AMERICAN BANKRUPTCY INSTITUTE OURNAL J Issues and Information for Today’s Busy Insolvency Professional Show and Tell: Ad Hoc Committees’ Rule 2019 Disclosures under Examination Written by: Business Bankruptcy Committee and 1 About the Author Ilan D. Scharf the National Bankruptcy Conference Pachulski Stang Ziehl & Jones LLP; New York Ilan Scharf is an associate in the New submitted position papers in response in [email protected] York office of Pachulski Stang Ziehl & December 2008, arguing that Rule 2019 should be maintained, although both nofficial (or ad hoc) committees, Jones LLP. recommended that it be amended.5 The including committees of fight over the scope of Rule 2019 and secured (or undersecured) share with the public the information its very existence promises to be a hard- Ulenders, equity-holders, noteholders required by Rule 2019 because, among fought battle in the coming years. and trade creditors, have long been other things, (1) they may be actively This article will examine (1) the a feature of chapter 11 cases. Such trading in the market, (2) disclosure role and responsibilities of ad hoc committees are typically comprised may weaken their bargaining power committees in contrast to the role and of claimants or interest-holders that and (3) disclosure may illuminate responsibilities of official committees, are similarly situated but believe they actual or perceived conflicts where (2) the purpose behind the enactment are not adequately represented on members hold different types of of Rule 2019, (3) recent decisions that an official creditors’ committee or claims against or interests in a debtor. have refocused scrutiny on the rule hold unique claims against a debtor. Efforts to enforce Rule 2019’s and (4) the arguments against repeal or Pursuant to Rule 2019 of the Federal disclosure requirements have been limitation of the scope of disclosures Rules of Bankruptcy Procedure, met with fierce opposition in court, the rule requires. unofficial committees in chapter 9 2 and more recently, there have been and chapter 11 cases are required efforts to repeal the rule altogether. Differing Roles and to disclose information about their The efforts to resist the effects Responsibilities of Ad Hoc claims or interests including, among of Rule 2019 moved beyond a case- other things, (1) the nature and amount and Vis-a-Vis Committees by-case defense in November 2007 of their claims or interests, (2) the An official committee of and became a concerted effort by date of acquisition of their claims or unsecured creditors is generally its opponents to repeal it altogether. interests acquired in the year before appointed by the U.S. Trustee in a The Loan Syndications and Trading filing of the bankruptcy cases, (3) the chapter 11 case and is comprised amount paid and (4) any subsequent sales of claims or interests.3 Historically, such disclosures Feature were not rigorously enforced. In many cases, if any disclosure was made by Association (LSTA) and Securities an ad hoc committee, it would include of holders of different types of Industry and Financial Markets only the names of the members of unsecured claims. As such, claimants Association (SIFMA) submitted a joint the committee and the amount of with competing goals and objectives letter to the Committee on Rules of their claim. However, in recent will often sit on the same official Practice and Procedure of the Judicial 6 cases debtors and others have sought committee. This is beneficial to Conference of the United States to compel strict compliance with the chapter 11 process because it 4 suggesting the repeal of Rule 2019. Rule 2019’s required disclosures. encourages resolution of intercreditor The American Bar Association’s Entities that buy and trade securities— 5 See National Bankruptcy Conference’s Letter to the Advisory especially when purchased at a 4 These decisions have been the subject of prior articles in this publication Committee on Bankruptcy Rules on Sept. 22, 2008, available at www. (see n. 24, infra) and law reviews. See e.g., Sparkle L. Alexander, nationalbankruptcyconference.org/other_communications.cfm (last visited discount—are generally reluctant to Note, The Rule 2019 Battle—When Hedge Funds Collide with the on Dec. 24, 2008). The Report of the Business Bankruptcy Committee 1 The author thanks Samuel R. Maizel for his valuable insights and Bankruptcy Code, 73 Brook. L. Rev. 1411 (2008); James M. Shea Jr., Special Task Force on Bankruptcy Rule 2019, dated Dec. 12, 2008 (ABA commentary on drafts of this article. Any opinions in this article reflect the Who is at the Table? Interpreting Disclosure Requirements for Ad Report), is available from the author. personal views of the author and should not be construed as the views of Hoc Groups of Institutional Investors Under Federal Rule of Bankruptcy 6 See, e.g., Mirant Americas Energy Marketing LP v. Official Comm. Pachulski Stang Ziehl & Jones LLP or any of its clients. Procedure 2019, 76 Fordham L. Rev. 2561 (2008); Kevin J. Coco, of Unsecured Creditors of Enron Corp. (In re Enron Corp.), 2003 WL 2 Rule 2019 does not require similar disclosures of official committees. Empty Manipulation: Bankruptcy Procedure Rule 2019 and Ownership 22327118*7 (S.D.N.Y. Oct. 10, 2003) (“Often single committees represent 3 Fed. R. Bankr. P. 2019(a)(4). Disclosure in Chapter 11 Cases, 2008 Colum. Bus. L. Rev. 610 (2008). what can be characterized as different ‘classes’ of unsecured creditors.”). 44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org disputes through compromise and in the bankruptcy estate. In addition, endeavor to effectuate settlements or negotiation rather than through committee members are often, but not plans favorable to those who bought at litigation.7 In addition, official always, entities that purchased securities depressed prices but disadvantageous committees have a fiduciary duty at a discount. As such, their interests to those who purchased at predefault to their constituencies and cannot are not necessarily aligned with other prices.”13 The report noted that other use the forum of the creditors’ creditors, such as trade creditors or par security holders may be misled committee to advance their own purchasers of securities. In fact, the by such groups’ participation in a parochial interests.8 Finally, official economic interests of par purchasers reorganization by the mistaken belief committees are selected by the U.S. and discount purchasers sitting on the “that in the hands of these self-styled Trustee—often after filling out a same committee may diverge. Finally, independents their cause will be questionnaire disclosing conflicts. participation by one or more ad hoc honestly and rigorously served.”14 As The U.S. Trustee also has protocols committees in a case may encourage such, the report recommended “that in place to monitor potential conflicts more aggressive bargaining or litigation persons who represent more than 12 when appointing committee members among creditor groups, because a stockholders...be required to file with and can reconstitute committees committee only represents one group of the court a sworn statement containing where necessary.9 claims and is not as compelled to reach the information now required by Ad hoc c o m m i t t e e s a r e negotiated settlements among creditors Rule 2019”15 in order to “provide a self-appointed—and therefore as a member of an official committee routine method of advising the court and unregulated—groups that generally holding a spectrum of claims. all interested parties in interest of the represent a single type of claim actual economic interest of all persons against a debtor even though members Rule 2019 Was Implemented participating in the proceedings.”16 This of the group may hold various types to Prevent Abuses by recommendation was embodied in what of claims. For example, an ad hoc Unofficial Committees is now Rule 2019. committee may represent the interests The Bankruptcy Code recognizes Rule 2019 Has Recently Been of senior unsecured noteholders, but the importance of ad hoc committees, some or all of the committee members and Rule 2019 provides a means the Subject of Renewed may hold secured debt, subordinated of mitigating the risks of their Enforcement Efforts notes or equity interests in the debtor. participation in the reorganization Although adherence to Rule 2019’s Typically, ad hoc committees will process. Rule 2019 is derived from disclosures by ad hoc committees appear in cases where similarly- Rule 10-211 of chapter X of the old has historically been lax, as hedge situated claimants believe that they Bankruptcy Act, which was adopted funds, private equity firms and other have unique rights that will not be largely as a result of a Securities and purchasers of distressed securities adequately advocated by an official Exchange Commission (SEC) report have increased their role in chapter committee or where parties (such as on the “Study and Investigation 11 cases—often through ad hoc secured creditors or equity-holders) of the Work, Activities, Personnel committees—and the debtors’ capital cannot sit on an official committee and Functions of Protective and structures have increased in complexity, of unsecured creditors. The benefits Reorganization Committees” (1937),10 there have been renewed efforts to of acting as an unofficial committee and “is part of the disclosure scheme of strictly enforce Rule 2019’s disclosure include (a) sharing costs of counsel the Bankruptcy Code and is designed requirements with respect to members and other professionals, (b) increased to foster the goal of reorganization and of ad hoc committees. bargaining power, (c) presenting a plans which deal fairly with creditors In recent cases, ad hoc committees united front to the debtor and other and which are arrived at openly.”11 The have argued that Rule 2019 does not stakeholders and (d) avoiding fiduciary SEC report examined perceived abuses apply to them because (a) they are obligations to other parties.