Vol 7 (2010) - Issue 3

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The Price of Admission to an Ad Hoc Creditor Group in US Bankruptcy Court: Full Disclosure?

I. Introduction
A company files for bankruptcy in the United States. You have invested in the company's debt. To save costs, you join forces with a number of other similarly situated investors, i.e., form an ad hoc group, and that group retains its own counsel. Do you and all the other members of the ad hoc group now have to file in the public record key sensitive information about your claim, such as what you paid for your investment and when? Do you now owe a fiduciary duty to similarly situated creditors who are not on your ad hoc committee? Have you inadvertently opened a proverbial Pandora’s Box of unforeseen problems?
The murky answer to these questions is that for now it depends on which judge you ask. Some bankruptcy judges, applying the disclosure requirements of Bankruptcy Rule 2019, have answered in the affirmative. Others, applying the same Rule, have reached the opposite conclusion: no disclosure is required and no attendant fiduciary duty exists.

This article discusses recent conflicting decisions on this issue, sometimes from different judges in the same court; what this means for ad hoc groups; and the proposed amendments to Rule 2019 that, if they become law, will expressly require more disclosure.

II. From Northwest Airlines to Philadelphia
Newspapers A guiding principle in US bankruptcy law is that the proceedings be open and transparent. There are many Bankruptcy Code provisions and Bankruptcy Rules that are designed to achieve that goal. One of them is Rule 2019. That Rule, as currently written, requires every entity, committee or indenture trustee representing more than one creditor to file a verified statement setting forth the creditors’ names and nature, amount of, and time of acquisition of each creditor's interest.
If you fail to comply with the Rule, the consequences, while discretionary, can be serious indeed. Specifically, the court may refuse to permit you to be heard or to intervene in the case at all.
In the past, the Rule was more honoured in the breach than in its observance by ad hoc or informal committees. And that did not seem to trouble debtors or, for that matter, the courts, unduly. That changed, however, in recent years as distressed investors and hedge funds began to play an increasingly prominent role in bankruptcy cases. Debtors perceived that the hedge funds took a short-term view, were looking for quick profits, and advanced positions in bankruptcy court, often adverse to the debtors, to realise those profits, using the leverage that came with an ad hoc group. Understanding that hedge funds jealously guard their trading information and would be reluctant to reveal it, debtors started to use Rule 2019 as a litigation tool to force disclosure and perhaps discourage the formation of ad hoc groups. This, in turn, spawned a series of bankruptcy court decisions that address whether ad hoc groups do or do not have to disclose 2019 information, often with surprisingly conflicting results. We turn to those decisions now.