Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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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.
Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019 991 This is not simply a question of stubbornness. Investors who purchase debt on the secondary market have proprietary and highly confidential methodologies for determining which securities they will buy and the timing and price for the purchase of such securities. Bankruptcy Code § 107(b) should be interpreted as protecting against disclosure of such information, consistent with the protections of the First Amendment. 36 While speech can be compelled under certain circumstances, it should not be compelled where the rule advances no legitimate or rational governmental purpose and where no other creditor and not even the official creditors’ committee is required to make such disclosure publicly. In addition, the debtors in both Scotia Development and Northwest Airlines appear to have invoked Rule 2019 as a sword to attack ad hoc investor groups that did not defer to the debtors’ reorganization strategies. This attack took the form of seeking to judicially extract extensive public disclosure of confidential proprietary information that was not requested by any actual investor nor was it requested from any other stakeholder or any official committee. Such a discriminatory use of Rule 2019 for no legitimate purpose implicates the basic tenet of equal treatment that underlies bankruptcy law and the U.S. Constitution. 37 For all of the same reasons, courts also have the power to exercise their discretion under Rule 2019’s express language (which is permissive) and Bankruptcy Code § 105(a) 38 to limit enforcement of Rule 2019 to the information that has historically been provided as a generally accepted practice over the last 70 years. 39 This was the alternative holding in the Scotia Development case. RULE 2019 DOES NOT APPLY TO AD HOC COMMITTEE COUNSEL EITHER The above discussion focuses on the term “committee” in Rule 2019, but Rule 2019 also applies to an “entity...representing more than one creditor.” The term “entity” has traditionally been interpreted as applying to a law firm representing multiple creditors, but this is also incorrect except under very narrow circumstances. 40 As the legislative history discussed above makes clear, Rule 2019 is aimed at persons having the delegated authority to act on behalf of a larger group. Lawyers are attorneys-at-law, not attorneys-in-fact. They advocate their clients’ positions but they do not make their clients’ decisions unless they have an express power of attorney to do so. 41 In the asbestos cases, various law firms purported to have powers of attorney to act on behalf of thousands of asbestos claimants, and therefore it was appropriate to require the law firms to comply with Rule 2019 because
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Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019

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