Two decisions (one only weeks ago) have held that the scope of Bankruptcy Rule 2019 encompasses “informal committees” of bondholders and that such committees must comply with the extensive disclosure requirements of Bankruptcy Rule 2019.1 In a recent decision, Bankruptcy Judge Christopher Sontchi of the Delaware Bankruptcy Court came out the other way, ruling that such a committee was not a “committee representing more than one creditor” and, consequently, is not subject to Rule 2019.2 In so doing, Judge Sontchi considered but declined to follow the two decisions addressing the same issue: In re Washington Mutual, Inc., et al., 419 B.R. 271 (Bankr. D. Del. 2009) and In re Northwest Airlines Corp., et al., 363 B.R. 701 (Bankr. S.D.N.Y. 2007).
In Premier International Holdings, the Official Committee of Unsecured Creditors (the “Official Committee”) moved to compel the Informal Committee of SFO Noteholders (the “SFO Informal Committee”) to comply with Bankruptcy Rule 2019 and provide trading and other information required by that Rule.
The Bankruptcy Court sided with the SFO Informal Committee and denied the motion to compel. It considered the plain meaning of Rule 2019 and concluded that since the SFO Informal Committee comprised “a self-appointed subset of a larger group,” it was not a “committee representing more than one creditor” within the meaning of Bankruptcy Rule 2019. Specifically, “[i]n order 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 by “self help.”” The Bankruptcy Court also reviewed the legislative history of Rule 2019 which it found confirmed the conclusion that the Rule does not apply to the SFO Informal Committee.
Judge Sontchi addressed at some length the two bankruptcy court decisions finding that informal committees must comply with the disclosure requirements of Rule 2019. In Northwest Airlines, the first of these decisions, Bankruptcy Judge Allan L. Gropper of the Southern District of New York found that an ad hoc committee of equity security holders was a “committee” under Rule 2019. In the second, Washington Mutual, Judge Mary Walrath of the Delaware Bankruptcy Court assumed that an ad hoc committee was a “committee” for purposes of Rule 2019 and proceeded to analyze whether the WMI Noteholders Group was indeed an ad hoc committee; concluding that it was, the WMI Noteholders Group had to comply with the Rule.
In his ruling, Judge Sontchi identified several reasons for declining to follow Northwest Airlines and Washington Mutual. First, he concluded, the Bankruptcy Court in Northwest Airlines had failed to analyze “whether under the plain meaning of the words a self-appointed subgroup of creditors with neither the authority nor consent of the larger group constitutes a “committee” under Rule 2019;” in Washington Mutual, he said, the Bankruptcy Court had simply assumed that an ad hoc committee constituted a “committee” under Rule 2019. Second, he disagreed with Northwest Airline’s interpretation of Rule 2019’s legislative history. Third, Judge Sontchi explained that “it is a mistake to focus on the conduct and role of the ad hoc committee to determine whether it is a committee under Rule 2019 …. Any definition of “committee” must be sufficiently clear and objective so as to require its applicability from the inception of the case….” Fourth, he disagreed with Northwest Airline’s conclusion that all ad hoc committees qualify as “committees” under Rule 2019. Rather, “a formal committee requires the consent of the governed either by contract or operation of law. In 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.” Finally, he found misleading Washington Mutual’s reference to the proposed amendment to expand the scope of the Rule’s coverage as supportive of its holding. Indeed “[t]he existence of a proposed rule expanding the disclosures required of those already subject to the rule is of no moment with regard to whether the rules applies in the first place.”
Bankruptcy Judge Sontchi's decision and the split in the case law (indeed, a split between bankruptcy judges in the same District, Delaware) breathes new life into the proposition that not every committee of creditors falls within Rule 2019. The outcome in the next case before a different judge, though, becomes that much more difficult to predict. While revisions to Bankruptcy Rule 2019 are under consideration and would mandate greater disclosure, the scope of the present version of Rule 2019 will increasingly require clarification from the appellate courts.