We Haf Vays to Make You Talk. No Really We Do Committees New Duties Under Amended 1102(b)(3) After BAPCPA

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Sep 2005

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), as all loyal readers of the ABI Journal know, is the most comprehensive set of changes to bankruptcy law since the 1984 amendment, if not the enactment of the current Bankruptcy Code in 1978. This column will examine a little-noticed portion of 11 U.S.C. §1102(b)(3), which established extensive new duties for creditor committees in chapter 11 cases.

What Are We Doing Again? Committee Duties

Under the current Code, appointment of committees in chapter 11 cases is governed by 11 U.S.C. §1102. 11 U.S.C. §1103 governs the duties of committees by the U.S. Trustee and provides:

§1103. Powers and duties of committees
(a) At a scheduled meeting of a committee appointed under §1102 of this title, at which a majority of the members of such committee are present, and with the court's approval, such committee may select and authorize the employment by such committee of one or more attorneys, accountants or other agents to represent or perform services for such committee.
(b) An attorney or accountant employed to represent a committee appointed under §1102 of this title may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case. Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.
(c) A committee appointed under §1102 of this title may—
(1) consult with the trustee or debtor-in-possession (DIP) concerning the administration of the case;
(2) investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan;
(3) participate in the formulation of a plan, advise those represented by such committee of such committee's determinations as to any plan formulated, and collect and file with the court acceptances or rejections of a plan;
(4) request the appointment of a trustee or examiner under §1104 of this title; and
(5) perform such other services as are in the interest of those represented.
(d) As soon as practicable after the appointment of a committee under §1102 of this title, the trustee shall meet with such committee to transact such business as may be necessary and proper.

Courts have held that 11 U.S.C. §1103(c) grants committees broad authority to participate in nearly all aspects of a chapter 11 case in order to protect the interests of the individual creditors or equity-holders that the committee represents.² Further, courts have also uniformly held that committees have fiduciary duties to their constituents as a whole,³ although they do not owe fiduciary duties to the debtor or its bankruptcy estate.⁴

Therefore, under current bankruptcy law, other than the broad and general powers of 11 U.S.C. §1103 and the committee's fiduciary duty to execute those powers for the benefit of the committee's constituents, there are no fixed duties placed on committees under current law.

The New Committee Order 11 U.S.C. §1102(b)(3)

BAPCPA significantly changes creditor⁵ committees' duties⁶ by imposing three broad specific duties on them by adding 11 U.S.C. §1102(b)(3),⁷ which provides:

(3) A committee appointed under subsection (a) shall—
(A) provide access to information for creditors who—
(i) hold claims of the kind represented by that committee; and
(ii) are not appointed to the committee;
(B) solicit and receive comments from the creditors described in subparagraph (A); and
(C) be subject to a court order that compels any additional report or disclosure to be made to the creditors described in subparagraph (A).

The language of this section is mandatory, and the duties are extremely broad and very general. Therefore this provision has the potential to create significant litigation and other problems for committees.

In the Information Age, What Is Information Under §1102(b)(3)(A)?

Initially, it is important to note that the term "information" is not defined by the Bankruptcy Code; the ordinary definition of information found in the Random House College Dictionary (1982)⁸ is "knowledge communicated or received concerning a particular fact or circumstance;...any knowledge gained through communication, research, instruction, etc." Given the breadth of this definition, the literal meaning of this provision could mean that committees would have to provide access to all data, documents and other evidence that the committee developed in the course of its work in a bankruptcy case.

Issues of particular concern under 11 U.S.C. § 1102(b)(3)(A) are:

Privileged and Work Product Information. Perhaps the most unsettling aspect of 11 U.S.C. §1102(b)(3)(A) concerns the failure of this provision to distinguish between privileged and nonprivileged information that must be provided to creditors that hold claims of the kind represented by the committee and are not appointed to the committee ("constituent creditors"). Prior to BAPCPA, it was established that the appointed creditors' committee held an attorney-client privilege with its attorney.⁹ However, if all constituent creditors are entitled to see privileged materials, that may weaken, if not effectively eliminate, both the attorney-client and work-product privileges for committees.

Confidential Information. Another problem of 11 U.S.C. §1102(b)(3)(A) is the treatment of confidential information obtained from various sources. In increasingly complex chapter 11, the use of confidentiality agreements to protect trade secrets and other private information (such as initial drafts of plans) has grown. Without a strict and enforceable confidentiality agreement, the exchange of information would slow dramatically. Even if it were physically possible to have every interested constituent creditor execute an acceptable confidentiality agreement, such a practice would render any confidentiality agreement meaningless, as it would be practically impossible to track down any "leak" given the sheer number of parties with access to the confidential documents. Further, in certain cases, disclosure of information may be restricted, regulated and/or prohibited by other applicable laws and could prevent committees from obtaining this information.

Another side effect, which an overly broad interpretation of 11 U.S.C. §1102(b) (3)(A) could have in chapter 11 cases, would be to greatly reduce a committee's ability to obtain documents and other information from debtors and third parties. Parties may refuse to cooperate with committees in light of §1102(b)(3)'s requirements absent broad court orders protecting their discovery, which would greatly impede the chapter 11 process.

Trojan Constituent Creditors. A further troubling issue under 11 U.S.C. §1102(b) (3)(A) involves the definition of what parties are entitled to information. As discussed above, any creditor that holds a claim "of the kind represented by that committee" is entitled to access to the committee's information. Because of the ease of acquiring claims in chapter 11 cases, this definition could include defendants in litigation brought by the committee, parties as to whom the committee is generally adverse (such as the secured creditor in a contested DIP or lien action) and claims traders who are seeking "inside" information. There is no limitation in 11 U.S.C. §1102(b)(3) that would prevent entities that technically hold claims represented by the committee, but are actually adverse to the committee from demanding sensitive information from the committee.

What Level of Detail Must Be Provided? A more trivial but still vexing issue concerns the amount of detail of information that must be provided under 11 U.S.C. §1102(b)(3)(A). Taken literally, information can mean anything from drafts of work papers relating to a chart in a report prepared by a committee's accountants to the final draft of the report. While a literal reading of the term "information" in this context would be particularly nonsensical, litigation could easily develop relating to the degree and nature of the "information" that would have to be provided to constituent creditors under this new provision.

Nature of Access. Another concern under 11 U.S.C. §1102(b)(3)(A) involves the manner in which "access" will be given to the information. Assuming the term "reasonable" can be read into the statute,¹⁰ the question of whether committees would now have to maintain document rooms or be required to post some information on web sites will have to be explored under this section. Further, certain constituent creditors may request that their "information" be provided in some user-friendly forms (e.g., spreadsheets), which may raise further issues.

Who Bears the Cost of the Accessed Information? The final issue of access to information is the sheer logistical problems pertaining to providing such access. In large chapter 11 cases, there may be tens or hundreds of thousands of constituent creditors presented by a committee. Currently in many large chapter 11 cases, the actual cost of providing statutory required notice runs into hundreds of thousands of dollars and represents a material burden on debtors' estates. Under BAPCPA's information access requirements, committees, and therefore indirectly debtors' estates, may be burdened with significant additional expenses and professional fees relating to providing access to their information. The statute is unclear as to whether the costs can be passed on to interested constituent creditors or must be borne by committees and ultimately by the debtor's bankruptcy estate.

Polling in Bankruptcy 11 U.S.C. §1102(b)(3)(B)

The second statutory duty imposed on committees by BAPCPA is the requirement that they solicit and receive comments from constituent creditors. While this provision does not raise the "parade of horribles" that the access-to-information provision in 11 U.S.C. §1102(b)(3)(A) does, it does present numerous logistical and technical problems for committees.

11 U.S.C. §1125: How to Solicit. One of the largest obstacles to implementing the "literal" meaning of 11 U.S.C. §1102(b) (3)(B) in soliciting and receiving comments from constituent creditors involves the limitation on soliciting of acceptance or rejection of plans under 11 U.S.C. §1125. In order for committees to comply with §1125 in the context of 11 U.S.C. §1102(b)(3)(B), they will either have to get prior court approval for their solicitation documents under 11 U.S.C. §1125 or spend a great deal of time carefully drafting their solicitation materials so as not to violate 11 U.S.C. §1125. In cases where the plan is hotly contested, the chance for extensive litigation over a committee's required solicitation in relation to 11 U.S.C. §1125 appears to be great.

Costs and Logistics. The most important issue raised by 11 U.S.C. §1102(b)(3)(B) is how the solicitation and receipt of comments will be conducted. The language of the statute seems to indicate that the committee has to reach out to gain the opinions of its constituent creditors in connection with the performance of its duties under the Code. Given the number of decisions a committee must make in the average chapter 11 case, such solicitation may, from a logistical and expense standpoint, be impossible. However, as with the term "information," there is no limitation on the term "solicit," and therefore, committees will have to carefully consider their options in determining how they will solicit responses from their constituent creditors in their cases in order to comply with 11 U.S.C. §1102(b)(3)(B).

11 U.S.C. §1102(b)(3)(C)

The final "duty" imposed on committees by BAPCPA requires committees to "be subject to a court order that compels any additional report or disclosure to be made...." Of all of the duties BAPCPA imposes on committees, this is most reasonable and appears to be at most a clarification of a court's power to supervise a committee under the current law. The fact that no standards for ordering the additional reports are set forth under 11 U.S.C. §1102(b)(3)(C) appears to indicate that courts have broad discretion in issuing such orders. As noted in the final section of this article, this provision may prove to be a boon to committees as it may serve to clarify their new duties under BAPCPA.

I'm Excited About This Plan! Potential Solutions to the Issues Raised by 11 U.S.C. §1102(b)(3).¹¹

This article has presented problems that could arise if an overly literal and almost nonsensical reading of 11 U.S.C. §1102 (b)(3) was adopted by a constituent creditor seeking information from a committee. While I clearly believe most courts will strive to interpret these provisions of BAPCPA in a rational and reasonable way, this does not mean parties cannot, in good faith, attempt to use this statute to obtain information to which they would not be otherwise entitled. While attorneys representing committees may rely on the rationality and reasonableness of their court in interpreting 11 U.S.C. §1102(b)(3) (and in all likelihood prevail in any actions brought under this new provision), this may not be the most cost-effective approach. Therefore, I offer one final suggestion that may greatly reduce, if not eliminate, the litigation under 11 U.S.C. §1102(b)(3): a committees' "first-day" U.S.C. §1102(b)(3) motion and order.

As noted above, 11 U.S.C. §1102(b) (3)(C) makes committees subject to court orders concerning reports and disclosures to be made to constituent creditors. Under this provision, committees could file their own motions with the court seeking to establish the manner in which committees' duties under 11 U.S.C. §1102(b)(3) would be performed.

The issues that should be addressed in a §1102 motion include (1) establishing that privileged and work-product information will not have to be disclosed to constituent creditors absent court order entered after notice and a hearing; (2) establishing that confidential materials protected under agreements between the committee and other third parties would not be considered information for purposes of 11 U.S.C. §1102(b)(3); (3) establishing the types of information that constituent creditors would have access to; (4) designating the manner in which constituent creditors would have access to the information; (5) setting the charges, if any, that would be required for obtaining certain forms of information from the committee under 11 U.S.C. §1102(b)(3); (6) prohibiting certain types of constituent creditors (based on their conflict of interest to other constituent creditors) from obtaining any information from the committee absent a court order entered after notice and a hearing; (7) approving procedures for solicitation of comments from constituent creditors during the course of the bankruptcy in compliance with other provisions of the Code; and (8) providing a procedure by which any disgruntled constituent creditor could seek to obtain additional information upon a motion to the court and showing for good cause under standards to be established under the facts of a particular case.

While using an 11 U.S.C. §1102 first-day motion and resulting order seems a bit unusual and cumbersome, it could provide much-needed clarity. 11 U.S.C. §1102(b)(3) is extremely broad and somewhat vague, and without clarity, significant litigation could arise. I do not offer the first-day motion as a panacea to all the potential problems raised by 11 U.S.C. §1102(b)(3). However, I do believe the §1102 first-day motion offers committees more than a "infinitesimally small" chance of preventing litigation on these issues for the benefit of all parties in a chapter 11 case.

Footnotes

¹ Board Certified in Business Bankruptcy Law by the American Board of Certification. Return to article

² See, generally, In re Drexel Burnham Lambert Group Inc., 138 BR. 717, 722 (S.D.N.Y. 1992); In re Nationwide Sports Distributors Inc., 227 B.R. 455 (Bankr. E D. Pa. 1998). Return to article

³ In re PWS Holding Corp., 228 F. 3d 224, 246 (3rd Cir. 2000); In re Tucker Freight Lines Inc., 62 B.R. 213 (W.D. Mich. 1986); and In re Barney's Inc., 197 B.R. 431 (Bankr. S.D.N.Y. 1996). However, committees do not owe fiduciary duties to individual constituents of the committee. See Picciotto v. Schreiber, 260 B.R. 242 (D. Pass. 2001). Return to article

⁴ In re SPM Manufacturing Corp., 984 F. 2d 1305 (1st Cir. 1993). Return to article

⁵ Given the language of 11 U.S.C. §1102 regarding the formation of committees of "equity security-holders" and 11 U.S.C. §101(17), it appears these duties do not apply to committees of equity security holders. Return to article

⁶ BAPCPA also changed the method of changing committee composition by adding 11 U.S.C. §1102(a)(4). This change will not be addressed in this article. Return to article

⁷ It is unclear why these duties of a committee were placed in 11 U.S.C. §1102, "Creditors' and Powers and Duties of Equity Security Holders Committees," as opposed to 11 U.S.C. §1103, "Powers and Duties of Equity Security Holders Committees." Return to article

⁸ That shows how long ago I was in college. Return to article

⁹ See, generally, In re Subpoenas Duces Tecum Dated March 16, 1992, 978 F. 2d 1159 (9th Cir. 1992) (privilege exists); In re JMP Newcor Intern. Inc., 204 B.R. 963 (Bankr. N.D. Ill. 1997); Matter of Baldwin United Corp., 38 B.R. 802 (Bankr. S.D. Ohio 1984). Return to article

¹⁰ The author has been given several answers to §1102(b)(3) problems involving restrictively reading the term "access." One easy, although not likely, solution to this problem would be to provide all constituent creditors access to all information the committee has for 45 seconds upon a certain date each week. Another suggestion given, only partly tongue-in-cheek, would be to allow access to all information after the case was concluded. Return to article

¹¹ Bill Murray, Ghostbusters (Sony 1984) (said in response to a plan in which heroes of the movie had an infintessimally small chance for survival even if their plan succeeded). Return to article

Bankruptcy Code:

1102