Jim Millar Speaks on Transparency in the Bankruptcy Process

When I hear about efforts to make creditors disclose more information as a prerequisite to participating in a chapter 11 case, I think about a couple questions: What is the purpose of the requested disclosure? And is that purpose legitimate?

Let’s think about some basic disclosure by a creditor as to the amount, priority and security for its claim. In the first instance, that information is obviously necessary to ensure that the creditor has standing—it needs a stake in the outcome of whatever issue is before the court. Moreover, a bankruptcy court should have the benefit of knowing those details of a creditor’s position so that it is able to contextualize a given creditor’s argument. And other parties in interest should have the ability to pressure test that position. No serious dispute exists over the propriety of this fundamental disclosure.

Problems start to arise, however, when debtors and others want to know about a creditor’s cost basis and trading history. While one might be able to conceive of some legitimate purpose, I believe the real reason for demanding such information is to get a window into the creditor’s economics. One can debate whether providing that information to a negotiating adversary would be helpful or appropriate—I think it probably wouldn’t be either. I don’t agree that a negotiation should be cabined by what the creditor’s adversary thinks is an appropriate return on an investment.

In addition, adversaries might try to paint a creditor as piggish before the bankruptcy court if it argues for a maximum return on its position. That characterization is out of bounds in my view. For the proper functioning of the markets for distressed debt, creditors should be able to push for whatever return they think they can obtain—and others can push back based on the facts and the law. Indeed, we expect parties in a bankruptcy case to be acting in their own self-interest and I simply don’t think the argument that “they’re making too much profit†really has a place.

I’ll also note that some have advanced the view that more disclosure is necessary to understand if a creditor can be relied upon to represent someone else that is not actively participating in the case. For example, can a small bondholder rely on an ad hoc group of bondholders to represent its interests? I don’t have a lot of sympathy for free riders—i.e. those that want their interests protected but don’t want to undertake the burden or pay the expense of being active. Moreover, we already have Bankruptcy Rule 2019, which provides for some disclosures by certain creditors that seems more than sufficient for these purposes.

The bottom line for me is that I would not favor requiring any additional disclosures by creditors. A simple understanding of a creditor’s stake in the proceedings should be plenty to satisfy any legitimate need to evaluate its position. The other reasons for disclosure strike me as nefarious attempts to obtain a negotiating advantage over the creditor or an opportunity to malign the creditor in court.