Bankruptcy Law Update: Rule 2019

January 22, 2010

Publication| Bankruptcy & Corporate Restructuring

In In re Premier International Holdings, Inc., et al., Case No. 09-12019 (CSS) (Bankr. D. Del. Jan. 20, 2010) (the “Six Flags” case), the United States Bankruptcy Court for the District of Delaware addressed the issue of what constitutes “a committee representing more than one creditor” under Rule 2019 of the Federal Rules of Bankruptcy Procedure. This has been a much-discussed issue over the last few years because Rule 2019 contains significant disclosure obligations that hedge funds and private equity firms, which often form ad hoc committees, often wish to avoid. Finding the plain meaning of Rule 2019 dispositive of the issue, the Court held that a committee consists of “a group representing the interests of a larger group with that larger group’s consent or by operation of law.” Specifically, the Court held that if an informal committee does not represent any persons other than its members either by consent or operation of law, then it is not a committee under Rule 2019 and is not subject to that rule’s rigorous disclosure requirements. The Official Committee of Unsecured Creditors (the “Official Committee”) has filed a notice of appeal of the decision.

This decision arose out of the chapter 11 bankruptcy cases of theme park company “Six Flags.” The Official Committee filed a Motion to Compel the Informal Committee of Noteholders to comply with Rule 2019 disclosures. The Noteholders Committee had taken on a central role in the case, including negotiating with the debtors to support the Revised Plan, which the Official Committee opposed. The Official Committee argued that it was “critical for the Court and the [Official] Committee to be able to fairly evaluate the [ ] Noteholder[s] Committee’s credibility and motives in these cases.”

The Court began its analysis with the plain language of Rule 2019 to determine Congress’s intent. Rule 2019 places disclosure requirements on “a committee representing more than one creditor,” and so the Court examined the plain meaning of that phrase. The Court’s goal was to elucidate a “clear and objective” definition that parties could rely on without the need for court guidance in every case.

Using the Oxford English Dictionary, the Court found that “committee” is defined as “a body of two or more people appointed for some special function by…a [larger] body.” The Court interpreted this to mean that a

This concept is consistent with the treatment of official committees under section 1102 of the Bankruptcy Code. Even though they are exempt from Rule 2019, official committees receive their authority to act directly from the Code.

Using both agency law and the Oxford English Dictionary’s definition of “represent,” the Court found that the term “represent” contemplates the appointment of an agent, which cannot be established without the principal’s consent.

Thus, under the plain meaning of the phrase “a committee representing more than one creditor,” a “committee” consists of a group representing the interests of a larger group with that larger group’s consent or by operation of law. Here, because the Noteholders Committee did not represent any persons other than its members either by consent, contract, or operation of law, it was not a committee under Rule 2019 and therefore did not have to make the required disclosures.

Although the Court found that the plain meaning of Rule 2019 was determinative, the Court addressed the legislative history of Rule 2019 as well as prior courts’ rulings on this issue.

The predecessor rule to Rule 2019 was developed during a time when “protective committees,” typically dominated by insiders and Wall Street bankers, completely controlled the reorganization from inception to implementation. The Court stated that today’s informal committees are very different from the “protective committees” that were targeted for reform in the 1930s. The Court found that “Rule 2019 is…for all intents and purpose, superfluous—the problem it was designed to address by requiring certain disclosures simply no longer exists.”  Congress did not intend Rule 2019 to apply to the Noteholders Committee in this case.

This opinion departs from two recent Bankruptcy Court decisions from Judge Walrath of the District of Delaware and Judge Gropper of the Southern District of New York, both of which found that certain informal committees are “committees” under Rule 2019. In re Washington Mutual, Inc., et al., 419 B.R. 271 (Bankr. D. Del. 2009); In re Northwest Airlines, Inc., et al., 363 B.R. 701 (Bankr. S.D.N.Y. 2007). Judge Walrath’s opinion never discussed whether an ad hoc committee constitutes a committee under Rule 2019, but assumed it falls under the definition. Judge Gropper’s opinion failed to look at the plain meaning of the term “committee,” but focused on the ad hoc committee’s actions and role in the case. The Six Flags Court found that Rule 2019 is designed to be prophylactic and provide information at the inception of the reorganization. “Any definition of ‘committee’ under Rule 2019 must be sufficiently clear and objective so as to require its applicability from the inception of the case or the primary purpose of the rule will be frustrated.” Because of its disagreement with Judge Walrath’s opinion, the Court has created a split within the Delaware Bankruptcy Court on the issue of whether informal committees are covered under Rule 2019.¹

The obligation to make disclosures under Rule 2019 is a difficult issue facing many ad hoc or informal committees in chapter 11 cases. Typically, the issue arises when such groups are formed by holders of debt securities involved in a chapter 11 case in an effort to gain leverage in the reorganization process. Such holders typically prefer not to disclose information about their investment in the debtor—such as when they acquired their debt or equity instruments, the amounts paid for such instruments, or the sales of any such instruments—on the basis that it is confidential information. The Six Flags opinion attempts to bring clarity to the rule’s application by defining when a group is a Rule 2019 committee. However, until the issue is resolved on appeal, there is now a split of authority in the Delaware Bankruptcy Court on whether certain groups are committees within Rule 2019, thereby triggering that rule’s disclosure obligations. Until the split is resolved, counsel will be in a quandary to decide whether to file Rule 2019 statements. Thus, the best course of action is to consult with experienced counsel to determine whether such disclosure is likely to be required in a particular case, as well as the potential ramifications to the committee as a result of that decision.