In February and March of this year, Judge Allan L. Gropper of the U.S. Bankruptcy Court for the Southern District of New York, presiding over the Northwest Airlines Chapter 11 case, required an ad hoc committee of hedge funds and other stockholders to disclose publicly full details of their trades in Northwest Airlines claims and stock. This was big news because hedge funds and other distressed debt investors carefully guard their trading data. The decision raised questions about whether these very active parties would continue to form ad hoc committees, choose to act independently, or limit their participation in bankruptcy cases altogether.
The Big Question: Would Other Courts Follow Northwest Airlines? As with most new decisions of note, this one had many people wondering whether other courts would follow it and require ad hoc committees to make such disclosures. This week we got the first answer to that question, albeit in a somewhat different context, in the Scotia Pacific Company LLC (Scopac) Chapter 11 case pending in Corpus Christi, Texas. The Scopac court’s answer: not in its case. Keep reading below to see how the court got to that decision.
A Bit Of Background. First, for those new to the disclosure issue, you can read more about it in a series of earlier posts on this blog (here, here, here, here, and here). If you follow the links in this sentence you can also find copies of Judge Gropper’s first decision requiring the disclosure and second decision refusing to allow the information to be filed under seal. Both decisions were based on Federal Rule of Bankruptcy Procedure 2019(a). As a reminder, here’s the key part of Rule 2019(a):
[E]very entity or committee representing more than one creditor or equity security holder . . . shall file a verified statement setting forth (1) the name and address of the creditor or equity security holder; (2) the nature and amount of the claim or interest and the time of acquisition thereof unless it is alleged to have been acquired more than one year prior to the filing of the petition; (3) a recital of the pertinent facts and circumstances in connection with the employment of the entity . . . ; and (4) . . . the amounts of claims or interests owned by the entity, the members of the committee or the indenture trustee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof.
Scopac’s Rule 2019 Motion. With that background, here’s the Scopac disclosure story. Not long after the Northwest Airlines decisions, Scopac filed a motion to compel an Ad Hoc Group Of Timber Noteholders (which originally called itself an Ad Hoc Committee and now refers to itself as the Noteholder Group) to file an amended version of its previously filed Rule 2019 statement. Relying on the Northwest Airlines decisions, Scopac argued that the Noteholder Group should be required to file detailed information about the amounts of the claims or stock owned by the Group’s members, when they acquired it, how much they paid for it, and when they sold or otherwise disposed of any of their holdings.
The Noteholder Group’s Objection. The Noteholder Group objected to the motion, arguing that it was merely a group of noteholders and not a "committee" as that term is used in Rule 2019. Specifically, it said that it didn’t represent or purport to represent any noteholders beyond those who were already members of the Noteholder Group. The Noteholder Group also contended that, even if it were a committee, the purpose of the rule is to protect others in the class it represents and here any non-member noteholders were welcome to join the group directly.
Friends Of The Court Join In. As they had in the Northwest Airlines case, the Securities Industry and Financial Markets Association (SIFMA) and the Loan Syndications and Trading Association (LSTA) filed an amici curiae "friend of the court" brief in opposition to the Scopac Rule 2019 motion. They argued that forcing disclosure of trading details would have a detrimental impact on the market for the debt and securities of distressed companies and the willingness and ability of sophisticated parties to participate in Chapter 11 cases.
Scopac’s Reply. Scopac filed this reply arguing that the Noteholder Group, which originally called itself an "Ad Hoc Committee" and only began to describe itself as an informal "group" after the motion was filed, was a Rule 2019(a) committee and should be compelled to make additional disclosure. Scopac also argued that the Noteholder Group was acting as a representative and thus fit squarely within the rule’s requirements.
The Scopac Court’s Rule 2019 Order. On Wednesday, April 18, 2007, Judge Richard S. Schmidt of the U.S. Bankruptcy Court for the Southern District of Texas issued this order denying Scopac’s motion to compel disclosure of the details of trades in Scopac’s secured timber notes. In his two-page order, Judge Schmidt ruled that the Noteholder Group was not a "committee" within the meaning of Rule 2019 and, as such, the disclosure requirements of that rule did not apply. The DealBook blog on the New York Times website reported on the decision here.
What’s Next? The Scopac decision represents a step back from the Rule 2019 view taken by the Northwest Airlines court, but for at least two reasons the issue remains far from settled. First, the Noteholder Group in Scopac successfully argued that it was not a committee at all because it didn’t represent anyone other than its own members. This apparently persuaded the Scopac court to draw a distinction between the Noteholder Group and the Ad Hoc Committee in Northwest Airlines. It’s unclear whether other courts would do the same. Second, many more large Chapter 11 cases are filed in the Southern District of New York than in Texas these days. As a result, Judge Gropper’s decision may have a bigger impact on future cases than the Scopac decision. That said, we’ll have to wait for additional cases to see which of these two approaches courts find more consistent with the language and purpose of Rule 2019.