On April 8, 2010, ABF Journal in partnership with the New York Institute of Credit and the Philadelphia Chapter of the Turnaround Management Association, held an Education & Networking Conference in Villanova, PA. In Session 4, bankruptcy judges, bankruptcy attorneys led by moderator Mark Indelicato discussed a variety of topics, one of them being Bankruptcy Rule 2019. Moderator:
Mark S. Indelicato, Hahn & Hessen LLP
Blake Cleary, Young Conaway Stargatt & Taylor, LLP
Teresa Currier, Saul Ewing LLP
The Honorable Kevin J. Carey, Chief Judge, U.S. Bankruptcy Court, District of Delaware
The Honorable Kevin Gross, U.S. Bankruptcy Court, District of Delaware
PA Supreme Court Justice Jane Cutler Greenspan, Retired
Daniel J. DeFranceschi, Richards, Layton & Finger, P.A.
Mark Indelicato: What bankruptcy rule 2019 requires, and for purposes of our discussion we’ll talk about ad hoc committees, is that they disclose, and traditionally what they will be required to disclose is that they exist, who their members are and maybe what positions they hold in total bankruptcy dollar claims. That was all until the Northwest decision in the Southern District of New York when Judge Gropper said, ‘That [isn’t] going to cut it, read the statute, read the rule,’ and what you not only have to disclose is who you are, what you are, where you are and why you are’ In other words, he wants you to disclose everything including price, when you bought it, when you sold it, your net exposure, the whole nine yards — and the claims buying community was up in arms. [They said,] ‘Look, this is all proprietary information. I go into a secret back room, I determine what the price is, when I’m going to buy it. I can’t tell you that. I can’t tell them that.’ But Judge Gropper said, ‘That’s tough, you’re going to do it.’
And then that decision was sort of adopted by Judge Walrath. Judge Walrath in Washington Mutual said she agreed with the Northwest decision. What I found even more surprising, she implied, not directly said, in the decision, that if you form an ad hoc committee, those members of the ad hoc committee owe fiduciary duty to other members that fall into that class, and I found that to be astonishing. Now an ad hoc committee is a real committee for purposes of, not only disclosure but negotiating of duties .. how does that work? Hopefully our panel will give us a little light on that.
And then we have [Judge] Sontchi, who said, ‘Everybody please read the statute. The statute says you got to be a committee brought together with a purpose. You have a couple of people who get together, they’re not a committee, they’re not subject to 2019, I don’t think any disclosure is required.’ So we have two Delaware judges who say something different. It’s not clear what’s happening. Let’s turn to the panel:
Blake Cleary: What I see in the opinions is that the judges are struggling with the concept of wanting disclosure, but are not sure exactly how you get that disclosure. I think, as Judge Walrath indicated earlier in today’s program, there is a benefit to knowing where the advocates are in the capital structure, to understand the positions they are advocating. So, with that background, the judges had looked at 2019 and we got two, even one other opinion that’s not a recorded opinion — Judge Shannon agreed that disclosure was required under 2019 but he didn’t adopt the fiduciary duty concept that was in Judge Walrath’s … the third option.
In one of his lines in his unrecorded opinion was the principle of bankruptcy is disclose, disclose, disclose, and we’ve all been taught that as professionals in what we provide to the courts so it certainly makes sense. And it seems to me in reading certain of the opinions, the way you get there to get the disclosure is through the fiduciary duty provision, but what strikes me in the case law that’s cited in those opinions, is they speak of cases that talk about equity, security holder.
What I have been told by my corporate partners is there is significant case law on what duties controlling shareholders have to minority holders. But what is unclear to me is how that translates when you’re in an insolvency, whether a creditor has — and even if they are a majority creditor of a class — whether they have a fiduciary duty to those other creditors… If that’s the foothold to get to 2019, then it seems more discussion and more analysis may be required in that area. But, back to the position, I think certainly there may be other ways that the court could require or request that when parties are advocating where they are in the capital structure to understand those positions. Certainly there’s been push back from the institutions who are holders of these debt instruments to not disclose their positions. And so, as practitioners we fight with our client: ‘But we don’t want to disclose that, there’s all kinds of problems if we do that.’ We’re stuck trying to balance representing the client at the same time complying with case law. And certainly, as it stands today, it’s going to depend on which court room you’re in and what floor your on in Delaware as to what exactly the requirements area, and I suspect the judges would love some clarity on this point as well.
Indelicato: We have to judges here that don’t seem to have joined the fray in either A, B or C.
The Honorable Kevin Gross: Disclosure, Disclosure, disclosure. I haven’t ruled on it. By the way, Chief Judge Carey and I have a disclaimer that nothing we say is binding on the court or even on ourselves as far as future decisions are concerned. But certainly I think disclosure is very, very important. I’m sure the debtor’s counsel, and the lawyers here do a lot debtor work. Want it and deserve it, and are entitled to it, and I don’t think that price is an issue that the court should be concerned with at all. I think because what if a lawyer came up to the podium to argue on behalf of someone and said, ‘Sorry guys, I’m not going to tell you who my client is but here’s the argument, but they really, truly are a creditor or whatever position… That’s what these ad hoc committees are doing to a large extent, they are using their numbers and their power at the table and they don’t want to tell anybody exactly what they consist of. I think that is problematic to a case.
The Honorable Kevin J. Carey: I haven’t had occasion to make any 2019 decisions, so I pull from the bench and I tend to rely more with Judge Shannon than Judge Walrath. One of the reasons is, so many of the cases, and I’ve said this publicly, develop into fights between and among hedge funds and parties that own more than one position in the case, so I agree with Judge Gross, it’s important for the court to know. I think it’s also important for other constituents to know who the players really are. I’m understanding there is a pending rule change to 2019, which is probably going to require more disclosure. What I hear tells me, it’s probably going to pass somewhat near its present form.
I think the Walrath decision points out a problem that we’ve imported into bankruptcy and it touches in part in one place. First of all, I think … she hinted that there might be a fiduciary relationship created. But the problem with how we use the word, fiduciary relationship, comes from the fact that we don’t have scenarios where the corporate context translates [neatly]. We use it to try to figure out what somebody should be doing and what they shouldn’t be doing. Now, there’s a plain way to say it that doesn’t solve the problem or add any clarity to what’s right and what’s wrong necessarily. But I think that with respect to groups that form themselves — they lower risk, if there is a risk of acquiring duties to others that may be on the committee. It comes from what Judge Gross said, and that is representing in the court: ‘We represent 80% of the senior notes.’ What they want the court to think is that’s just senior notes position. Well, it may not be the position of everybody who holds the senior notes. Pick any tranche or equity — the same thing goes. From my standpoint, until the rule changes, to the extent somebody takes positions that represent to the court, they are representing a collective ‘you,’ which may go beyond just their own committee members. They may have brought upon themselves the duty. I haven’t had that situation yet and I think the court should be very careful before it imposes such a duty.
Teresa Currier: My only thought is, I always err on the side of using 2019 disclosures whenever possible, and there are other kinds of ad hoc committees or groups beyond the debtors. The fiduciary duty aspect really troubles me because a lot of these other types of groups — maybe it’s franchisees or something else — they definitely don’t act in a way that is necessarily about all of them. They can be groups that are only organized to reduce legal fees. So that whole, I almost like to do my future 2019 statements and put a statement in that we aren’t representing all the other entities, only the ones on this 2019 statement. So to give the court all the information it needs about everyone’s position, but also to limit it or at least try to make the record clear that we aren’t speaking for others.
Judge Gross: I know particularly when you’re dealing with an ad hoc committee of creditors… I don’t think organizing yourselves to present a centralized position to save fees or whatever should necessarily be posed upon you as a fiduciary duty.
Daniel J. DeFranceschi: One of the things that I would like to add to the discussion is… I should disclose also I typically represent debtors but I also represent ad hoc committees, so the things that I’m saying are my views about my clients. But what happened in the Six Flags’ case, that’s Judge Sontchi’s opinion, is to me why this rule needs to be amended or clarified in some manner. What was going on in that case is we were in the midst of a very contested plan negotiation confirmation process. The debtors, my client, was aligned with the noteholder group that was at the operating company level. The creditors committee … was aligned with the ad hoc noteholder group at the parent level. They were trying to put on the table a different plan than the plan the debtors were aligned with at the time. And the creditors committee filed a motion seeking disclosure only from the noteholders that were aligned with the debtors, but did not seek disclosure at all from the noteholders that were aligned on their side. It struck everyone, first of all, we didn’t all think that Judge Sontchi was going to rule the way he did, which was to say, basically, plain meaning, just because you call yourself a committee, doesn’t make you a committee. But it also wasn’t lost on him that this law was sometimes being used sort of as a litigation tactic.
I think what Judge Sontchi was really getting at is this shouldn’t be about the facts and circumstances in the middle of the case about which party needs more disclosure and which one needs less disclosure. It should be clear cut at the very beginning of the case who needs to file, who’s a committee or as the Walrath decision pointed out [it would also determine that] the group was actually an entity, so they had to disclose it as an entity, not only as a committee. That’s really troubling because what often happens, in this case, there was an allegation that the group that disclosure was sought from basically had interests not only at the operating company level which they were negotiating better treatment but also had interest at the parent level, which the suspicion was that they were selling off as they were negotiating a better position at the operating company level. So, I think that if the new rule actually can bring some clarity to the point, I think it will help everyone, because lawyers and ad hoc committees that land in front of Judge Walrath — we make sure we disclose the same in front of Judge Carey, Judge Gross, but in front of Judge Sontchi, for example, I don’t have to do that. It’s really confusing. By the way, we do put in that disclaimer that we’re not taking on any fiduciary obligations, we’re expressly disavowing them, we represent only ourselves, on those specific issues for that group, because I know committees change as the case goes on.
Judge Carey: That precipitates my next question: What do you do internally with respect to those groups?
DeFranceschi: In some cases, there are trading prohibitions and other’s there aren’t, it just depends on the case.
Indelicato: Sometimes the ad hoc committees themselves want to put in the prohibition because they don’t want to have fights amongst themselves if they’re trading in or out or trading inside information so not always, but sometimes they put them in themselves.
Cleary: Another issue is professionally, you have to make sure your engagement letter represents the group, and not individual creditors who change positions, and you’re going to take direction from the majority. So there’s retention issues and client issues that also come up when you represent the ad hoc committee, it’s confusing. The engagement letters that I’ve seen have developed to take care of … internal operating issues.
Indelicato: The easy fix to me … was just to say that if you represent more than one party in a bankruptcy proceeding you have to disclose whether you’re a committee, an ad hoc committee, if you have a lot of landlords — why should it be different if you’re representing ten landlords and they don’t call themselves an ad hoc committee. You may want to know the same disclosure for them. That’s my quick fix, but I’m sure Congress is going to come up with something much more complicated. And we look forward to that with bated breath.