In many chapter 11 cases, a committee of unsecured creditors is formed early in the case to represent the overall interests of unsecured creditors. See 11 U.S.C. § 1102. Members of the committee hold a “fiduciary” obligation to the entire general unsecured creditors’ class. Notably, each member of an unsecured creditors committee is duty-bound to act in the interests of all general unsecured creditors above the committee member’s singular and particular interests in the case. This fiduciary obligation carries great responsibility, and as recently seen in connection with the Neiman Marcus bankruptcy, great consequences if not honored.

Daniel Kamensky, a hedge fund founder, was the co-chair of the Official Committee of the Unsecured Creditors in the Neiman Marcus bankruptcy case. Earlier this month, Kamensky pled guilty to one count of bankruptcy fraud in a criminal action against him in the United States District Court for the Southern District of New York. Kamensky’s guilty plea was the result of his scheme to pressure a rival bidder to abandon its higher bid for securities in Neiman Marcus’ bankruptcy case so that his own hedge fund could acquire the assets at a lower price. Kamensky was made aware of a diversified financial services company’s interest in bidding on the securities involved at a price which was potentially twice as much as what Kamensky’s hedge fund was offering. After learning of the competing bid, Kamensky sent messages to employees at the financial services company telling them not to bid and threatened to use his position as co-chair of the Committee to prevent the financial services company from acquiring the securities. Further, Kamensky stated that if the financial services company moved forward with the bid, Kamensky’s hedge fund would cease doing business with them in the future. As a result, the financial services company decided to not make the bid to purchase the securities.

This scheme violated Kamensky’s fiduciary duty to the unsecured creditors in the Neiman Marcus bankruptcy as the higher bid from the financial services company would have resulted in a greater recovery for the unsecured creditors. Additionally, Kamensky is a former bankruptcy attorney, and therefore should have been well aware of his fiduciary obligations that come with the position of a committee member. Instead, Kamensky exploited his position on the committee to favor his own hedge fund at the expense of the general unsecured creditors he was supposed to represent.

U.S. Attorney Audrey Strauss recognized Kamensky’s abuse of his committee position in attempting to corrupt the asset distribution process and take profits for himself and his hedge fund. Strauss goes on to say that Kamensky “predicted in his own words to a colleague: ‘Do you understand…I can go to jail?’… ‘this is going to the U.S. Attorney’s Office.’ His fraud has indeed come to the U.S. Attorney’s Office and now has been revealed in open court.” Indeed, it has. Kamensky has acknowledged his “lapse of judgment” and “terrible mistake.” The extent of the consequences will be known when Kamensky is sentenced on May 7, 2021.

Stephanie Slater is a Law Clerk, based in the firm’s Wilmington, DE office.