In a Jan. 20, 2010, opinion, Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware held that a group of investors who had together proposed a plan of reorganization for the debtor did not have to comply with the disclosure requirements of Federal Rule of Bankruptcy Procedure 2019 (“Rule 2019”) In re Premier International Holdings, Inc., No. 09-12019 (Bankr. D. Del. Jan. 20, 2010) (Sontchi, J.) (“Six Flags”). In Six Flags, Judge Sontchi expressly disagreed with two prior decisions on the subject of Rule 2019 disclosure, one by Judge Mary K. Walrath, also of the District of Delaware, and the other by Judge Allen J. Gropper of the Southern District of New York. A mere two days later, Judge Brendan L. Shannon, who also sits in Delaware, held that an ad hoc committee that had played an active role in a bankruptcy case was required to comply with the Rule 2019 disclosure requirements. In re Accuride Corporation, No. 09-13449 (Bankr. D. Del. Jan. 22, 2010) (Shannon, J.) (“Accuride”). These recent decisions show the divisiveness of the issue of Rule 2019’s disclosure requirements and set the stage for further litigation as to their application.1 Rule 2019
Rule 2019 requires that every entity or committee representing more than one creditor or equity security holder file a statement setting forth, among other things, the name of each creditor or holder and “the nature and amount of the claim or interest and the time of acquisition.” This means that the members of a “committee” must divulge the nature and amount of debt and/or equity securities the members hold, when the securities were acquired, and at what price.
As noted, Six Flags marked a stark departure from two prior decisions, In re Northwest Airlines Corporation, 363 B.R. 701, 703 (Bankr. S.D.N.Y. 2007) (Gropper, J.) (holding that “[b]y appearing as a ‘committee’ of shareholders, the members [of an ad hoc committee of equity security holders] purport to speak for a group and implicitly ask the court and other parties to give their positions a degree of credibility appropriate to a unified group of large holdings,” and requiring that ad hoc committee members comply with Rule 2019) and In re Washington Mutual, 419 B.R. 271 (Bankr. D. Del. 2009) (Walrath, J.) (holding that a group of noteholders was acting as an ad hoc committee representing more than a single creditor, and noting “that collective action by creditors in a class implies some obligation to other members of that class” and requires compliance with Rule 2019). Id. at 279.2 Accuride relies on both of these earlier decisions.
In Six Flags, a informal group of noteholders (the “Noteholders”) submitted a revised plan of reorganization supported by the debtors, but opposed by the Creditors’ Committee. The Creditors’ Committee filed a motion to compel the Noteholders to comply with Rule 2019, arguing that it was critical for all parties-in-interest to be able to evaluate the Noteholders’ credibility and motives. Relying heavily on both the plain language and extensive legislative history of Rule 2019, the court held that the Noteholder group was not a “committee representing” the interests of anyone but its members and, thus, did not have to provide disclosure under Rule 2019.
The court’s plain meaning analysis began with the definition of the word committee: “a body of two or more people appointed for some special function, and by usu[ally] out of a (usu[ally]) larger body.” Six Flags at 11 (emphasis in original, internal citation omitted). Therefore, reasoned the court, “[t]he use of the word ‘appointed’ clearly contemplates some action to be taken by [a] larger body. . . . Accordingly, for a group to constitute a committee under Rule 2019 it would need to be formed by a larger group either by consent, contract or applicable law – not ‘self-help.’” Id. Further, “the plain meaning of ‘represent’ contemplates an active appointment of an agent to assert deputed rights [i.e., rights assigned to another to assert]. It is black letter law that a person cannot establish itself as another’s agent such that it may bind the purported principal without that principal’s consent . . . .”). Id. at 12. The phrase “a committee representing more than one creditor…” thus refers to a group representing the interests of a larger community of interests with the consent of that community. The Noteholders, however, were representing nobody’s interests but their own and accordingly were not a “committee” under Rule 2019.
The court then discussed the legislative history of Rule 2019. Citing the purpose of the rule and its predecessors to be to curb powerful “protective committees” that historically exercised vast control over the bankruptcy process, the court noted that “[t]he informal and ad hoc committees of today have none of these expansive powers.” Id. at 27. “Thus, Rule 2019 is also, for all intents and purpose, superfluous—the problem it was designed to address by requiring certain disclosures simply no longer exists.” Id.
After examining the legislative history, the court went on to describe its divergence from the Northwest and Washington Mutual decisions. First, the court noted that Judge Gropper had focused on the ad hoc committee’s behavior in the Northwest case, rather than on the plain language of Rule 2019, ignoring the fact that Rule 2019 is intended to be prophylactic in nature, with its disclosures designed to inform parties-in-interest at the outset of the case. The court then described the following errors in the Northwest and Washington Mutual analyses: (i) did not follow standards of statutory construction and give the rule a plain reading, including not analyzing, but simply assuming, that an ad hoc committee is a “committee” under the rule; (ii) misinterpreted the legislative history; (iii) mistakenly focused “on the conduct and role of the ad hoc committee to determine whether it is a committee under Rule 2019 . . . . ([a]ny definition of ‘committee’ under Rule 2019 must be sufficiently clear and objective so as to require its applicability from the inception of the case . . . .” id. at 31); (iv) “held, in effect, that all ad hoc committees qualify as ‘committees’ under Rule 2019,” which was incorrect because “[i]n no way can a group purporting to speak on behalf of others and implicitly requesting third parties to treat them as a representative of the larger group, be considered a ‘formal’ committee” id. at 32 (emphasis in original); and (v) reliance on a possible change to Rule 2019 expanding disclosure, which “is of no moment with regard to whether the rule applies in the first place.” Id. at 33.
In Accuride, the Official Committee of Equity Security Holders (the “Equity Committee”) moved to compel Rule 2019 disclosure by a self-styled ad hoc committee (the “Ad Hoc Noteholder Group”). The Equity Committee alleged that the Ad Hoc Noteholder Group and its members had actively participated in the case from its inception (and in plan negotiations prior to the petition date), were represented by a single law firm compensated by the debtor’s estate, had backstopped a rights offering under the plan, and had previously moved to disband the Equity Committee. Motion of the Official Committee of Equity Security Holders for an Order (a) Compelling the Ad Hoc Noteholder Group to Comply with Fed. R. Bankr. P. 2019; (b) Prohibiting Further Participation in These Cases by the Ad Hoc Noteholder Group Pending Compliance with Fed. R. Bankr. P. 2019; and (c) Directing the Debtors to Withhold Further Payments to or on Behalf of Such Group Pending Compliance with Fed. R. Bankr. P. 2019, dated Jan. 4, 2010 (the “Motion”) at 4-6.3
The Motion relied heavily on the Northwest and Washington Mutual cases. The Equity Committee asserted that the Ad Hoc Noteholder Group was “very active in the case . . ., [had] filed responsive pleadings; [had] furthered their own agenda in the cases . . . and [had] propounded separate discovery against the Equity Committee”. Id. at 12. It alleged further that “the Ad Hoc Noteholder Group acts through a single set of professionals . . . and presents a unified position and voice to the Court and other parties. The Ad Hoc Noteholder Group has repeatedly asserted that it represents a collective group of noteholders rather than individual noteholders’ interests.” Id. The Equity Committee argued that these factors were of paramount importance in the Northwest decision and should be dispositive in the court’s decision here. Id. at 13.
The Ad Hoc Noteholder Group responded, relying in part on Six Flags. Objection of the Ad Hoc Noteholder Group to the Motion of the Official Committee of Equity Security Holders . . . , dated Jan. 13, 2010 (the “Objection”). It argued that the Motion ignored the Ad Hoc Noteholder Group’s prior disclosures and failed “to consider that the [Ad Hoc Noteholder] Group has not filed any post-petition pleading seeking to affect or influence the Plan or taken any action adverse to the Debtors in pursuit of Plan confirmation.” Id. at 2. As to the pre-negotiated plan, it was “negotiated prepetition at arm’s length and in good faith . . . .” Id. The Ad Hoc Noteholder Group further asserted that at the outset of the case it had filed a notice of appearance identifying its members, disclosed that its members held seventy percent of the debtor’s subordinated notes, and provided further disclosures at other appropriate times during the case. Id. at 3-6. Finally, the Objection stated that the Ad Hoc Noteholder Group had “filed no pleading in the Chapter 11 Case that purports to represent any entity other than” itself. Id. at 7.
In a Jan. 22 order, Judge Shannon ruled that the Ad Hoc Noteholder Group must make Rule 2019 disclosures. Judge Shannon did not offer the rationale for his ruling; the text of the order itself runs less than a full page and merely orders compliance with the rule.
Proposed Rule Changes
The Federal Rules Committee has published for comment through Feb. 16, 2010, proposed changes to Rule 2019. The proposed changes include: (i) expansion of the scope of disclosure requirements by requiring disclosure by all groups or committees that consist of more than one creditor or equity holder, as well as bodies that represent more than one creditor or equity holder; and (ii) authorization for courts to require disclosure by an individual when that party’s stake in the debtor would aid the court’s evaluation of that party’s arguments. These proposed changes reflect a marked difference from the Six Flags decision, and appear to go beyond even the requirements of Washington Mutual and Northwest. It is too early to tell if or when these proposed revisions will be adopted and take effect.
Six Flags is a significant decision authored by an influential judge sitting on one of the most respected bankruptcy courts in the nation. The Accuride ruling by another influential judge sitting on the same court, although summary and without explanation, provides a counterbalance to Six Flags, but sets forth no new or additional standard for considering whether and when Rule 2019 disclosure is required. As a result, while parties seeking to take collective action in bankruptcy cases may look to Six Flags to argue against Rule 2019 disclosure, they must remain aware that it is merely the opinion of one bankruptcy judge and that interpretation of the rule remains fractured and unsettled. As Accuride reflects, the danger of inconsistent results is real.