Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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996 Norton Journal of Bankruptcy Law and Practice [Vol. 16] 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-
Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019 997 sures that are now suddenly being demanded of ad hoc investor groups under Rule 2019. Indeed, even members of official committees are not expected to disclose publicly the amount of their holdings (other than to the U.S. Trustee at the time of committee formation), let alone their trading histories. While it is true that many creditors must file individual proofs of claim asserting their claim amount, they are not required to state the value of the consideration that they paid for the claim or their entire trading history in that claim and others of the same class. In the case of bond debt and syndicated loans (the most common claims represented by ad hoc groups), the proof of claim is filed by the indenture trustee or administrative agent. There is no issue regarding the consideration paid for the claim—it is the aggregate amount loaned to the debtor minus any repayments. Rule 2019 seeks to drill down beneath this layer of information—which is the only information fundamentally relevant—to require individual bondholders/participants to provide details regarding their subsidiary interests in the global loan/note, including a detailed trading history regarding all acquisitions and dispositions of such interests. No other party is required to make this kind of disclosure in bankruptcy. In other words, the Northwest Airlines interpretation of Rule 2019 does not “level the playing field” at all; it tilts it against investors who participate in ad hoc groups in an irrationally discriminatory manner. Reason # 4: Disclosure is necessary to understand hedge fund motivations Hedge funds, like all other investors, desire to maximize the return on their investment. This is no secret, and it is a bankruptcy truism that all stakeholders (whether acting individually or collectively) seek the highest possible return for themselves. For some, this return focuses purely on the maximum current economic recovery. For others, this return focuses on the maximum long-term economic recovery. For others still, the focus is on a combination of value and liquidity. Also, the foregoing do not include the other nonmonetary return considerations relevant to many trade creditors, landlords, equipment lessors and lessees, regulatory authorities, employees, etc. In sum, hedge funds are just like other participants in the process. They are individual stakeholders who have individual needs and individual motivations based on a great variety of factors that may or may not coincide with the needs and motivations of any other hedge fund or any other stakeholder. And, yes, hedge funds can sometimes be disruptive participants, but so can landlords and lessors who demand return of their property, trade creditors who seek immediate enforcement of rec-
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Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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