $40, $50, $60 million in fees and have an incredibly vital role. Most of us wouldn't hire a lawyer to do the closing on our summer cottage in a 20 minute interview. We'd take two or three weeks to gather some references and we'd sit down with three or four of them and we'd have lunch with one or two of the ones that we like the best.
Matt Dundon:
So the really fast hiring process, it works okay. I think honestly, we do a great job on the gigs we get and I'm sure my competitors who beat me on ones I don't get, do a great job too, for the most part. Maybe not as good as the one I would've done, but okay. I think that process could be better, but it somehow has to be reconciled with time. And part of this might be solved by having the trustee form committees faster. So if you could form a committee within a few days after a petition date, now obviously this is really going to be limited to the ones where there's a lot of interest, because the ones where there's minimal interest, it's going to take a while to get the questionnaires in.
Matt Dundon:
But in a big case where 20 or 30 creditors are going to want to sit forming that committee in a two or three days, and then that committee taking a week to hire its professionals, having thoughtful reviews of materials, having informal conversations, having interviews that go for 45 minutes instead of 15 minutes, I think that could be terrific and I think that would probably result in a better and more thoughtful choice of professionals, but probably the only way you could make that work, given the inexorable timing of chapter 11 cases, is if you could form those committees really fast. And that's something, the people who spend more time with the trustee’s office than I do, that would be an interesting advocacy agenda, is to say, look under select circumstances, can we do case files on Monday, first day hearings Tuesday, could we have the committee formed on Thursday or Friday with the express understanding that the purpose of this was to give the committee a week to hire professionals instead of two days.
Matt Dundon:
I wouldn't mind seeing that. And I think certainly in wearing my creditor hat as I do, one of the few people who spends as much time advising members of individual members of committees and being part of this professional hiring process. On the hiring side, I would infinitely prefer in a big complex case to have a week to hire my lawyer and my financial advisor, my investment banker, instead of a day.
Justin Bernbrock:
I hadn't thought of that. I think it's a really good idea and hopefully, perhaps some folks will hear this and give some more thought to that. I think you mentioned a short while ago, and it's obviously true that individual committee members are not paid to sit on the committee per se. There are instances however, where a member of the committee will receive some sort of expense reimbursement either for their own individual council, so separate and apart from true 327 committee professionals. Should that be something that is more encouraged, popular? I do get the sense sometimes it's a little bit of a whispered conversation.
Matt Dundon:
It's sort of a jurisdiction by jurisdiction thing. There are certain jurisdictions where it just can't happen because the US trustee's office and the judges have seen this and have slapped it down. And there are other jurisdictions where it happens with some regularity. Once again, selfishly we as a professional to a committee member, love being able to get paid for our time. And that is very nice as opposed to having that time had to be paid for by our client, or the investment portfolio or whatever. So it would be, we put in an honest bill under those circumstances and we take that money happily and we think we add value to the estate and so I sleep very well at night with that. And it would be nice for me if that was the case everywhere.
Matt Dundon:
I think it's useful. I think that the thing it lives in tension with is that a committee is a business body and it's not supposed to be a congress of lawyers for its members. And if you created a situation where routinely lawyers were getting paid to be on calls, but principals were not, then you're going to have a committee that no principals are participating in, just economics would dictate that. Indenture trustees get their lawyers paid automatically so there are some subsets of regular committee members. Indenture trustees actually bill their time to the charging lien and the lawyers are either paid by the estate or from the charging lien. So the indenture trustee side, they are getting paid to sit on the committee, the PBGC, the people who are doing that work are on salary. They're getting paid to sit on that committee in the sense that they're receiving their salary as well they should.
Matt Dundon:
So the concept of the burden will fall on private creditors. It is good in large cases and I have not seen it. In the jurisdictions where it's done, I don't think it has a corrupting intent. I don't think anybody goes on a committee for the purpose of getting fees for sitting on a committee. I've never seen that be a motive of anyone. So I think as a change that could encourage participation on committees, we certainly in talking with prospective committee members, we have had people say, so what I would get paid for being on the committee and I'm saying nothing and they're wait, so it has an hour of calls and I have to cancel my meetings for an hour and deal with this stuff? Do I get more dollars of recovery on my claim? No, you don't get any increase to your claim. It's like being on a jury except you don't even get your parking paid for by the county.
Matt Dundon:
There are people who say, no, I don't want to be involved. But what we just have to realize is that while it would have a small democratizing effect at the margins, 20 or 30 people a year might go on creditor committees in large cases because of this 99.9% of the fees that are going to become payable as a result of this are going to go to people like you and me, bankruptcy professionals at well-established firms, with high hourly rates who don't need the money. So I think that it's something that I don't feel strong as much as it might mean to me, I don't think in places where we don't have these reimbursements and fees like Delaware, I haven't noticed that the committees are less good or qualified or their professionals are less adroit for the fact that, most of the committee people have to bear their professional costs internally.
Justin Bernbrock:
Right? That's yeah again, super interesting. There have been some recent, very recent, notable examples of issues where ethics and trouble has befallen folks that have been in and around committees. What advice do you have for folks either who, sort of long time players of the game or folks who aren't and brand new to it, what is from your perspective, to the extent, you've got guiding principles that you would impart to others?
Matt Dundon:
So look, someone who aspires to be a UCC professional as a significant part of their business portfolio, by far, the best way to get involved is to act for a UCC member, right? That was not our intentional path, but it was effective enough for us that even though we had no intention of it opening up a UCC professional business, it did so very nicely. And so someone who's doing it with some intentionality, it's great. You can see how committees work, you can see what committee counsel do and don't do. There is a lot of let's call it routine in the work of committee, financial advisors and committee lawyers that it helps to get. There is a certain rhythm to the pitch in how you win business and you get to start to know people who habitually sit on UCC. So for all that, there is a problem that in many cases, there aren't people who want to sit.
Matt Dundon:
There are also a lot of people who have bankruptcy exposed businesses who sit on every committee they can because they enjoy it or they feel it has synergies with other things they have going on in their effort to have recovery on claims. And you get to know some of those women and men who are good people to know if you want to have your own restructuring business. And you get to know the sort of lawyers who habitually represent indenture trustees and the officers at the Pension Benefit Guaranty Corporation, who sit on a lot of committees. So spending a year or two, doing this and getting familiar with how it works and how it differs from work you may have done for, if you've done a lot of ad hoc work for secured lenders, CLOs, it's quite different. And if you've done work for debtors, quite different. Good chance to sort of see how that works.
Matt Dundon:
So that's what I always tell people like I want to get into this business, I say that. And another thing obviously is that if you're in a universe where your firm has a lot of ties to creditors in a certain industry, I guarantee you, there will be a middle market or even upper middle market case at some point in that industry in the next 12 months where they will struggle to get creditors, to sit on that committee. And if you can go around not to one creditor to say, hey, I want to represent you in this bankruptcy, including but not limited to sitting on the committee, you get five people and say, look, you all should collectively take care of yourself. Put in the questionnaire even if you don't really understand what the creditor or let me teach you what the creditor, not saying if you don't, let me teach you what a creditor committee is and have you all get together, put in the questionnaires and you've effectively recruited the majority of the committee and there's a good chance they're going to hire you as it's council, right?
Matt Dundon:
Now that kind of effort has to be disclosed to the US trustee because the trustee requires in the questionnaires that the committee members disclose if they've been contacted by a prospective professional. And I can tell you we've done that, and the trustee has gotten three questionnaires from each person says; Matt Dundon called me and said, we should do this. And you know what? They formed the committee knowing full well that Matt Dundon was probably going to be its financial advisor. And so while I think the trustees don't love that scenario and nor do I, the best thing is when there's a lot of people who sua sponte apply and there's a robust competition, I think they think that the power in creating a fair outcome for all creditors of having a UCC outweighs that sometimes that these UCCs might get recruited and that you did it. It's okay for you to be a professional, if you create the enthusiasm and willingness to do that.
Matt Dundon:
And so that's another thing that I think people, once again, focus on, well, how do I beat these guys who stand high on the league tables? How do I crack into that? And the answer is, well, look for situations as in everything. How do you score a double in baseball, right? You hit the ball where the outfielders aren't. So these kinds of situations, and, listen, those aren't likely to be committees that are going to have a $5 million fee application at the end, but they could be substantial interesting committees where you can generate results and start having results to talk about. Far too many creditor committee professionals talk a lot about their expertise and not very much about their results. Hey, here's a below the fulcrum, here's a claim that started out, a case where all the ducks started out below the fulcrum, we're probably looking at recovering at zero or a cent. And I got them for $0.50. Here's a case where people started out at $0.40 and I got them par.
Matt Dundon:
And that in a just world, and I think the committee world is at least as often just as any other, that gets a lot of attention and it can move you up in people's estimations pretty quickly when your competitors like I've done eight of the last nine cases in this industry, but in six of those eight cases, recoveries were terrible. You have a different story to tell.
Justin Bernbrock:
Yeah, that's interesting. Well, Matt, this has been, I mean, just incredibly illuminating for me and I hope it is so for the audience. And so thank you very, very much. We do have a tradition on the podcast where the final question is always the same for all of our guests. And it is if you were not doing what you're doing today, if you were not involved in the restructuring industry and assuming no limitations, worldly or otherwise, what would Matt Dundon be doing?
Matt Dundon:
I would be somewhere in the outskirts of Avignon running a Cote du Rhone winery, producing Mourvedre-heavy blends without any doubt, maybe with a nice kitchen attached to the cellar to have people visiting the tasting room in the summer have some good food.
Justin Bernbrock:
Well, I will say that's one of the more unique answers we've had to that question. That sounds phenomenal. And possibly attainable.
Matt Dundon:
Indeed, I say though, I actually like what I'm doing better than probably doing that. So that's not my first choice, it's unattainable. It's like my second choice if I got kicked out of this business tomorrow where somebody came along and gave me an offer, I couldn't refuse and evolve both buying my firm and firing me at the same time or something like that. I have a backup plan.
Justin Bernbrock:
There you go. Well again, Matt, thank you so much. This has been really great. I really appreciate it and appreciate the time.
Matt Dundon:
Thank you very much.
Justin Bernbrock:
All right. Take care.
Bryan Uelk:
Hello again, everyone. This is Bryan Uelk of Sheppard Mullin for Restructure This, with this week's restructuring news. Mallinckrodt has obtained commitments from investors for 650 million of exit financing in the form of bonds rather than the 900 million loan deal that the company initially had been pushing. This pivot is perhaps partially a reflection of the market, but it may also indicate an unwillingness to invest in the company in light of its involvement in the opioid crisis. Further, according to market watch home prices are up as much as 20% this year, even though rising interest rates have increased the average monthly mortgage payment by approximately 50% since January. To casual observers, this seems unsustainable. And one has to wonder whether this will have knock-on effects that affect the restructuring market.
Bryan Uelk:
On the bright side for consumers though, even if you can't afford to buy a new home right now, you probably were able to see the sequel to Top Gun over the Memorial day weekend, Top Gun Maverick, which in my humble opinion, features Tom Cruise at his very best, had estimated ticket sales of over $150 million this past weekend. This is great news, of course for the film industry, which struggled mightily during the pandemic and in the face of streaming services.
Bryan Uelk:
In other news, the financial times reports that EY is considering splitting its audit business from its consulting business. Supporters of this strategy might argue that it will facilitate better audits and perhaps even reduce internal conflicts. Significant hiccups in the professional services industry like this are few and far between, so it'd be interesting to see how this plays out.
Bryan Uelk:
Finally, if you're a restructuring professional, particularly a bankruptcy lawyer, you may have read the story about the US trustee's objection to Hogan Lovells partner, Neal Katyal, approximately $2,400 an hour billing rate in the LTL Management case. Some critics argue that no lawyer, especially in the bankruptcy context where there's limited value to go around, is deserving of such a hefty fee. On the other hand, Mr. Katyal is the former acting solicitor general of the United States and in many ways, possesses a skillset and depth of experience that few other lawyers in the world probably have. Plus with persistent inflation, it's not terribly surprising to see professionals offering their services at inflated prices, in much the same way that other industries are doing so.
Bryan Uelk:
Well, that's it for this week's restructuring news. This has been Bryan Uelk of Sheppard Mullin for Restructure This.
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