Thursday, May 06, 2010 1:59:44 AM
Bankruptcy Rule 2019 Redux – Delaware
Bankruptcy Court Holds That Informal
Committee is Not Subject to Rule 2019
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,
“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.
1 Such disclosure includes the names and addresses of the group members, the nature and amount of their claims or
interests, the amounts paid for the claims or interests and the time of acquisition, and any sales or other
dispositions of the claims or interests.
2 In re Premier International Holdings, Inc., et al., Case No. 09-12019 (Bankr. D. Del. Jan. 20, 1010). It should be
noted that in August of 2009, proposed amendments to Rule 2019 were published for public comment. The
proposed amendments expand the scope of the Rule’s coverage and the content of its disclosure requirements.
Particularly, the pending amendments include, among others, (1) the new term “disclosable economic interest”
which is defined to encompass “any claim, interest, pledge, lien, option, participation, derivative instrument, or any
other right that grants the holder an economic interest that is affected by the value, acquisition, or disposition of a
claim or interest,” and (2) expanding the disclosure requirements to “every entity, group, or committee that consists
of or represents more than one creditor or equity security holder.”
2
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.
* * * *
This memorandum is not intended to provide legal advice with respect to any particular situation
and no legal or business decision should be based solely on its content. Questions concerning
issues addressed in this memorandum should be directed to any of the following:
Alan W. Kornberg (212) 373-3209 Stephen J. Shimshak (212) 373-3133
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