Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

984 Norton Journal of Bankruptcy Law and Practice [Vol. 16]
THE RULE 2019 DEBATE IN A NUTSHELL
The heart of the Rule 2019 disclosure debate involves the interpretation
of the terms “committee” and “entity” as used in the rule. Rule 2019
only applies to parties that qualify as a “committee” or an “entity” representing
more than one creditor or equity security holder. 6 Although Rule
2019 and its predecessors have been around for almost 70 years, there
has been very little discussion concerning the specific applicability of
the rule. Instead, the customary and accepted practice has been for counsel
to ad hoc committees to file a disclosure identifying the members of
the committee and their aggregate (but not individual) holdings. There
have also been instances in mass tort cases where law firms have been
required to file detailed 2019 statements, but it has been in the context
of lawyers asserting that they represent hundreds or thousands of claimants,
prompting courts to seek back-up details to verify the assertions. 7
Recently, however, some have adopted a broader interpretation (e.g.,
Northwest Airlines, which many debtors now champion) to apply Rule
2019 to virtually any group that acts in a coordinated manner through
common counsel in a bankruptcy case. According to this interpretation,
all informal or ad hoc committees/groups must file extensive public
disclosures regarding the nature of their claims and a full trading history
of the timing and price of all acquisitions and dispositions of each
member’s claims/interests relating to the debtor.
RULE 2019’S ORIGINS
To appreciate fully the significance of the recent Rule 2019 controversy,
one must begin with the rule’s history.
Rule 2019 is the current version of a procedural rule that was first
promulgated approximately 70 years ago in response to abuses by socalled
“protective committees” in restructurings during the Great Depression
era. These abuses were chronicled in a series of reports submitted
by the Securities and Exchange Commission to the U.S. Congress
(the SEC Report). 8
“Protective committees” were nonstatutory committees organized by
insider groups dominated by the debtor and/or its investment bank and
institutional investors. The committees would solicit smaller investors
to enter into a “deposit agreement” (or other similar instruments, which
were rarely arms-length) pursuant to which the smaller investors would
deposit their securities, and then the “committee” would negotiate with
the debtor with little, if any, participation by the smaller holders that the
committee represented. 9 In smaller situations, the “protective committee”
could even be a single entity with deposited securities.