The New Committee Disclosure Requirements: Much Ado About Nothing?
By: Douglas E. Wedge
Moore & Van Allen, PLLC; Charleston, S.C.
It is a matter of debate among trade creditors whether active participation on a creditors’ committee is time well spent. On the one hand, participation on a chapter 11 creditors’ committee can be expected to involve a great deal of time, add a serious amount of extra work for credit managers, in-house counsel or whomever is chosen to represent the creditor on the committee, and imposes on each member of the committee a fiduciary duty to fellow creditors. On the other hand, ours is one of the few, if not the only, bankruptcy systems where unsecured creditors are accorded a significant voice in the disposition of a reorganization, which requires the active participation of creditors willing to work on committees. Indeed, Congress expressed its recognition of the importance of committee membership in its modification of the Bankruptcy Code to allow a party in interest to object to the U.S. Trustee’s selection of committee members1 ..
Unfortunately, another provision related to committee participation adopted by Congress in the 2005 amendments to the Code has complicated the decision as to whether to serve on a committee. Specifically, the new legislation imposes an additional duty that unsecured creditors’ committees must perform: providing access to information for creditors that hold claims of the kind represented by the committee and that are not appointed to the committee. While §1102(b)(3)(A) directs committees to perform this task, it does not elaborate on the scope of this role. At first blush, the concept of “access to information” is a commendable one. However, it also compromises the long-standing ability of committees to delve into the inner-workings and records of a debtor. As a result, even those creditors accustomed to serving on creditors’ committees have expressed concern about future committee participation in the face of this new disclosure obligation.
In response, committees have elicited court approval for various means of straddling the thin line between maintaining the confidentiality of delicate negotiations and the newly imposed goal of open communication to unsecured creditors. In the sample cases described below, it appears that the courts are amenable to supporting such committee efforts.
In the Calpine Corp. case, the committee, shortly after its appointment, filed a motion seeking an order clarifying the requirement pursuant to §1102(b)(3)(A) to provide access to information to its constituency pending the establishment of an information-sharing protocol between the debtors and the committee.2 Specifically, the committee sought an order that would allow them to withhold confidential, proprietary, nonpublic information or any information the disclosure of which would constitute a waiver of any privilege. The committee reasoned that such an order made sense in that Congress could not have intended constituents to have unfettered access to confidential information. The committee stated that the order would assuage debtors who would otherwise be reluctant to share sensitive financial and strategic information with a committee as well as protect the committee from sharing the fruits of their investigation with inappropriate parties. Given the potential chilling effect §1102(b)(3)(A) could have on the debtors and their willingness to share information with the committee and the concomitant reduced ability of the committee to analyze the case, the committee asserted that the relief sought could be granted under §105(a) as the relief was necessary and appropriate to carry out the provisions of the Code.
The court agreed. It entered an order providing that “the committee shall not be required to disseminate any confidential, proprietary, nonpublic information concerning the debtors, including (without limitation) with respect to the acts, conduct, assets, liabilities and financial condition of the debtors, the operation of the debtors’ business and the desirability of the continuance of such business, or any other matter relevant to these cases to the formation of a chapter 11 plan...or any other information if the effect of such disclosure would constitute a general waiver of the attorney-client, work-product or [other applicable] privilege...until the court further clarifies the requirements under §1102(b)(3)(A) or the committee establishes an information-sharing protocol with the debtors....” 3
With this order in effect, the committee was then able to establish a creditor information protocol with the debtors, which the court approved on Feb. 23, 2006. The protocol set forth both the committee’s duties with respect to providing information to its constituency (e.g., establishing a Web site and listing the type of information that will be available at the site, as well as limiting the dissemination of privileged and confidential information). The protocol also established a procedure for handling creditors’ requests for information, including requests for privileged or confidential information. If the committee determines that it should not divulge the privileged or confidential information, it will respond accordingly, and the requesting creditor can file a motion to compel disclosure. If the committee determines that it is appropriate to reveal the privileged and confidential information, it will submit a “committee information demand” to debtors, indicating that certain information will be disclosed unless the debtors object. If there is a dispute, the court will schedule a hearing to resolve it. Finally, the protocol limits the liability of the committee for any acts or omissions in connection with the protocol or the dissemination of information pursuant to §1102(b)(3)(A).
Calpine is not an anomaly. More recently, the court in Amcast Automotive of Indiana, Inc. ordered similar relief as it approved the committee’s information-sharing procedures, which included defining the committee’s role regarding the sharing of public information as well as its handling of confidential and privileged information. 4 Like Calpine, the committee in Amcast is not required to share confidential, privileged or nonpublic information, and in the event that there is a dispute concerning the provision of information, parties may seek relief from the court. The committee retains discretion to share privileged or confidential information; however, if the committee obtains privileged or confidential information from a third party, the committee may not reveal such information unless the third party provides written consent.
There have been other cases and orders dealing with this issue. Fortunately, these cases appear to be forging a template for dealing with an unintended stumbling block to active committee participation in complex chapter 11 cases. With protocols such as those described above, both the congressional goal of increased creditor access to committee information, as well as the need to protect privileged and proprietary informations are addressed. As a result, §1102(b)(3)(A) should not be viewed as a reason to avoid serving on an unsecured creditors’ committee.