Heightened Rule 2019 Disclosure Obligations for Committee Members after Decisions in Northwest Airlines and Owens Corning
Jordan Siev
Anderson Kill & Olick, PC; New York
Andrea Pincus
Anderson Kill & Olick, PC; New York
John Scott
Anderson Kill & Olick, PC; New York
Creditors’ committees, both ad hoc and official, play an integral role in the reorganization process by making certain that the interests of the debtor’s creditors are adequately represented and protected. The interests of the individual members (often institutional holders) in keeping information concerning their holdings and trading in the debtor’s securities confidential may conflict with Federal Rule of Bankruptcy Procedure 2019, which requires that certain information about the individual committee members’ holdings be disclosed to the public. Neither the conflict nor the rule are new, but the issues are exacerbated by recently enhanced disclosure obligations and expansion of electronic filing, which gives virtually anyone willing to pay a nominal fee the ability to access this information. Although Rule 2019 has been in existence for a number of years, it has increasingly been used in a new way: offensively by debtors in an attempt to slow down or thwart the efforts and momentum of increasingly activist hedge funds and other institutional investors taking aggressive positions in bankruptcy cases.
This article discusses the recent Northwest Airlines1 and Owens Corning2 bankruptcy court decisions mandating heightened and more detailed 2019 disclosures by committee members in the wake of demands by aggrieved debtors for otherwise confidential and competitive investment information. These decisions evidence the inherent conflict between these competing interests, and provide insight into how courts in the future may fashion remedies that address the concerns of committee members while at the same time protecting the public’s interest in obtaining full disclosure.
Northwest Airlines: To Disclose or Not To Disclose
In the Northwest Airlines bankruptcy case, pending in the U.S. Bankruptcy Court for the Southern District of New York, this issue was placed front and center this year. The dispute started in January 2007 when a law firm filed a notice of appearance in the Northwest case on behalf of “the ad hoc committee of equity securityholders,” comprised of 11 hedge funds holding Northwest common stock and other claims. Shortly thereafter, the law firm representing the committee filed a verified statement pursuant to Rule 2019(a) of the Federal Rules of Bankruptcy Procedure. The 2019 statement disclosed that the funds collectively held 16.2 million shares of Northwest common stock, as well as $165 million in claims against the debtors. Further, the 2019 Statement noted that “[s]ome of the shares of common stock and some of the claims were acquired by the members of the ad hoc equity committee after the commencement of the [bankruptcy] cases.” Finally, the 2019 statement and related documents disclosed that the committee had agreed to pay its law firm’s fees on a pro rata basis according to their respective share of the stock and claims to the total stock and claims, “subject to the committee’s right to have the debtors reimburse” those fees. The 2019 statement was subsequently amended to include 13 institutions holding a total of 19 million shares of stock and claims totaling $264 million.
Unsatisfied with the level of disclosure in the 2019 statement, the debtors moved to require the committee to supplement its 2019 statement so as to disclose “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 applicable language of Rule 2019 requires that every entity or unofficial committee representing more than one creditor or equity securityholder in a chapter 11 bankruptcy case file a verified statement setting forth precisely this information, but does not state the required degree of specificity.
The Court's Ruling
In a ruling dated Feb. 26, 2007, Bankruptcy Judge Allan L. Gropper (S.D.N.Y.) determined that the committee’s 2019 statement was “insufficient on its face” as it failed to disclose the required information. He thus required the committee members to disclose the full extent of their claims, the times when acquired, the purchase prices, and any sales or dispositions of their holdings. In so ruling, Judge Gropper rejected the committee’s contention that, as each creditor on the committee only represented its own interests, and not those of any other creditor, no entity or committee represents more than one creditor. Rather, Judge Gropper found that the law firm represented the interests of the committee as a whole, and not of any one member, and the entities appeared as a committee, thus “implicitly ask[ing] the court and other parties to give their positions a degree of credibility appropriate to a unified group with large holdings.”
Judge Gropper also noted that the committee reserved its right to seek compensation from the court pursuant to §503(b) of the Bankruptcy Code if it made a “substantial contribution” to the case. In turn, the committee would have a better chance of proving its substantial contribution by acting as a group, rather than individually, as individual parties are often accused of acting solely in their self-interest. Finally, Judge Gropper cited to an “influential study in the 1930s by Prof. (later Justice) William O. Douglas for the Securities and Exchange Commission, [which] centered on perceived abuses by unofficial committees” in reorganizations. This study led to the adoption of the rule that remained unchanged substantively and eventually became Rule 2019 under the revised Bankruptcy Code. Given the long-standing nature of Rule 2019, Judge Gropper found no reason for declining to “apply it as written.” He thus gave the committee three business days to amend its 2019 statement.
A Matter of Transparency
The committee subsequently sought and obtained a stay of that ruling as part of a request to file its amendment to the 2019 statement under seal, accessible only to the court and the U.S. Trustee. At a hearing on March 7, 2007, Judge Gropper heard arguments from the committee and the debtors, as well as the official creditors’ committee and intervener Bloomberg Inc., both of whom supported the debtors’ request to have the information remain unsealed. The committee argued that the information was confidential (in that it had not been disclosed publicly) and commercial in nature (in that it related to the funds’ business operations, trading data and investment strategies), which is all that is required under §107(b) of the Bankruptcy Code and applicable law for filing under seal. To require the funds to disclose this information would, in the committee’s view, provide their competitors and adversaries in the case with an unfair advantage, and have a “chilling effect on creditors and shareholders from actively participating in bankruptcy proceedings.”
The debtors and the other opposing parties argued that the information was required in order to test the credibility of the positions being taken in court by the committee, and that one member of the committee already voluntarily had disclosed the information in a public SEC 13(d) filing (to refute the arguments about proprietary information and perceived harms from further disclosures). To allow the committee to file the information under seal would, in the opposing parties’ view, run contrary to the transparency and public nature of bankruptcy proceedings. For its part, the U.S. Trustee stated that it supported the transparency argument, but recognized the exception in Code §107(b), which requires the party seeking protection to meet its burden on confidentiality.
On March 9, 2007, Judge Gropper denied the committee’s motion to file the amended Rule 2019 statement under seal. Judge Gropper focused on the fact that the committee repeatedly had asked the court to give credibility to the positions it espoused on behalf of equity-holders during the bankruptcy case, and therefore had “subordinated to the requirements of Rule 2019 their interests in keeping private the prices at which they individually purchased or sold the debtors’ securities.” Because the committee acted as representatives of the debtors’ equity-holders, Judge Gropper found that other equity-holders were entitled to “know where their champions [we]re coming from … so that they make an informed decision whether this committee will represent their interests or whether they should consider forming a more broadly based committee of their own.” Accordingly, the court required committee members to disclose to the public the information at issue. Although the court’s decision is subject to an appeal filed by the committee on March 14, 2007, several of the committee members recently disclosed their trading activity in Northwest’s stock and debt as of March 9, 2007. The disclosures confirmed that the three largest equity-holders on the committee owned approximately 10.5 million shares of the debtor’s stock and held approximately $120 million in claims.
The Other Side of the Coin: Owens Corning Bankruptcy
By contrast, the judge presiding over the Owens Corning bankruptcy case in the U.S. Bankruptcy Court for the District of Delaware instituted a procedure designed to protect individual creditors’ privacy rights by effectively allowing the parties to file their 2019 statements under seal. In that case, Judge Judith K. Fitzgerald entered an order authorizing counsel representing more than one creditor or equity securityholder to file the 2019 statements electronically without exhibits, which exhibits were to include information concerning, among other things, “the nature and amount of the claim or interest at the time of acquisition thereof.” Certain insurance companies challenged the order, arguing that they were entitled to the information in the exhibits, that Rule 2019 required that the information at issue be made public and that it was inappropriate to require parties to first obtain court permission before receiving access to the 2019 statement exhibits, which otherwise were to reside with the debtor. At the hearing on the matter, Judge Fitzgerald upheld her order, which she found was appropriate because it adequately balanced the creditors’ privacy interests with the public’s competing interests in full disclosure:
It provides for protection of the parties’ rights to ask us [for] this information by simply filing a motion with this court telling me why you want it. And I don’t think that’s inappropriate. The problem that the courts wrestle with with electronic case filing is just that. Everything gets spread on the public docket and that is not appropriate. … [I]t seems to me that requiring somebody to show me how the information is necessary, relevant, whatever term you which to choose in a motion is not violating anybody’s substantial rights.
Going Forward
Based on Judge Gropper’s ruling in Northwest, it seems likely that there will be an increase in the number of motions filed by debtors and other constituencies in bankruptcy cases requesting that members of ad hoc committees be required to disclose their trading history in the debtor’s securities or be barred from active participation in bankruptcy proceedings. For example, in March 2007, the debtor in the Scotia Development LLC bankruptcy case, pending in the Southern District of Texas, filed a motion alleging that the ad hoc committee in that case had adopted an “aggressive and improper posture,” filing numerous pleadings and taking hard-line positions counter to the debtor’s, while hiding behind “a veil of secrecy,” and cited the Northwest February 2007 decision in support of compelling the ad hoc noteholders committee members to file an amended Rule 2019 statement including “the composition of the ad hoc committee, the interests each committee member holds and at what price such interests were acquired.” 3 The debtor’s motion further demanded that the bankruptcy court refuse to hear further the ad hoc noteholders' committee unless and until it complies fully with Rule 2019. The matter is scheduled to be heard on April 10, 2007.
While the potential heightened scrutiny of disclosure obligations may appear to some to be a deterrent to participating on committees, this must be balanced with the benefits of the strong negotiating position and shared (if not estate-covered) costs that come with committee status in a bankruptcy case. While prospective committee members should consider the possibility of having to disclose otherwise confidential information about their stakes in the debtor in light of the Northwest Airlines decision, there are alternative procedures that bankruptcy courts can institute to prevent this information from being disclosed publicly, including the procedure instituted in Owens Corning, as well as allowing parties to file 2019 statements under seal. It is important for prospective or newly formed committee members to be aware of the various alternatives, to discuss these with counsel early on in the case and, particularly for investors holding significant positions in a debtor’s securities, to evaluate the benefits of a strong voice and coordinated advocacy through committee membership notwithstanding the requirements of Rule 2019 disclosure.
1 In re Northwest Airlines Corp., et al, U.S. Bankruptcy Court, Southern District of New York, Case No. 05-17930 (ALG).
2 In re Owens Corning, et al, U.S. Bankruptcy Court for the District of Delaware, Case No. 00-3837-JKF.
3 In re Scotia Development LLC, U.S. Bankruptcy Court, Southern District of Texas, Corpus Christi Division, Case No. 07-20027-C-11, Docket 492.