Everything Starts Somewhere: DSI's Catherine Vance Unlocks the Mystery Behind the Origin of BAPCPA's Section 1102(b)(3), Which Requires a Creditors' Committee to Provide Creditors with Access to Information and a Ready Ear - Part I

Catherine E. Vance, DSI's research and policy guru, is as steeped in the legislative history of BAPCPA as you'll find. During BAPCPA's most formative and "tumultuous years," starting in 1998, Cathy viewed BAPCPA's development from the unique vantage point of legal writer, analyst, and national education coordinator for the Commercial Law League of America. Clearly then, given BAPCPA's well-known flaws, when Cathy decides to look into the history of BAPCPA's incongruous new Code section 1102(b)(3) (which requires a creditors' committee to "(A) provide access to information for creditors who hold [like] claims" and "(B) solicit and receive comments from [such] creditors"), it's worth reflecting on her comments.

Cathy's latest work, entitled The Origin of Information Sharing Under New § 1102(b)(3) (pdf), however, is not about "the legal problems with these § 1102(b)(3) orders and the motions that underlie them - most notably the absence of a case or controversy and insufficient notice." Rather, she starkly notes, the purpose is "to dispel a myth that permeates them all: that we know nothing about the origin or purpose of § 1102(b)(3)."

So what should we know about the origins of Section 1102(b)(3)? Well, for starters, it's origins were quite inauspicious, resting on a short statement from Representative Nydia Velasquez, then the ranking democratic member of the House Small Business Committee, who "[o]n May 5 ... offered House Amendment 57, making her intention clear: Vel�zquez had small business creditors on her mind, especially those whose claims are large from the creditor's perspective, but small from the debtor's."

Cathy quotes directly from Representative Velasquez's passionate statement in support of the amendment (reported in the Congressional record), where Representative Velasquez said:

Mr. Chairman, while H.R. 833 provides a plan for overhauling our Nation's bankruptcy law, there is one issue that, while seemingly small, will have a great impact on this Nation's small businesses. That is the way that the bankruptcy process leaves small businesses who are creditors on the outside looking in.

To solve this problem, I am offering an amendment that will quickly and fairly address the issue by ensuring more small business involvement and greater communication in the bankruptcy process. My amendment will make two simple changes.

First, it would allow a small business involved as a creditor in a Chapter 11 bankruptcy case to be added to the creditor committee by the court. The court could make such an appointment by comparing the amount of the claim as a proportion of the business' gross annual revenue, thus showing that a business is disproportionately affected.

Second, my amendment will ensure that those small businesses not included on the creditor committee will have access to critical information regarding the credit [sic] committee's actions. This could be achieved by simply making the committee open to comments from and required to provide additional information to those small businesses not included on the committee but who will nonetheless be affected by the outcome.

Cathy notes that no further changes were proposed, and the provision sailed through without much further ado, "save for some unhelpful information included in the various House reports."

To Cathy, however, there is no need to engage in protracted mental anguish in every chapter 11 case over how to handle the most basic of chapter 11 duties (i.e., the sharing of information between the debtor and the committee). In effect, Cathy seems to argue, do what others have done with BAPCPA's more enigmatic provisions -- first, try to limit them; and if that doesn't work, ignore them. She writes:

Had the drafting been better, the information sharing amendment might not have become divorced from its intended beneficiaries, small business creditors. The companion to the information sharing amendment, a provision that permits the court to add small business creditors to the official committee, is much more clear; it speaks specifically to small business creditors whose claims are disproportionately large when compared to the creditor's annual gross revenue.


The § 1102(b)(3) amendment, however, is much less precise, and even with an understanding of its origin, there will still be problems applying the new mandate. The absence of any language limiting the information sharing amendment to small business creditors could force a broader interpretation than Rep. Vel�zquez intended because of the prevailing "plain language" rule. The language of the statute is not restricted to small business creditors, the reasoning would go, and the courts have no authority to add that restriction, irrespective of what Rep. Vel�zquez intended.

[W]hen one knows its history, the intent of the Vel�zquez amendment is clear. Thus, the courts could interpret § 1102(b)(3)'s reference to "creditors" as limited to small business creditors because the literal application of the provision would produce a result demonstrably at odds with the intent of its drafters.

That this issue regarding the sharing of information with non-Committee members turned out to be such a mess is no surprise. BAPCPA is perhaps the most maligned statute in recent memory, ranking up there according to this esteemed bankruptcy veteran as "the worst single piece of legislation since the Fugitive Slave Law or the Alien and Sedition laws" (see comment here). We all knew that BAPCPA would give bankruptcy professionals much to fight about and profit from. Here's a great example of how BAPCPA's shoddily drafted and ill-conceived provisions waste precious resources of troubled debtors, as well as the Courts.

Special thanks to Cathy Vance for graciously granting us the privilege and honor of posting her analysis. Part II, due up soon, will take a look at how bankruptcy professionals, together with the Courts, have tackled the confidentiality and disclosure issues raised by Section 1102(b)(3) in the five cases referenced in Cathy's article (Refco, Calpine, Dana, FLYi, and G+G Retail), and possibly others.

© Steve Jakubowski 2006