Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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992 Norton Journal of Bankruptcy Law and Practice [Vol. 16] they were acting in a truly “representative” capacity within the meaning of Rule 2019 and its legislative history. The term “entity,” therefore, should not be interpreted as encompassing law firms (or financial advisers or other professionals) that are not acting pursuant to powers of attorney. Instead, the term only encompasses situations where a single person has representative authority, rather than a “committee” of persons. A specific example of this, which Rule 2019 identifies by name, is an indenture trustee, but other examples would include a bank agent with contractual authority to bind the loan participants, an asbestos lawyer with powers of attorney, and an industry organization with authority to bind trade creditors or employees or retirees. This interpretation is reinforced by Rule 2019 itself. For example, part (a)(3) of Rule 2019 focuses on “the employment of the entity or indenture trustee.” This equates “entities” with “indenture trustees.” Also, part (a)(4) of Rule 2019 contemplates disclosure of “the amounts of claims or interests owned by the entity,” which would be meaningless if “entity” meant “law firm” but is meaningful if “entity” is intended as a “single representative” version of a “committee.” Further, the sentence following part (a)(4) of Rule 2019 contemplates disclosure of “the instrument, if any, whereby the entity, committee or indenture trustee is empowered to act on behalf of creditors.” This hearkens directly back to the “deposit agreements” that were the target of the original SEC Report and refers literally to the document that gives the entity, committee, or indenture trustee the legal power to act on behalf of the creditors that it purports to have authority to bind. 42 An engagement letter for a law firm does not do this, only a power of attorney does. Finally, there is a fundamental misconception about the role of law firms for ad hoc committees. The law firm does not typically represent the individual members of the group—it only represents the consensus interests of the group as a whole. Appearances and pleadings are filed in the name of the group, not its individual members. Positions are advocated on behalf of the group only, such that individual group members are always free to file separate pleadings advocating different positions. From the law firm’s perspective, it is also critical that its client is the group as a whole and not its individual members. Otherwise, counsel could have a duty to advise the group members individually, even where their interests diverge, which could result in a clear conflict of interest. Also, the group could be considered to have dissolved each time a member left the group, which makes no sense, and there may also be attorney-client privilege implications. Thus, applying the words
Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019 993 of Rule 2019, even if counsel can be an “entity,” group counsel does not represent “more than one creditor,” it only represents a single entity—the group itself, just as counsel to an official committee represents the committee as a whole but not its constituent members. One final point is worth noting. If counsel to an ad hoc group is deemed a reporting “entity” under Rule 2019, the same must also be true for counsel to an official committee. Rule 2019 only excepts from its application the official committee itself. There is no language that similarly excepts the “entity” that represents the official committee. The reason for this, of course, is that “entity” is used to refer to agents or representatives with the duty and binding authority to make decisions on behalf of others, not to law firms who have a duty and are bound to act only in accordance with the decisions of others (their clients). SO WHAT IS ALL THE FUSS ABOUT So there is a split of authority regarding Rule 2019’s applicability to ad hoc investor groups, but what is all the fuss about From the debtor’s perspective, this is a way to muffle the voice of one of their largest creditor constituencies because the debtor does not agree with the typically more aggressive perspective of secondary market investors and knows that compelled disclosure of trading histories will cause many investors to shy away from group participation. From the investors’ perspective, this is a crucial issue relating to their ability to protect their interests on a coordinated and cost-effective basis while maintaining the confidentiality of their sensitive and proprietary business information and strategy. A rule (like Northwest Airlines) that would require investors to publicly disclose the amount of their current investments and their prior and prospective trading histories (acquisitions and dispositions) in such investments would undermine their ability to compete in a market where no other investor is required to disclose such information. Notably, the federal securities laws that Congress has enacted to regulate the markets for public securities do not impose any similar obligation on individual investors or groups except for some limited reporting obligations for regulated investors related to shareholdings that exceed a certain percentage of the debtor’s outstanding equity. In addition, investors are understandably concerned about any procedural rule that debtors can try to use as a weapon to seek leverage in a bankruptcy case, and they have good reason for concern. Scopac wasted no time in invoking the Northwest Airlines decision against its investors. It did this despite the fact that the noteholder group held in excess of 95% of the timber notes and had been formed at Scopac’s request. Scotia Development will not be a unique case. Indeed, one
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Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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