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As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Congress amended � 1102 of the Bankruptcy Code. In general, � 1102, along with � 1103, authorizes the formation and role of committees of unsecured creditors and equity security holders, as the case may be, in the reorganization process under Chapter 11. Among other things, the BAPCPA added � 1102(b)(3), whose clear language essentially compels such committees to share information they obtain during the reorganization with similarly situated creditors that are not members of such committees. This amendment may seriously undermine the ability of unsecured creditors’ and equity holders’ committees to actively participate in the reorganization process. The fact is that debtors, and those working with debtors to effect a reorganization or sale, will be less likely to be open with members of committees who may be required to inform creditors or equity holders who are against a reorganization or sale the contents of discussions intended to be confidential. Specifically, � 1102(b)(3) provides that “[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).” Committee’s duty to give information is problematic The language of � 1102(b)(3) lends itself to an expansive interpretation. The lack of clarity of the language and the scary results that obtain if the words in the amendment are given their broadest and not illogical interpretation, creates potentially unsolvable problems for counsel representing an unsecured creditors’ or equity committee. The BAPCPA does not define “information” or “access,” so it is unclear what limits, if any, there are on a committee’s duty to give information or access to information to pretty much anyone who asks for it. There will certainly be instances when disclosure would violate some other obligation, such as when the information is subject to the attorney-client privilege, is considered confidential and proprietary or is subject to nondisclosure agreements. These issues are compounded by the conflict that can arise between the duty of the committee and its counsel to represent the interests of all unsecured creditors in the case, as opposed to one particular creditor that may or may not be hostile to the committee. In such a situation, a committee’s compliance with � 1102(b)(3)’s disclosure requirement could be detrimental to the debtor, the bankruptcy estate and the unsecured creditor body in general. Obviously, counsel should exercise great care when attempting to balance these conflicting interests. As courts interpret this language, it remains to be seen whether such counsel can in fact avoid the Catch-22 of either acting against the interests of his client or violating � 1102(b)(3). Savvy counsel and committee members have been trying to find ways to avoid, minimize or at least clarify the obligations imposed by � 1102(b)(3). To date, there is only a single published decision to give guidance to the meaning of � 1102(b)(3), In re Refco Inc., 336 B.R. 187 (Bankr. S.D.N.Y. 2006), which involved the collapse of the country’s largest independent futures brokerage. In Refco, the unsecured creditors’ committee, shortly after its appointment, filed a motion for an order defining what its obligations were under � 1102(b)(3). Initially, the court expressed concern over the justiciability of the motion because there was no readily discernible dispute. However, because of the case’s complexity and the rapidity of its developments, the court was ultimately willing to address the committee’s motion on the merits. Turning to the merits, the court analogized � 1102(b)(3) to � 704(7) of the Bankruptcy Code. That section provides that a trustee shall, “unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest.” While the court in Refco recognized the differences in language in the two statutory sections, it concluded that the “facial differences . . . did not appear material.” After deciding that the two sections are analogous, the Refco court relied on three principles gleaned from cases interpreting � 704(7) as bearing on the interpretation of � 1102(b)(3). The first is that a trustee’s duty under � 704(7) is “fairly extensive,” which makes sense because trustees represent the interests of the bankruptcy estate generally. The trustee has no personal interest in the case and should have a duty to keep creditors and equity holders informed. The second is that the trustee’s duty to provide information is not unlimited, as the introductory phrase “unless the court orders otherwise” indicates, such that the trustee can obtain a protective order if the disclosure of information would result in the waiver of the attorney-client privilege, furnishing of confidential or proprietary information, or diminution of the value of the bankruptcy estate. The third is that the trustee’s right to a protective order is in furtherance of his fiduciary duties to all unsecured creditors, and the trustee may need a protective order to prevent one unsecured creditor from obtaining an advantage over other unsecured creditors or other parties in interest. The Refco court then analogized the duties of a trustee with those of a creditors’ committee. Such duties include taking the lead in negotiating a plan of reorganization, supervising the debtor and pursuing assets, among other things, for the benefit of all unsecured creditors. As the court’s own description demonstrates, however, the duties of a creditors’ committee in a Chapter 11 case are different and, at times, more complex than those of a Chapter 7 trustee. For example, members of creditors’ committees, by definition, have claims against the debtor. A Chapter 7 trustee should have no personal interest in the bankruptcy case. The Refco court attempted to balance the interest of giving unsecured creditors who are not members of a committee access to information against the interest of maintaining the relevancy of unsecured creditors’ committees by allowing them to receive confidential and sensitive information from the debtor and others regarding the reorganization process. The court ruled that the committee would not be required to disclose, without a further order of the court, information that could reasonably be determined to be confidential and nonpublic or proprietary, whose disclosure could reasonably be determined to result in a general waiver of the attorney-client privilege, or whose disclosure could reasonably be determined to violate an agreement, order or other applicable law. ‘Refco’ is helpful, but it appears to have deficiencies Undoubtedly, attorneys for committees will welcome the approach of the Refco court to some of the problems that � 1102(b)(3) presents. Indeed, some commentators have already lauded the decision of the Refco court and advocated using the court’s order, which was attached to the opinion as Exhibit A, as a model. There appear to be, however, certain deficiencies in the reasoning of the court and its resulting order. First, the court was quick to dismiss the issue of justiciability. The court took great pains to describe the parade of horribles and other practical considerations that could follow if it did not issue what was admittedly a “comfort” order. Other courts may very well be more cautious in issuing a similar order in the absence of an actual case or controversy. Second, the analogy between � 1102(b)(3) and � 704(7) is not a tight one. There are differences in the language employed in both statutes that the court dismissed in summary fashion. Specifically, � 1102(b)(3) does not contain the language “unless the court orders otherwise.” Thus, it may very well be that Congress intended � 1102(b)(3) to be more forceful than � 704(7). Third, � 1102(b)(3) is one of several amendments intended to provide individual unsecured creditors with a greater role in the reorganization process. The BAPCPA also added � 1102(a)(4), which authorizes the U.S. trustee to change the membership of a committee to ensure adequate representation of its constituents, particularly smaller creditors holding claims that are disproportionately large for their size. Arguably, a Refco order could undermine that kind of participation by making it more costly and time-consuming for such creditors to obtain information. Finally, the Refco court’s ruling and order have the effect of shifting the burden to the individual creditors seeking information. A Refco order would require individual creditors to incur the expense of getting relief from such an order. Despite all the practical concerns described by the Refco court, other courts may not deem such policy considerations to be a basis for such burden shifting absent an actual controversy regarding the disclosure of information that would justify departing from � 1102(b)(3)’s plain meaning. As the Refco court acknowledged, further case law will be needed to develop the exact parameters of � 1102(b)(3). Craig M. Rankin is a partner at Los Angeles-based Levene, Neale, Bender, Rankin & Brill, which specializes exclusively in matters of bankruptcy, insolvency and business reorganization. Christopher Alliotts is of counsel to the San Francisco office of Los Angeles-based SulmeyerKupetz.

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