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).