Refco Court Clarifies Committee Duty to Provide Information Access

One of the notable changes to business bankruptcy practice made by the recent BAPCPA amendments is the new statutory requirement that Creditors' Committees "provide access to information" for creditors. 11 U.S.C. 1102(b)(3) requires official committees to: (1) "provide access to information" for creditors holding claims of the type represented by the committee; (2) "solicit and receive comments" from the creditors; and (3) be subject to a court order that compels "any additional report or disclosure to be made" to the creditors. Many practitioners have puzzled over the implementation of these new requirements, since the statute leaves undefined the "information" which committees are required to provide, and fails to explain the implications of these requirements as to confidential or privileged information.

At the request of the Creditors' Committee in the Refco bankruptcy, Bankruptcy Judge Drain has provided some thoughtful and helpful clarification. In re Refco, Inc., __ B.R. __, 336 B.R. 187 (Bankr. S.D.N.Y. 1/20/06). The highly publicized bankruptcy of Refco, the largest independent U.S. futures brokerage, was precipitated by the disclosure that the company's CEO had secretly incurred $430 million in debt to the company. After the filing, the Debtors quickly moved to sell their futures business. A Creditors' Committee was appointed which worked with the Debtors on the proposed sale, analyzed potential claims, and began to investigate the events precipitating the filing. Shortly after its appointment, the Committee moved for clarification of its obligations based on the concern that 1102(b)(3)(A) might be interpreted as imposing duties contrary to other applicable laws and the Committee's fiduciary duties.

After noting that the new provisions of 1102(b)(3) fail to define the "information" which committees must make available or describe how it should be delivered, and that the legislative history provides no meaningful guidance as to the purpose or intent of the provision, Judge Drain turned to analogous provisions of the existing Bankruptcy Code for help. In particular, the court noted that the Code has long had a similar requirement for trustees that they "furnish such information concerning the estate and the estate's administration as is requested by a party in interest" unless the court orders otherwise. 11 U.S.C. 704(7).

Judge Drain identified identified three relevant propositions that have been applied in interpreting a trustee's duties under 704(7): (1) the duty to furnish information is "fairly extensive" in light of the overriding duty to keep parties informed, with the burden generally being on the trustee to demonstrate why information should not be disclosed; (2) the duty to provide information is not unlimited, though, and a trustee can obtain a protective order if disclosure would result in waiver of attorney-client privilege or require disclosure of proprietary or confidential information; and (3) the trustee's right to a protective order is informed by the trustee's fiduciary duties, and whether the purpose of the requesting party is inconsistent with those duties (for instance, if the requesting party is seeking information in order to obtain an undue advantage over another party). Judge Drain found each of those considerations to be applicable to construing a committee's obligation to provide access to information under 1102(b)(3)(A).

The Refco court also looked to similar provisions in the Bankruptcy Act of 1898 which required a committee to "report to the creditors" periodically "concerning the progress of the proceeding." Courts construing this obligation found it to not require the committee to forward to each creditor "all of the raw data it receives and considers," but only to provide a fair presentation of the status of the debtor, so long as there were no material omissions. Judge Drain found this principle to also apply with equal logic to the "access to information" obligation under 1102(b)(3)(A).

Finally, the court looked to the duties and functions of the Creditors' Committee to evaluate the propriety of possible confidentiality restrictions. Judge Drain noted that the diverse functions of official committees -- serving as negotiating bodies for a plan, providing supervision and oversight over debtors, investigating the debtors' assets and affairs -- make the committees more than mere conduits for the exchange of information between debtors and creditors, but active participants in the process. In this capacity, committee members often receive confidential or proprietary information from the debtor and others which their fiduciary duties of loyalty to the unsecured creditor body require them to hold in confidence. Disclosure of such information to others can present additional complications when the debtor has public stock or debt, since securities laws may prohibit selective disclosure (and even the selective disclosure of information generated independently by the committee might also implicate such concerns). In addition, committees have an interest in maintaining confidentiality in order to preserve the committee's own attorney-client or other privileges, particularly where the committee is authorized to pursue litigation on behalf of the estate generally.

In order to reconcile and balance these concerns, the Refco court entered an order that directs the Committee to provide general information to its constituency, but protected the Committee from disclosing (1) confidential and non-public or proprietary information; (2) information which if disclosed could result in waiver of attorney-client or other applicable privilege; and (3) information which if disclosed could violate an agreement, order or law, including applicable securities laws. It further directs the Committee to consider the requesting party's willingness to enter into a confidentiality order and/or trading constraints in determining whether otherwise protected information can be disclosed. Finally, it commits to the court's prompt determination of any disputes over the provision of information, in light of the legitimate concern that such information may be stale and without value if not provided promptly.

Helpfully, the court's published opinion includes a copy of the order setting forth the "Creditor Information Protocol." The order contemplates that the Committee will proactively, through a website, provide: (1) general information concerning the cases, including case dockets, access to docket filings, and identification of significant parties; (2) monthly Committee reports summarizing recent proceedings, events and public financial information; (3) highlights of significant events; (4) a calendar of upcoming significant events; (5) access to the claims docket; (6) a general overview of the chapter 11 process; (7) copies of any press releases issued by the Committee and the Debtors; (8) a registration form to request "real-time" case updates by email; (9) a form for submitting creditor questions, comments, and requests for specific information; (10) responses to such requests (with provision for providing such responses privately in the Committee's discretion); (11) answers to frequently asked questions; and (12) links to other relevant websites.

The Committee is excused from providing "confidential, proprietary or other non-public information" whether provided by the Debtors, a third party, or prepared by or for the Committee itself. It is also excused from providing information if the disclosure would constitute a general waiver of attorney-client, work-product or other applicable privilege of the Committee. The Debtors are obligated to assist the Committee in identifying confidential information. To the extent information is obtained by the Committee through formal or informal discovery, disclosure is governed not by the Protocol but inestead by any order governing the discovery.

Provisions are made for creditors to request additional information from the Committee, to which the Committee must respond within twenty days (shortened to ten days after January 31, 2006) by either providing the information or giving the reasons why it cannot be provided, including any grounds for confidentiality. If the matter cannot be resolved by the parties, the requesting party can move to compel. The Committee must consider, in deciding whether to release information, the requesting creditor's willingness to enter into reasonable confidentiality and/or trading restrictions. If the Committee believes information which was originally provided by the Debtors (or another entity) on a confidential basis should be provided to creditors, it can give notice to the Debtor (or other entity) which has 15 days to object to its disclosure.

While committees in other cases will likely seek similar clarification orders, Judge Drain cautioned that as the law develops, "the need for such comfort orders should end." For now, the Refco decision serves as a model for providing some much-needed clarity to the obligations of committees under 1102(b)(3)(A).

Court Encourages Use of Cross-Border Insolvency Provisions

Aside from the provisions affecting consumers, BAPCPA made several other notable changes to bankruptcy practice. One of these was the passage of Chapter 15, intended to provide more effective mechanisms for dealing with cross-border insolvencies (previously addressed only by the bare-bones provision for ancillary proceedings under 11 U.S.C. 304). The new provisions in Chapter 15 provide for the commencement of an ancillary case by an authorized foreign representative, and for a wide range of bankruptcy relief to be available upon recognition of the foreign proceeding.

A New York District Court has provided the first published commentary on the new Chapter 15 provisions of BAPCPA. In United States v. J.A. Jones Const. Group, LLC,333 B.R. 637 (E.D.N.Y. Nov. 29, 2005), the court suggests that a Chapter 15 ancillary case is now the exclusive means of obtaining a stay of pending litigation which involves an entity that is the subject of a foreign insolvency proceeding.

The J.A. Jones opinion was issued in response to a letter received by the court from an individual who represented that he was the interim receiver to the property of one of the defendants in the litigation pending in New York pursuant to an order entered in a Canadian insolvency proceeding. The Canadian bankruptcy proceeding involved the parent corporation of the entity which was a defendant in the New York case.

The District Court effectively held that Chapter 15 is now the exclusive means for obtaining such relief, stating that "In the absence of recognition under Chapter 15, this Court has no authority to consider [the receiver's] request for a stay." Out of concern for comity, the judge did stay the litigation for 60 days to give an appropriate representative an opportunity to commence a Chapter 15 case. As of this posting, there was no indication that a Chapter 15 petition has been filed.

Got Credit Counseling?

While the interpretation of some new BAPCPA provisions (like the homestead caps) have engendered debate, others -- for better or worse -- are abundantly clear. One thing that appears to be beyond dispute is that there will be no evading the pre-petition credit counseling requirements of 11 U.S.C. 109(h), or at least the requirement that debtors certify they have sought and were unable to obtain such counseling prior to filing.

Several recent cases have provided some additional clarity on the application of this new requirement, and the very limited circumstances in which it can be waived or extended. In a case that was previously discussed here, a Texas court has issued another published opinion, In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 11/16/05). This opinion clarifies that: (1) a "certification" as required by the statute must contain a declaration under penalty of perjury, as indicated in 28 USC 1746, or be deemed insufficient; (2) completion of credit counseling post-petition is insufficient; and (3) the effect of non-compliance with the counseling requirement is that a petition will be "stricken" rather than "dismissed," on the theory that if the debtor is ineligible there is no valid case to be dismissed.

Several other cases have similarly confirmed that completion of credit counseling post-filing will not remedy the failure to obtain it pre-filing. In re Fuller, __ B.R.__, 2005 WL 3454699 (Bankr. W.D. Pa. 12/16/05); In re Rodgers, __ B.R. __, 2005 WL 3454702 (Bankr. W.D. Pa. 12/16/05); In re Stidham, __ B.R. __, 2005 WL 3454709 (Bankr. W.D. Pa. 12/16/05); In re Childs, __ B.R. __, 2005 WL 3529729 (Bankr. D. Md. 12/19/05); In re Davenport, __ B.R. __, 2005 WL 3292700 (Bankr. M.D. Fla. 12/6/05). In Davenport, the case was dismissed notwithstanding the debtor's eminently logical and practical "no harm, no foul" argument that the dismissal would be "futile" since she could merely refile a new petition with the credit counseling certificate now in hand.

Multiple courts have also agreed that when a debtor fails to comply with the 109(h) pre-petition counseling requirements, the petition should be "stricken" rather than "dismissed." In re Valdez, __ B.R. __, 2005 WL 3526495 (Bankr. S.D. Fla. 12/13/05); In re Rios, __ B.R. __, 2005 WL 3462728 (Bankr. S.D.N.Y. 12/19/05). This is not an idle distinction; rather, the effect of treating the filing as a nullity and striking it is that if (or, more likely, when) the debtor refiles, the first filing will not be treated as a previously filed case which would trigger a presumption of bad faith and result in the automatic expiration of the automatic stay after 30 days under 11 U.S.C. 362(c)(3). The Rios court cautions that notwithstanding its opinion that a filing without satisfying the counseling requirements is void ab initio, parties would be well advised to seek a court determination as to whether a case was properly commenced before acting in reliance on a filing being void for lack of eligibility.

The Hubbard case also provides some insight on what would be necessary to represent that counseling is unavailable. While a debtor's lawyer may act as the debtor's agent for purposes of inquiring about the availability of counseling, mere general inquiries (rather than specific requests for a particular debtor) will not be a sufficient basis for representing that counseling is not available. On the other hand, a debtor will not be required to "scour the field" and seek out counseling from multiple agencies if it contacts one which is unable to provide the services within five days. If the debtor faces exigent circumstances, he/she can then file an appropriate certification without seeking counseling from another agency. Meanwhile, other courts have been more generous than the Hubbard court as for what constitutes a "certification," permitting any paper or motion which contains the reuired information and is signed by the debtor to constitute a "certification." See, e.g., In re Graham,__ B.R. __, 2005 WL 3629925 (Bankr. W.D. Ky. 12/21/05); see also Childs, supra (certification need not be under oath).

Congratulations are perhaps due to Mr. Melvin Carter, one of five debtors whose cases are described in the Childs decision referred to above. Mr. Carter was the only one of the five granted a waiver from the prepetition credit counseling requirement (and, as far as I can tell, the only one described in any published opinion). How did he do it? Mr. Carter's certification (his third, actually, after the court had denied earlier motions for extension) stated: "My real property ... is scheduled for foreclosure on October 21, 2005 at 11:04 A.M. On October 20, 2005, I was advised to seek credit counseling, which I did. Due to the large number of requests, I was unable to obtain an appointment for credit counseling until November 26, 2005. I completed the required counseling on November 26, 2005."

The court in Childs (a per curiam decision which is described as representing the consensus of all the members of the Maryland Bankruptcy Court) held that a certification is sufficient if it contains a simple description of the exigent circumstances precipitating the filing, and states that the debtor requested counseling that was not made available to him within five days, even if it does not specify the date the services were requested. Applying this standard, Mr. Carter's certification (unlike those of the other debtors in Childs and every other case that has so far been reported) was deemed sufficient.

Also worth noting in the Childs case is its definition of "exigent circumstances" as used in 109(h). The court defines this standard as "minimal," and requiring only "some looming event that renders prepetition credit counseling to be infeasible." It purposefully distinguishes this standard from the "excusable neglect" standard applied in other circumstances, noting that "exigent circumstances," unlike "excusable neglect," requires no inquiry into the reasons for the exigency and the debtor's responsibility for them. Other courts may disagree, however. Compare In re Talib, 2005 WL 3272411 (Bankr. W.D. Mo. 12/1/05) (description of exigent circumstances must explain why debtor waited until eleventh hour to seek counseling).

To get a taste of how bankruptcy judges feel about applying these new provisions, you should also read "Tell Us How You Really Feel About Credit Counseling".

Tell Us How You Really Feel About Credit Counseling

While judges have been fairly uniform in applying the new credit counseling requirements under BAPCPA (and dismissing cases where debtors fail to comply with them), that doesn't mean they are happy about it. In In re Valdez, ___ B.R. ___, 2005 WL 3526495 (Bankr. S.D. Fla. 12/13/05), Judge A. Jay Cristol of the Southern District of Florida, when required to dismiss a case filed by a pro se debtor who was unaware of the counseling requirement, rhetorically queried:

"The Court wonders what exactly was intended by Congress in regard to this Code section. Is it the intent of Congress that poor, ignorant persons who do not know the law and cannot afford to obtain the advice of counsel are to be denied protection and assistance of the Bankruptcy Code which is available to more affluent and better educated persons? Or is it the intent of Congress that decent, honest, hardworking persons, who have suffered financial misfortune or tragedy, be educated by budget and credit counseling services to help them determine if there is a more appropriate way to deal with their financial problems? Sadly, the language in the Code does not clearly reveal Congress' intent; either the Code language was inartfully drafted or the congressional intent was indeed the former less compassionate, harsher result, rather than the latter."

While expressing the "sympathy of the Court" to the debtor who was the object of this harsh result, Judge Cristol held that he could not modify statutory language based on sympathy and was required to dismiss the case because the debtor had not fulfilled the pre-petition counseling requirement.

Judge Thomas Fulton of Kentucky is also willing to give Congress the benefit of the doubt. In In re Graham, __ B.R. __, 2005 WL 3629925 (Bankr. W.D. Ky. 12/21/05), he suggests a somewhat discretionary standard for evaluating whether credit counseling could have been obtained by a debtor prior to filing, looking to what a debtor could "reasonably accomplish in light of his or her particular, and likely exigent, circumstances." Believing (perhaps against evidence to the contrary) that Congress continues to have the intent to "provide relief and a fresh start to honest but unfortunate debtors who would otherwise face a series of untenable choices," Judge Fulton suggests that "Surely such a body of persons ostensibly guided by mercy would not strand the lost so squarely between Scylla and Charybdis!"

Judge Frank Monroe of Texas was not nearly so generous to Congress. In In re Sosa, ___ B.R. ___, 2005 WL 3627817 (Bankr. W.D. Tex. 12/22/05), Judge Monroe notes how those responsible for passing the Act "did all in their power to avoid the proffered input" from sitting bankruptcy judges, professors, and professional associations in order to further an agenda "to make more money off the backs of the consumers in this country," suggesting that calling BAPCPA a "consumer protection" act is "the grossest of misnomers."

On the pre-filing credit counseling required by 11 U.S.C. 109(h)(1), Judge Monroe sarcastically notes, "No doubt this is a truly exhaustive budget analysis." While viewing the pre-filing requirement as "inane," Judge Monroe nonetheless found it to be a clear and unambiguous provision -- sarcastically adding, "obviously designed by Congress to protect consumers." As a result, even though the debtors actually completed credit counseling after having filed their petition, the court was required to dismiss their case, leading Judge Monroe to wonder, "Can any rational human being make a cogent argument this this makes any sense at all?"

Upon entering the dismissal order, Judge Monroe concluded, "Congress must surely be pleased."

Meanwhile, one debtor has been spared from the application of BAPCPA. In In re Looper, ___ B.R. ___, 2005 WL 3455200 (Bankr. E.D. Tenn. 2005), the court has concluded that a debtor who filed his petition on the effective date of BAPCPA -- October 17, 2005 -- would not be subject to the new credit counseling provisions. Why? Because he was a prisoner serving a life sentence without the possibility of parole. How did inmate Looper get a break, while so many other debtors have not?

In Looper, the debtor presented his petition for mailing to the clerk's office on October 14, 2005, and it arrived on October 17, 2005 and was stamped as filed on that latter date. But under Supreme Court precedent, pro se prisoners are protected by the "Prisoner Mailbox Rule," under which documents to be filed by a pro se prisoner (who can't personally travel to the courthouse to physically file documents) are deemed "filed" when they are delivered to prison officials for mailing. Because the court found no specific provision of the Bankruptcy Code and Rules defining "filing," it concluded that the "Prisoner Mailbox Rule" applied and the petition was treated as having been filed on October 14, 2005. As a result, the debtor was not required to comply with BAPCPA's new credit counseling requirements, which apply to petitions filed on or after October 17, 2005.

Isn't it good to know some debtors can still get a break?