Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

998 Norton Journal of Bankruptcy Law and Practice [Vol. 16]
lamation rights, creditors’ committees who seek to subordinate secured
claims, and debtors who engage in scorched-earth litigation tactics. It is
all part of the Chapter 11 dynamic.
A variation on this theme is the argument that hedge funds are “different”
because they can sometimes participate in more than one level
of the debtor’s capital structure, and therefore their motivations are “different.”
This may be true, but so what Commercial banks can be both
lenders and shareholders; insurance companies can be both bondholders
and insurers; trade creditors can be secured, unsecured, and priority;
and individuals can be creditors, employees, and shareholders all at the
same time. All this does is reinforce the point that every creditor has its
own motivations, regardless of whether disclosed, and every creditor is
entitled to act in its own interests. Whether that creditor acts on its own
or as part of a group acting in the interests of its own members, there
cannot be anything wrong with this unless the creditor publicly purports
to act on behalf of other creditors or to have a duty to them, as is the
case with official creditors’ committee members. Even with creditors’
committees, only the U.S. Trustee is privy to any multiple positions that
a creditor may hold at the time that it seeks appointment, as there is no
requirement for public disclosure of this information even for this type
of clear fiduciary.
This theory also posits that there is a danger that a hedge fund might
take action to maximize recovery on a particular investment that might
reduce its recovery on another investment and thereby somehow prejudice
other investors in the latter investment. Again, this theory is based
upon the false premise that investors somehow owe a duty to other investors
when they act as an ad hoc group. There is no such duty. Outside
of bankruptcy, ad hoc groups can exist and the members of the group can
own different investments in the same debtor’s capital structure without
having to disclose any such investment other than to the limited extent
required by state and federal securities laws. Bankruptcy should be no
different. There is nothing illegal or unethical about having a diverse
investment portfolio. And there is nothing illegal or unethical in voting
one’s bankruptcy claims in furtherance of one’s own economic interest.
Reason # 5: Rule 2019 protects against misuse of confidential
information
Rule 2019, a mere procedural rule, has nothing to do with the use of
confidential information. Contract law, common law fraud, and, where
applicable, the state and federal securities laws regulate the misuse of
material, nonpublic information by investors. In bankruptcy, improper
use of confidential information may also raise vote designation and/or