Originally published in The Deal, April 2007.

An ominous confluence of recent events may be adding up to a perfect storm that could well persuade would-be members of creditors’ committees to think twice before signing on. Among the issues:

  • The new bankruptcy law imposes significant, but ill-defined, information-sharing requirements on creditors’ committees.
  • At the same time, creditors’ committees have various fiduciary obligations, including the protection of confidential, proprietary and privileged information.
  • While Chapter 11 filings and financial restructurings have declined substantially, that situation shows signs of changing. The potential involvement of large numbers of distressed-debt investors and other nontraditional creditors may further exacerbate a committee’s information-sharing woes.

Are the benefits of serving on a creditors’ committee outweighed by the potential burdens? The answer requires an assessment of several factors, beginning with the new bankruptcy act’s requirements.

Section 1102(b)(3) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 directs an official creditors’ committee to "provide access to information" to noncommittee creditors who "hold claims of the kind represented by the committee." This new information- sharing obligation has raised some questions, including whether a committee must disclose confidential, privileged or proprietary data.

Debtors fearing disclosure might withhold information vital to the committee’s work. Committee members may face the Hobson’s choice of violating the law or breaching their fiduciary duty to prevent disclosure of protected data to unauthorized parties, including noncommittee creditors.

Since Section 1102(b)(3) became law, some creditors’ committees have sought to avert this potential dilemma by seeking a "comfort order" from the bankruptcy court, setting forth in advance of any request the kinds of information the committee is obligated to disclose. In the first reported decision on this issue, In re Refco Inc., the court concluded that the new law required the committee to provide access to all "general information" but that it did not substantively alter a committee’s existing obligation to protect confidential, privileged or proprietary information.

Notably, however, Section 1102(b) (3) further permits a court to compel "any additional report or disclosure to be made" to appropriate noncommittee creditors. Ostensibly relying on this provision, the Refco court set up a procedure for such creditors to challenge in court a committee’s refusal to disclose information. Moreover, the court directed the committee, in advance of withholding information from a requesting noncommittee creditor, to determine whether the requesting creditor is willing to agree to reasonable confidentiality and trading restrictions with respect to the requested data and whether such an agreement is reasonably likely to protect the confidentiality of the information. Finally, if the committee decides to disclose confidential information obtained from the debtor or a creditor, it must notify that party in advance.

A number of other courts have generally followed the Refco court’s approach. Thus a committee needs to be aware that the court may well be looking over its shoulder and should be prepared to defend its decision not to release the requested information. Understandably, then, Section 1102(b)(3)’s formidable information-sharing requirements may dissuade some potential committee members from signing on.

If a prospective committee member needed more convincing not to serve, the added concerns arising from the predicted increase in nontraditional parties (such as hedge funds) and complex financing agreements, and the greater likelihood of competing interests, might just prove to be the tipping point. Looked at another way, however, the presence of all or any of these complications may make a creditor’s personal involvement in the process all the more important to protecting its interests.

Thus, while serving on a creditors’ committee may entail more work and more headaches, the benefits may still make navigating the potential perfect storm a worthwhile endeavor. A prospective committee member must assess the pros and cons of assuming that position so that he or she can make an informed decision whether to jump aboard or jump ship.

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