Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019 989
The concept of acting in a “representative capacity” on behalf of others
is at the heart of Rule 2019. 23 Indeed, it is explicitly stated in the
most important part of Rule 2019(a), its first clause, which defines the
parties who are subject to the substantive disclosure obligations set forth
in clauses (1) through (4) that follow. That introductory clause states
that it applies to every “committee representing more than one creditor”
except for official statutory committees. This is further supported by the
fact that the word “represent” and variations thereof is used in many
places in the Bankruptcy Code, and in each place it is clear that the term
is used consistent with someone who represents someone else. 24 Similar
to the definition of “committee,” the legal and general dictionary definitions
of “represent” contemplate a delegation of authority and acting
in the capacity as an “agent” for another. 25 This is consistent with the
limited jurisprudence regarding Rule 2019. 26 Ad hoc groups of investors
do not act for anyone other than the group’s members and clearly
do not serve as “agents” or “fiduciaries” to any party, even if they do
casually refer to themselves as a “committee.” Thus, as the Supreme
Court has instructed, the plain meaning of the rule must control, and it
simply does not apply to ad hoc groups. 27
Even if the term “committee” were ambiguous, Rule 2019’s legislative
history leaves no doubt that it was promulgated to protect small
investors from “protective committees” that acted in a “representative
and fiduciary” capacity during the Great Depression. Moreover, Bankruptcy
Rule 1001 mandates that the Bankruptcy Rules “shall be construed
to secure the just, speedy, and inexpensive determination of every
case and proceeding.” 28 An overly broad interpretation of the term
“committee,” such as that adopted in Northwest Airlines, would neither
be “just” nor would it promote speed and efficiency. As discussed
below, a broad interpretation would inappropriately empower debtors
to wield Rule 2019 as a weapon to discriminate against stakeholders
with whom they disagree. Moreover, litigation regarding Rule 2019 and
likely creditor responses (such as ceasing collective action and instead
operating separately through individual counsel in bankruptcy cases)
would unnecessarily increase the cost of bankruptcy to creditors and
result in numerous duplicative filings on even the simplest of issues. 29
As noted by the Seventh Circuit Court of Appeals in another context,
“Coordination is especially common in bankruptcy, which often is described
as a collective proceeding among lenders.” 30
In addition, even if the term “committee” were deemed to apply to
ad hoc groups, the rule should not be applied to such groups in the manner
requested by the debtors in Northwest Airlines and Scotia Development.
In both cases, the debtors requested that the bankruptcy court