Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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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).
Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019 1001 10. SEC Report at 586 (emphasis added). 11. SEC Report at 897 (emphasis added). 12. Further evidence of the “representative” concern regarding “protective committees” can also be found in the Trust Indenture Act of 1939 (the TIA). The TIA, like Rule 2019, resulted from action to implement the SEC Report’s recommendations to curtail abusive behavior by protective committees. The TIA prohibits any provision in an indenture from impairing any individual bondholder’s right to payment of principal and interest. See 15 U.S.C.A. § 77ppp(b). This provision was specifically enacted to curtail so-called “majority action clauses” in indentures that were used by “protective committees” to negotiate out-of-court restructurings that were binding upon all bondholders. See In re Board of Directors of Multicanal S.A., 307 B.R. 384, 388-89 (Bankr. S.D. N.Y. 2004). 13. See Chapter X, § 210 & Chapter X, Rule 10-211: Every person or committee representing more than one creditor or stockholder, and every indenture trustee, shall file a signed statement with the court setting forth (1) the names and addresses of such creditors or stockholder; (2) the nature and amounts of their claims or stock and the time of acquisition thereof unless they are alleged to have been acquired more than one year prior to the filing of the petition; (3) a recital of the pertinent fact and circumstances in connection with the employment of such person or indenture trustee, and, in the case of a committee, the name or names of the person or persons at those instance, directly or indirectly, such employment was arranged or the committee was organized or agreed to act; and (4) with reference to the time of the employment of such person, or the organization or formation of such committee, or the appearance in the case of any indenture trustee, a showing of the amounts of claims or stock owned by such person, the members of such committee or such indenture trustee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof. 14. Fed. R. Bankr. P. 2019(a). 15. 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); In re Owens Corning, Case No. 00-3837 (Bankr. D. Del. Oct. 22, 2004) and cases cited in note 26, infra. 16. David A. Rosenzweig, Will Disclosures Mandated in Northwest Airlines Fly with Hedge Funds, J. Corp. Renewal, June 2007. 17. Fred S. Hodara, But What Did You Pay for It The Story of the Ad Hoc Committee, Rule 2019, and the Northwest Discovery Dispute That Went Awry, Akin Gump Strauss Hauer & Feld LLP Bankruptcy Update, April 2007 at 1, 3. 18. Scotia Pacific Company LLC’s Motion for an Order Compelling the Ad Hoc Committee To Fully Comply with Bankruptcy Rule 2019(a) by Filing a Complete and Proper Verified Statement Disclosing Its Membership and Their Interests, at 2; In re Scotia Development LLC, Case No. 07-20027 (Bankr. S.D. Tex. Mar. 16, 2007). 19. Scotia Pacific Company LLC’s Motion for an Order Compelling the Ad Hoc Committee To Fully Comply with Bankruptcy Rule 2019(a) by Filing a Complete and Proper Verified Statement Disclosing Its Membership and Their Interests, at 11. 20. See Courtroom Minutes & Transcript of Record, In re Scotia Development LLC, Case No. 07-20027 (Bankr. S.D. Tex. Apr. 17, 2007); see also Order (Apr. 18, 2007). 21. See Courtroom Minutes & Transcript of Record, In re Scotia Development LLC, Case No. 07-20027 (Bankr. S.D. Tex. May 22, 2007); see also Order (May 29, 2007). 22. The legal definition of “committee” is: “A group of people appointed or elected to consider, determine, or manage a matter” (Black’s Law Dictionary (7th ed. 1999)). While ad hoc groups certainly constitute “a group,” its members are not “appointed or elected” by anyone “to consider, determine, or manage” anything. The nonlegal definition of “committee” is: “A group of people officially delegated to perform a function, such as investigating, considering,
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