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On Oct. 17, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) became effective. BAPCPA represents the most substantial revision to the U.S. Bankruptcy Code in 25 years. Although media coverage has focused primarily on those revisions affecting consumer bankruptcy cases, there are a number of revisions that will have a significant impact on corporate Chapter 11 cases. One such revision affects committees of unsecured creditors and equity security holders and their members. Section 1102 of the code provides for the appointment of committees of unsecured creditors and equity security holders and regulates their composition. Section 1102(b)(3) has been added and requires that a committee must provide access to information to noncommittee members who hold claims of the kind represented by the committee; must solicit and receive comments from similar such noncommittee members; and can be subject to a court order compelling additional reports or disclosures to such noncommittee members. However, no guidance is provided as to the type of information that must be shared with noncommittee members or the method through which comments of noncommittee members may be solicited and received by a committee or what types of reports or disclosures can be compelled by the bankruptcy court. Moreover, the legislative history of BAPCPA is silent as to why Congress determined that apparent broad disclosure of information by creditors’ committees should be required. This is somewhat puzzling given that committee members regularly communicate with constituents regarding publicly available information. Consequently, this provision of BAPCPA strikes at the heart of an important element of committee practice: confidentiality. It is standard practice for the bylaws of committees to contain confidentiality clauses that require the committee’s members to treat as confidential information that is nonpublic or otherwise not available to the public and that is shared with the committee members and discussed at committee meetings. In addition, committee bylaws typically require that the committee’s deliberations and votes be treated as confidential. Further, it is standard practice for committees to enter into confidentiality agreements with debtors that provide that the committee and its members will treat as confidential any written or oral accounting, financial or operational information received from the debtor and designated by the debtor as confidential. Such provisions generally facilitate the free flow of information between the debtor and the committee. Under BAPCPA, this flow of information will likely be impeded or, at a minimum, significant additional costs will likely be incurred by debtors and committees in order to maintain the flow of such information and its confidentiality. The obligation to provide access to information to noncommittee members raises issues related to disclosure of nonpublic information, such as protection of documents and information covered by the attorney-client privilege or testimonial or other substantive privileges, materials covered by the work product doctrine, settlement negotiations and trade and business secrets. It is a certainty that such issues will be litigated extensively, thus increasing the costs and burden of Chapter 11 cases to all parties involved. Possible resolutions There are several potential options for addressing these issues. For example, communications between a debtor and a committee could be restricted to committee counsel on a “for counsel eyes only” basis. This appears to be a viable option for maintaining confidentiality given that nothing in the BAPCPA revisions to � 1102(b) purports to abrogate the attorney-client privilege between the committee and its counsel. Similarly, the work-product doctrine could be used to maintain the confidentiality of committee information given that the revised statute does not purport to abrogate a committee’s reliance on that doctrine in communications with counsel. Another option is for a committee to claim confidentiality of negotiations or communications between a committee and a debtor based on Rule 408 of the Federal Rules of Evidence, on the ground that those communications were in fact settlement negotiations. This is a viable strategy given that committees and debtors often negotiate the provisions of plans of reorganization or liquidation. Nothing in the revised � 1102(b) purports to abrogate the protections of Rule 408 of the Federal Rules of Evidence. Another option is for a committee to form a subcommittee to engage in communications with the debtor and other third parties because a subcommittee of a committee may arguably not be covered by the provisions of BAPCPA. Yet another option is that a committee may attempt to rely on the confidentiality agreement entered into with the debtor. Nothing in the revised � 1102(b) appears to obligate a committee to disclose information that it has agreed with a third party will be kept confidential. One potential method of addressing these issues would be to propose an order at the beginning of a case in order to obtain court-approved procedures related to protected information and the exchange of such information. However, it is unlikely that all such issues can be addressed comprehensively. At a minimum, BAPCPA creates substantial difficulties as committees attempt to adopt and develop procedures that balance the right of access to information with the protection of oral and written communications with the debtor and others. Equally uncertain is the process by which committees will solicit comments, which is a wholly new aspect of the operations of committees. Under the pre-BAPCPA code, committees had the following duties: Consult with the trustee or debtor in possession concerning the administration of the case. 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. 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. Request the appointment of a trustee or examiner under � 1104 of this title. Perform such other services as are in the interest of those represented. See 11 U.S.C. 1103(c). See also In re Subpoenas Duces Tecum Dated March 16, 1992, 978 F.2d 1159, 1161 (9th Cir. 1992). Under the pre-BAPCPA code, the committee did not have a duty to solicit and receive comments from its constituents. See In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 85 B.R. 13, 17 (Bankr. S.D.N.Y. 1988). Consequently, committees had no readily available procedures for communicating with constituents given that no such requirement existed. In soliciting comments from constituents, the revised � 1102(b) provides no guidance as to what information may be communicated and the extent to which a committee’s constituency must be consulted. The first issue, communication of information, ties back to the confidentiality issue discussed above where it is not clear whether committees will be forced to disclose confidential information in the course of soliciting comments from constituents. Soliciting comments Revised � 1102(b) likewise does not provide any guidance as to what it means to solicit comments from the committee’s constituents. There is no guidance provided as to the content that will be required for any such solicitation and what form that solicitation may take-i.e., may such solicitation come by mail, e-mail or telephone? Bankruptcy courts will be required to approve proposed procedures and protocols under revised � 1102(b)(3) in advance of such solicitation of comments in order to ensure that a committee’s obligations under the revised statute are satisfied. However, one question arises: What if there are insufficient funds in a debtor’s estate to pay the costs of a committee’s compliance with revised � 1102(b)(3)? The legislation provides no guidance. Revised � 1102(b)(3) also subjects committees to a court order compelling any additional report or disclosure to be made to creditors who hold claims of the type represented by the committee. Nothing in the legislative history or in the legislation itself indicates what type of additional report or disclosure a court may require a committee to make. The language of the statute suggests that a court may require a committee to prepare a report specifically for dissemination to creditors, perhaps as part of the solicitation process. If the statute is intended to operate in this fashion, substantial costs will be incurred as parties litigate before bankruptcy courts across the country the nature and content of such reports in advance of soliciting comments. For example, if a committee is soliciting comments on whether the committee should support a debtor’s plan of reorganization or liquidation, will a court require the committee to prepare a report or disclosure similar to the disclosure statement required to be prepared by a plan proponent under the code? In addition, in larger cases, where there will likely be thousands of creditors who are constituents of a committee, to what extent will a committee be forced to communicate with such creditors? Will a court approve solicitation of comments from a subset of such creditors? In addition, this portion of revised � 1102(b)(3) suggests that a court may abrogate confidentiality agreements between debtors and the committees or abrogate confidentiality clauses in bylaws of committees in order to compel reports or disclosure of information. Abrogation of attorney-client privilege between a committee and its counsel or of the work product doctrine may also be implicated by this revision to � 1102(b). Until the nation’s courts provide further guidance, committees and their counsel will be torn between properly complying with BAPCPA and conducting committee business. Substantial inquiries by creditors or input through the solicitation process will likely impede committees and increase the cost to debtors’ estates, in addition to increasing the burdens on professionals employed by committees. John W. Mills III is counsel, and Colin M. Bernardino and Daniel A. Fliman are associates, at Atlanta’s Kilpatrick Stockton. All three practice in the firm’s financial transactions, real estate and restructuring department. They can be reached via e-mail, respectively, at [email protected], [email protected] and [email protected].

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