Hedge funds and other investors in debt or equity securities often form unofficial “ad hoc” committees through which they actively participate in chapter 11 cases. Recent decisions affirm that such ad hoc committees must comply with the disclosure requirements of Bankruptcy Rule 2019 – including the nature and amounts of claims or interests held by members and other details. What about a “group” that says it’s a lot less than an ad hoc committee and therefore, outside the Rule? In a recent decision, Judge Mary Walrath of the Delaware Bankruptcy Court ruled that the members of a noteholder “group” must comply with Rule 2019 and file a verified statement setting forth, among other information, (1) the names and addresses of the members of the group; and (2) the nature and amount of the claims or interests held, the time of their acquisition, the amounts paid for them, and any sales or other disposition of the claims or interests.1
In Washington Mutual Inc., J.P. Morgan Chase Bank moved to compel a group of creditors calling themselves the “Washington Mutual, Inc. Noteholders Group” (the “WMI Noteholders Group”) to comply with Bankruptcy Rule 2019 and provide trading and other information required by that Rule. The WMI Noteholders Group argued that Rule 2019 didn’t apply to it because the Group was not an “entity or committee representing more than one creditor,” to which the Rule speaks, but rather, “a loose affiliation of creditors who, in the interests of efficiency are sharing the cost of advisory services in connection with the case.2”
The Bankruptcy Court rejected the WMI Noteholders Group’s position. It considered the similarities between the WMI Noteholders Group and an ad hoc committee and held that the WMI Noteholders Group possessed virtually all of the characteristics found in an ad hoc committee, as (1) it consisted of multiple creditors holding similar claims; (2) the members of the Group filed pleadings and appeared in the case collectively; and (3) the Group retained counsel, which took instructions from the Group as a whole, and which relied on the collective $1.1 billion in holdings of the members of the Group to argue in favor of their combined position.3 The Bankruptcy Court held that under the plain language of Rule 2019, although the members of the WMI Noteholders Group called themselves a Group, they acted as an ad hoc committee or entity representing more than one entity, and therefore they had to comply with Rule 2019.
Judge Walrath found support for her conclusion in In re Northwest Airlines Corp.,4 where Bankruptcy Judge Allan L. Gropper of the Southern District of New York held that an ad hoc committee of equity security holders must comply with the disclosure requirements of Rule 2019. By her ruling, Judge Walrath declined to follow the two-page order issued by Judge Richard S. Schmidt of the Bankruptcy Court for the Southern District of Texas, which held that a noteholder group is not a “committee” within the meaning of Rule 2019 and as such, the disclosure requirements of the Rule did not apply.5
But the Delaware Bankruptcy Court did not stop there. In response to the Group’s argument that Rule 2019 didn’t apply because the Rule applies only to a body that speaks on behalf of an entire class in a fiduciary capacity, the Bankruptcy Court labeled as “erroneous” the Group’s assumption that it owed no fiduciary duties to other similarly-situated creditors, either in or outside the Group. However, it deferred the determination of the extent of such fiduciary duties to a later day.
Following Judge Walrath’s decision, ad hoc committees and other groups of creditors acting collectively should expect to comply fully with Rule 2019’s disclosure requirements, including the requirement to disclose trading information, both in the Sothern District of New York and in Delaware. Moreover, after Washington Mutual, such committees and groups may well find themselves with fiduciary duties to other members of their class, whether or not those members joined the group.