Over the last several weeks, Judge Allan L. Gropper of the United States Bankruptcy Court for the Southern District of New York has issued two rulings in the Northwest Airlines case that threaten to alter significantly the consequences to distressed investors of serving on ad hoc committees in bankruptcy cases. On February 26, 2007, Judge Gropper ordered an ad hoc committee of equity security holders of Northwest Airlines (the “Ad Hoc Committee”) to modify their previously filed Bankruptcy Rule 2019 statement to disclose, among other things, each member’s holdings of claims and equity interests, as well as the dates on which such claims or interests were purchased and the purchase prices paid. Thereafter, on March 9, 2007, Judge Gropper denied the Ad Hoc Committee’s motion to file the modified Bankruptcy Rule 2019 statement under seal, finding such relief inconsistent with the terms of the Bankruptcy Code. By requiring public disclosure of sensitive information such as the dates and prices at which ad hoc committee members acquired their holdings, Judge Gropper’s decisions undercut what had been the prevailing practice of disclosing only the aggregate holdings of committee members in Rule 2019 statements. If the decision is not reconsidered or reversed, distressed investors serving on ad hoc committees or considering doing so can expect to see similar motions filed and will be forced to weigh the benefits of committee participation against the potential that they will be required to disclose sensitive information concerning their positions.
The Ad Hoc Committee first appeared in the Northwest Airlines case in early January of this year. Consistent with prevailing practice, it filed a Bankruptcy Rule 2019 statement indicating the collective debt and equity holdings of the members of the Ad Hoc Committee, as well as stating that certain claims and equity interests had been acquired after Northwest filed under chapter 11. The Ad Hoc Committee did not disclose the dates when each member acquired claims or equity interests or the prices they paid.
After its appearance, the Ad Hoc Committee participated actively in the case, moving for the appointment of an official shareholders’ committee and the appointment of an examiner and pursuing discovery in connection with each. In early February 2007, the debtor filed a motion seeking an order to compel the Ad Hoc Committee to file an amended 2019 statement containing the dates each member acquired shares of common stock and/or claims, the amounts paid and any sales or other disposition thereof. The motion was based on language in the text of Rule 2019 that required the disclosure of
(1) the name and address of the claim or equity security holder; (2) the nature and amount of the claim or interest and the time of acquisition thereof . . . and (4) with reference to the time of . . . the organization and formation of the committee . . . the amounts of the claims or interests owned by . . . the members of the committee . . . the times when acquired, the amounts paid therefore, and any sales or other dispositions thereof.
On February 26, 2007, Judge Gropper granted the debtor’s motion, holding the Ad Hoc Committee’s Rule 2019 statement to be insufficient on its face. The Judge first found that the Ad Hoc Committee was a “committee” for purposes of Rule 2019(a)(4) since it had appeared and litigated issues in the case as a committee, retained and proposed to pay counsel collectively and gave instructions to its counsel as a committee. Based on this finding, the Court then directed the Ad Hoc Committee to file an amended Rule 2019 Statement that disclosed “the amounts of claims or interests owned by the members of the committee, the times when acquired, the amounts paid therefore, and any sales or other disposition thereof.”
Following the Court’s February 26th ruling, the Ad Hoc Committee asked Judge Gropper to allow it to file the modified Rule 2019 statement under seal pursuant to Bankruptcy Code Section 107(b). The Ad Hoc Committee argued that filing under seal was required to avoid the “truly irreparable harm” the members of the Ad Hoc Committee would face if forced to reveal the confidential commercial information required by Judge Gropper’s decision.
On March 9, 2007, Judge Gropper denied the Ad Hoc Committee’s motion to seal, holding that it was his “duty . . . to enforce Bankruptcy Rule 2019 in a manner consistent with protecting the legitimate rights of the parties and the public interest, keeping in mind that §107(b) provides a broader mandate in favor of sealing documents than applies in non-bankruptcy cases.” In so ruling, the Judge found the Ad Hoc Committee’s argument that sealing was required to protect individual committee members’ “investment strategies” unsupported by the record. Protecting the pricing information of individual committee members, he held, was not relevant to their function as committee members, reasoning that “their negotiating decisions as a Committee should be based on the interests of the entire shareholders’ group, not their individual financial advantage.”
Whatever interest individual committee members had in keeping pricing information confidential, moreover, was overridden by the policies underlying Bankruptcy Rule 2019. That rule, the Judge held, required disclosure to allow claim or interest holders to make an informed decision as to whether an ad hoc committee would adequately represent their interests or whether they should consider forming a separate committee. Judge Gropper further emphasized that the members of the Ad Hoc Committee held significant amounts of debt. Other shareholders had a right to know whether these holdings gave them divided loyalties. In short, “Rule 2019 gives other members of the class the right to know where their champions are coming from. Granting the motion to seal would scuttle the Rule.”
Motions to reconsider Judge Gropper’s rulings are pending and the Ad Hoc Committee has indicated that it will appeal those rulings if not reconsidered. In the interim, the opportunity is there for debtors to insist on strict compliance of Rule 2019 as a means to gather information regarding an investor’s basis in claims for use at a later negotiation regarding recoveries or simply to discourage investor activism. Members of the distressed investing community should be aware that some debtors may attempt to use Judge Gropper’s decisions to exert leverage on ad hoc committees and other groups of creditors working together.