Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

990 Norton Journal of Bankruptcy Law and Practice [Vol. 16]
preclude the respective ad hoc groups from any further participation in
their Chapter 11 cases unless the groups’ members provided the Rule
2019 disclosure demanded by the debtors. As discussed below, such an
application of the rule would improperly allow a mere procedural rule
to abridge the numerous substantive rights of the investors in violation
of Congress’s directive that the Bankruptcy Rules “shall not abridge,
enlarge, or modify any substantive right.” 31
What makes this judicial intrusion upon investor rights particularly
unreasonable (and potentially unconstitutional) is the fact that neither
the integrity of the bankruptcy process nor the debtors could have any
legitimate use for the information that they now seek under Rule 2019.
It is well-settled that similarly situated creditors cannot be treated differently
based upon the price that they paid for their claims. 32 Perhaps
a reason for disclosing trading history would be if the ad hoc group had
actual authority to bind other creditors in the same class as the group’s
members, or otherwise had fiduciary duties to them, in which event it
might be reasonable that those other creditors should be entitled to seek
disclosure of the information to ensure that they were being fairly represented.
Even then, however, official committees make no such public
disclosure even though they clearly owe fiduciary duties to the class of
creditors or equity interest holders they represent. In any event, as noted
above, ad hoc groups never (in the authors’ experience) have actual
authority to bind anyone and have not been held to have fiduciary duties
to anyone, so there is no legitimate reason to compel them to make
greater disclosure than other creditors and even the official creditors’
committee in the case.
As discussed below, the other reasons advanced for applying Rule
2019 to ad hoc groups similarly ring hollow.
Without a reasonable or “rational basis” for applying the rule, it
cannot pass muster under 28 U.S.C.A. § 2075 and implicates constitutional
rights. To begin with, a remedy that would preclude the group’s
members from protecting their interests in the case would violate their
participation rights under Bankruptcy Code § 1109(b) 33 and could affect
the members’ “due process” rights under the Fifth Amendment to
the U.S. Constitution. 34 Moreover, in the Scotia Development case, the
noteholders held secured claims that are property interests further protected
against a judicial taking by the Fifth Amendment. 35 Regardless
of whether Rule 2019 could be applied to result in an actual violation of
either prong on the Fifth Amendment, the point is that due process and
property rights are fundamental to our society, and creditors should not
casually be denied equal access to the court to “enforce” a procedural
rule to require disclosure of legally irrelevant information.