Members of the ad hoc shareholders’ committee in the Northwest Airlines reorganization case lost their attempt on March 9 to seal “the amounts of claims or interest [they] owned …, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof.” So held Judge Allan L. Gropper of the United States Bankruptcy Court for the Southern District of New York in In re Northwest Airlines Corp., following his earlier ordering of the disclosure of trading details. The bankruptcy court has now ordered sensitive trading information to be made part of the public record, possibly discouraging hedge funds and other institutional investors from serving on any kind of committee in a reorganization case.

The Earlier Feb. 26 Decision -- Disclosure Ordered

The ad hoc shareholders’ committee, which sought designation as an “official” committee (i.e., one whose fees and expenses would be borne by the debtors’ estate), had challenged Northwest's reorganization strategy; requested the appointment of an examiner; and actively pursued discovery from the airline. In response, Northwest relied on Bankruptcy Rule 2019 and asked the bankruptcy court to compel the committee members to disclose the extent of their holdings. Bankruptcy Rule 2019 requires every “entity or committee representing more than one creditor or equity security holder” to file a verified statement setting forth, among other things, (1) “the name and address of the creditor or equity security holder”; (2) “the nature and amount of the claim or interest and the time of acquisition thereof unless it is alleged to have been acquired more than one year prior to the filing of the petition”; and (3) “the amounts of claims or interests owned by … the members of the committee … the times when acquired, the amounts paid therefor, and any sales or other disposition thereof.” The rule, however, explicitly exempts from disclosure the members of an “official” creditors’ or shareholders’ committee (“except … a committee appointed pursuant to § 1102 or 1114 of the Code”).

The committee replied that Bankruptcy Rule 2019 does not impose a disclosure obligation on its individual members. It argued that the rule, by its terms, applies only to an “entity or committee representing more than one creditor or equity security holder.” In re Northwest Airlines Corp. No member of the committee, it reasoned, represented any party other than itself. Thus, reasoned the committee, only counsel for the committee had a disclosure obligation under Bankruptcy Rule 2019 (it was representing more than one shareholder). Id.

Judge Gropper flatly rejected the argument, relying on the following: the shareholders appeared in the case as a committee; their notice of appearance described themselves as a committee; the ad hoc committee had moved for the appointment of an official shareholders’ committee; and the committee, as such, had been actively participating in the case. Id. According to the court, “[w]here an ad hoc committee has appeared as such, the committee is required to provide the information plainly required by Rule 2019 on behalf of each of its members.”

Sealing Motion Denied

The ad hoc committee then moved on March 1, 2007 to file its disclosures under seal, but Judge Gropper denied the request. Any interest the individual committee members have in keeping their trading facts confidential, he reasoned, is overridden by the interests that Bankruptcy Rule 2019 seeks to protect. Slip op. at 7. Citing a lack of support, the court rejected the committee members' contention that filing disclosures under seal would protect the members' "investment strategies." Instead, it focused on the public interest behind Bankruptcy Rule 2019.

Bankruptcy Rule 2019, according to the court, gives shareholders a right to the committee members' trading information, enabling the shareholders to make an informed decision whether the committee will represent their interests. Id. It also allows parties to gauge "the credibility of an important group that has chosen to appear in the bankruptcy case and play a major role." To uncover divided loyalties, Judge Gropper held, the shareholders have a right to know whether the committee members purchased their debt and their stock at the same time. Id. The shareholders are even entitled to know whether the committee members may sell their interests in the future.

Group action was the decisive factor here. As Judge Gropper noted, "[b]y acting as a group, the members of [the] shareholders' Committee subordinated to the requirements of Rule 2019 their interest in keeping private the prices at which they individually purchased or sold the Debtors' securities."


Enforcement of Bankruptcy Rule 2019 disclosure requirements is hardly novel. Courts have already relied on the rule to promote transparency in asbestos reorganization cases. Baron & Budd, P.C. v. Unsecured Asbestos Claimants Committee (In re Congoleum Corp.), (held, law firms representing multiple plaintiffs in asbestos reorganization case must file Rule 2019 statements disclosing any co-counsel, referral, or fee sharing relationships among attorneys); see Michael L. Cook, “Transparency in Asbestos Reorganizations: A Modest Remedy,” Daily Bankruptcy Review, Dec. 22, 2004.

Judge Gropper’s ruling is a reminder that courts may compel shareholders and creditors to disclose confidential trading information. An entity’s failure to comply with Bankruptcy Rule 2019 could even result in the court’s disregarding its claims. See In re Manville Forest Products Corp., 89 B.R. 358, 376-77 (Bankr. S.D.N.Y. 1988). As shown by Judge Gropper's denial of the committee's motion to file its confidential information under seal, courts may give a higher priority to public disclosure over protecting confidential information.

There may no longer be safety in group action. Other debtors may follow Northwest’s lead and use Bankruptcy Rule 2019 to attack critics serving on ad hoc committees. If Judge Gropper's decision stands, acting as a group will deny investors assurance that their trading facts will remain confidential in a reorganization case. Thus, these two rulings may have a significant impact on how hedge funds act in chapter 11 cases.

The ad hoc committee received an order extending its time to appeal the Feb. 26 decision until March 14, and three of Northwest's stockholders have asked the bankruptcy court to reconsider its earlier ruling. Given the potential impact of Judge Gropper's decisions on the hedge fund industry, we expect members of the ad hoc committee to continue challenging the decision aggressively.