Required Disclosure by Claim Traders Participating in a Bankruptcy Case

Client Advisory

March 2007
Bankruptcy Judge Allen Gropper has issued two orders in the In re Northwest Airlines Corporation case pending in the Bankruptcy Court for the Southern District of New York which can have significant consequences for the participation of claims traders in Chapter 11 cases. On February 26, 2007, Judge Gropper issued a Memorandum of Opinion and Order holding that Rule 2019 of the Federal Rules of Bankruptcy Procedure[1] requires disclosure of the amount of claims and interests held, along with the times when acquired, the amounts paid for the securities, and all sales or other dispositions of the securities by all members of the Ad Hoc Committee of Equity Security Holders participating in that case. On March 9, 2007 Judge Gropper ruled that the information could not be filed under seal.
A brief description of the factual background and the issues involved follows. 
Ad Hoc Committee
In Northwest, 11 hedge funds formed an ad hoc committee of equity security holders. On January 11, 2007, the Ad Hoc Committee moved for the appointment of an official equity security holders committee. On January 16, 2007, counsel for the Ad Hoc Committee filed a statement under Rule 2019, which was amended three days later. The amended statement provided the identities of the members of the Committee and revealed that the members owned in the aggregate 19,065,644 shares of Northwest common stock and claims in the aggregate amount of $264,287,500.
On February 9, 2007, the Debtors filed a motion to compel the Committee to file a supplemental statement pursuant to Rule 2019 disclosing “the amounts of claims or interests owned by the members of the committee, the times when acquired, the amounts paid thereof, and any sales or other dispositions thereof” as required by Rule 2019(a)(4). The Debtors requested that the Court “refuse to further hear the Ad Hoc Committee and strike the Ad Hoc Committee’s request for the appointment of an official committee of equity security holders” in the absence of the information sought.
The Court ruled for the Debtors on February 26, stating that where “an ad hoc committee has appeared as such, the committee is required to provide the information plainly required by Rule 2019 on behalf of each of its members.” The Committee had argued that the rule only applied to “every entity or committee representing more than one creditor or equity security holding” and since the committee only represented itself, it fell outside the Rule. The Court dismissed this argument asserting that “the Rule cannot be so blithely avoided.” The Court noted that “[b]y appearing as a ‘committee’ of shareholders, the members purport to speak for a group and implicitly ask the court and other parties to give their positions a degree of credibility appropriate to a unified group with large holdings.” Such a group has a better chance of recovering its fees and expenses from the estate under Bankruptcy Code § 503(b)[2] than an individual shareholder or creditor. Judge Gropper noted that the disclosure rule was derived from the study lead by Supreme Court Justice Douglas for the Securities and Exchange Commission in the 1930’s on the perceived abuses by unofficial committees in equity receiverships in the 1930’s and has been a part of bankruptcy practice since that time.
The Committee Moves to File Under Seal
On March 1, 2007, the Ad Hoc Committee filed a motion requesting permission to file its supplemental Rule 2019 statement under seal. The Committee pointed to Section 107(b) of the Bankruptcy Code that mandates that the court “protect an entity with respect to a trade secret or confidential research, development, or commercial information.”[3] It argued that requiring disclosure of the information “will have a chilling effect of creditors and shareholders from actively participating in bankruptcy proceedings” because disclosure would allow other investors to gain a commercial advantage by copying the trading strategies of the Committee members. The Committee argued that requiring disclosure would deter participation by claims traders which would have a negative impact on the secondary trading market, and weaken the voice of creditor and equity constituencies by undermining the ability to concentrate claims and interests in the hands of a few big players.[4] 
The motion to seal was opposed by the Debtors, the Creditor’s Committee and by Bloomberg News, which filed a motion to intervene in the dispute “for the limited purpose of enforcing the public’s right of access.”
Judge Gropper’s Ruling
In its March 9 Order, the Court rejected all of the Committee’s arguments and denied the Committee’s motion to seal. The Court mandated that the Committee file an amended Rule 2019 motion within three business days.
The Court began with a discussion of Bankruptcy Code §107(b). It recognized that while the statute created a means to file documents under seal, case law also made clear that judges must “carefully and skeptically review sealing requests to insure that there is really an extraordinary circumstance or compelling need.” Moreover, it is a “basic tenet” of bankruptcy jurisprudence that court records are open for public examination at reasonable times without charge. Thus, if the information was not protected under Bankruptcy Code §107(b), the Court had a duty to enforce Rule 2019 “in a manner consistent with protecting the legitimate rights of the parties and the public interest.” 
The Court then addressed the Committee’s main argument, that disclosing this information would be tantamount to compelling disclosure of the members’ investment strategies and require divulging of a “trade secret.” Relying on the absence of support in the parties’ affidavits and a concession at oral argument that the trading strategies of the Committee member were not at issue, the Court dismissed the Ad Hoc Committee’s argument, finding “no basis” for finding that the information was confidential commercial information. The Court pointed to the affidavit of a Committee member as evidence of the real reason the Committee sought to file the information under seal: disclosing the information would “damage our bargaining position and give our counterparties an unfair advantage if they were to know our basis or acquisition cost of the assets we were trying to sell.”
The Court stated that by seeking to form a committee and increase their bargaining power with respect to the formation of the plan of reorganization, the members of the Committee cannot now seek to avoid the mandates of the rule. “By acting as a group, the members of this shareholders’ Committee subordinated to the requirements of Rule 2019 their interests in keeping private the prices at which they individually purchased or sold the Debtor’s securities.” All negotiations by the Committee must reflect the interests of the entire shareholders’ group, not the individual financial advantages of a handful of its members. Committees ensure that a class is being treated fairly; they do not exist to protect the price at which individual members might be induced to sell.
In this case, the Court noted two specific reasons for adhering to the disclosure requirements of Rule 2019. First, other shareholders, “have a right to know whether the debt purchases were made at the same time as the purchases of stock” to decide whether to join the Committee or organize their own group. The information may raise questions as to any potential divided loyalties of the Committee members. Second, the representative Committee members noted that they might sell their shares at some point during the bankruptcy case. The Court asserted that this “possibility that members…will sell and leave a group without a representative is exactly why there are disclosures required under Rule 2019.” 
The Court concluded “any interest that individual Committee members may have in keeping this information confidential is overridden by the interests that Rule 2019 seeks to protect. This is because “Rule 2019 gives other members of the class the right to know where their champions are coming from. Granting the motion to seal would scuttle the Rule.”  
Pursuant to Judge Gropper’s orders, in order to participate in the bankruptcy case, the members of the Ad Hoc Committee must disclose the information required under Rule 2019. At the time of the writing of this Client Advisory, it is unclear whether the Committee will file this supplemental Rule 2019 statement or elect not to proceed as a committee. It also remains to be seen whether other judges will follow Judge Gropper’s lead, and, if so, how claims traders will react. The application of Judge Gropper’s rulings to other fact patterns remains to be seen. Agents for bank groups have not customarily filed statements under Rule 2019, although they might also be seen as an entities “representing more than one creditor” within the scope of the Rule. Official committees are excluded from the requirements of Rule 2019, although information concerning acquisition of their claims have been sought by the representatives of the Office of the United States Trustee forming committees in bankruptcy cases.
Rule 2019 does not apply to activity by a creditor or equity security holder not a part of a group acting collectively.   Judge Gropper’s decision does not require disclosure of information by a creditor who files a proof of claim or acts alone in filing other pleadings in a bankruptcy case.

If this discussion of Northwest Airlines rulings prompts any questions, please contact James Gadsden ( or John Hanley ( of our New York Office.

[1] Rule 2019(a) provides: 

Every 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, in the case of a committee, the name or names of the entity or entities at whose instance, directly or indirectly, the employment was arranged or the committee was organized or agreed to act; and
  4. with reference to the time of employment of the entity, the organization or formation of the committee…the amounts of claims or interests owned by the entity, the members of the committee…the times when acquired, the amounts paid thereof, and any sales or other disposition thereof. 

[2] Providing for recovery by a party making a “substantial contribution” to a bankruptcy case”

[3] Section 107(b) provides “On request of a party in interest, the bankruptcy court shall…(1) protect an entity with respect to a trade secret or confidential research development, or commercial information.”

[4] In addition, the Committee also noted that it provided the Debtor with most of the requested information already on a confidential basis and that the Debtor did not seek relief against other offending Rule 2019 statements that were previously filed. 

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2018 Carter Ledyard & Milburn LLP.
© Copyright 2007

© Copyright 2018 Carter Ledyard & Milburn LLP