Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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without its consent. 45 The only exception to this is the right of statutory
majorities to bind dissenting creditors under a Chapter 11 plan of reorganization,
but it is the vote of the creditors and the approval of the court
that counts, not the position advocated by any ad hoc creditor group.
To imply otherwise, as the Northwest Airlines decision did, creates
a slippery slope that could lead to assertions that ad hoc groups act as
fiduciaries or are otherwise accountable to other investors beyond the
traditional rules of securities regulation and common law fraud. Indeed
some have interpreted Northwest Airlines as meaning that “if committee
members want the benefit of collective participation, they must accept a
fiduciary obligation to the class and disclosure rules must be complied
with.” 46 The compelling response to this is that committee members do
not want the benefit of collective participation beyond the ability of any
other creditor or group of creditors to represent its own interests and to
vote its own claims.
What ad hoc committee members do want, and what they have a right
to expect, is that, if they are among the largest creditors in a particular
class of claims and they hold a blocking position or consent vote, the
debtor should consider their input before proposing a plan that affects
their claims. Far from being pernicious, this is precisely what bankruptcy
should be about—a negotiated approach to reorganization that is ultimately
put to the vote of all creditors for final approval or disapproval.
Moreover, if this is the rationale for applying Rule 2019 and for
seeking to impose fiduciary duties, it necessarily follows that a single
creditor who holds a blocking or consent position must also have fiduciary
duties to others in the same class. The analysis should be the same
whether it is one large creditor or a group of creditors that is collectively
large, yet the absurdity of asserting that an individual creditor has a
fiduciary duty to anyone but itself underscores the fundamental flaw of
seeking to impose a fiduciary duty on a group of creditors acting solely
in their own interests.
Finally, if Rule 2019 is designed to protect other investors, then (from
an Article III “case or controversy” perspective) it is only those “other
investors,” not the debtors, who should have the right to seek to enforce
Rule 2019. 47 Yet it was only the debtors in Northwest Airlines and Scotia
Development that sought to invoke the rule, suggesting that their
intentions were a far cry from “protecting investors.”
Reason # 3: Rule 2019 holds hedge funds to the same rules as other
bankruptcy participants
This is also just plain wrong. No other creditor or shareholder in a
bankruptcy proceeding is required to make the kind of detailed disclo-