Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

1000 Norton Journal of Bankruptcy Law and Practice [Vol. 16]
within the group; they are motivated by their own selfish considerations
in the same sense that debtors and other creditors are motivated by their
own selfish considerations; and they are as constructive or destructive
to the process in the same sense that debtors and other creditors can be
constructive or destructive.
In truth, the battle is not really about Rule 2019 at all: the rule is simply
the latest weapon in the arsenal that debtors seek to employ against
the owners of their debt, particularly those owners who tend to be more
assertive about their economic views. However, it is surely a losing
battle. Secondary market investors, including hedge funds, are here to
stay, and their votes will often be determinative as to whether a particular
class consents to a particular plan of reorganization. So debtors can
choose to fight with hedge funds all they want, and hedge funds can
choose to fight back. In the end, however, the quickest and most effective
reorganizations are typically accomplished on a consensual basis,
and debtors should welcome the participation of a sophisticated group
of creditors that collectively has substantial voting power rather than
seeking to fight those creditors at every turn.
NOTES
1. Fed. R. Bankr. P. 2019.
2. “Hedge funds” in this context is a loosely-used term to encompass more generally the
universe of “distressed investors” that includes actual hedge funds, investment bank proprietary
desks, alternative investment managers, and other funding sources that purchase stressed or
distressed debt or equity on the secondary markets.
3. In re Northwest Airlines Corp., 363 B.R. 701, 47 Bankr. Ct. Dec. (CRR) 248 (Bankr.
S.D. N.Y. 2007).
4. Paul D. Leake & Mark G. Douglas, Ad Hoc Committee Disclosure Requirements–A
Bitter Pill to Swallow for Distressed Investors, Jones Day Bus. Restr. Rev. May/June 2007, at
4, 4; see also Mark Berman & Jo Ann J. Brighton, Will the Sunlight of Disclosure Chill Hedge
Funds, Am. Bankr. Inst. J., May 2007, at 24.
5. In re Scotia Development LLC, Case No. 07-20027 (Bankr. S.D. Tex. Apr. 18, 2007)
(order denying motion to compel), recons. denied (May 29, 2007) (order denying motion for
reconsideration). How and why a California company owning Northern Californian timberlands
ended up choosing Corpus Christi, Texas for its bankruptcy filing is an interesting story in and
of itself, but one for another day.
6. The rule also applies to “indenture trustees.”
7. See, e.g., Baron & Budd, P.C. v. Unsecured Asbestos Claimants Committee, 321
B.R. 147, 53 Collier Bankr. Cas. 2d (MB) 1159, 61 Fed. R. Serv. 3d 42 (D.N.J. 2005) (law
firms representing multiple asbestos claimants required to disclose co-counsel and fee-sharing
relationships and arrangements); In re Owens Corning, Case No. 00-3837 (Bankr. D. Del. Oct.
22, 2004) (revised order requiring filing of Rule 2019 statements; permitted all information
other than identity of group members to be filed confidentially).
8. See Report on the Study and Investigation of the Work, Activities, Personnel and
Functions of Protective and Reorganization Committees (1937).
9. See Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States,
3 Am. Bankr. Inst. L. Rev. 5, 30 (1995).