A decision out of the U.S. Bankruptcy Court for the Southern District of New York raises questions about what many have considered to be a routine order in large chapter 11 cases. In In re: Spiegel, Inc., 2003 Bankr. LEXIS 435 (May 7, 2003), the bankruptcy court while not outright denying the application, declined, on the record in front of it, to enter a “Securities Trading Order,” and generally expressed reservations about such orders.
In Spiegel, the Official Committee of Unsecured Creditors (”Committee”) consisted of nine members including bank lenders, trade creditors and a landlord, and one ex-officio member, another bank. Shortly after the committee was formed, counsel for the committee sought an order providing that committee members who, as a regular part of their business, trade in securities for others or for their own account, would not be violating their fiduciary duties as committee members if they continued trading in debtor’s securities or debt as long as they established an appropriate “Screening Wall.” A Screening Wall (or “Chinese Wall” or “Ethical Wall”) is a protocol designed to block information flow between the individual(s) designated as committee member(s) and those individuals working in the member’s trading department. Such orders have been granted since at least 1991, when the bankruptcy court, after review of positions taken by the Securities and Exchange Commission, approved such procedures in In re Federated Dep’t. Stores, Inc., Case No. 1-90-0130, 1991 Bankr. LEXIS 288 (Bankr. S.D. Ohio Mar. 7, 1991). The concern addressed by these orders is that without such orders, sophisticated financial institutions would be less willing to serve as committee members, thus the knowledge base of a significant constituency could be lost in bankruptcy cases. As authority for the motion, the committee cited, among other orders, the order entered by the U.S. Bankruptcy Court for the Southern District of New York in the WorldCom case, and the order entered by the presiding judge in the case of Iridium Operating LLC.
Despite the lack of objection, the bankruptcy court declined to grant the request of the committee based on a lack of factual record. In the court’s view, the lack of factual record distinguished Spiegel from Iridium, in that the Spiegel application, unlike the Iridium application, was devoid of any information regarding the nature of any committee members’ businesses, their fiduciary duties, or the specific harm that would inure to any members if the relief was not granted. The court declined to discuss the order entered in WorldCom because it was not binding on the court. Because of the lack of factual record, the court continued the matter for further hearing.
Such a decision, standing alone, would not necessarily cause concern, however, in setting the matter over for further hearing, the court questioned in a broader sense, the propriety of such orders:
Even with such a [factual] record, this court would not be inclined to grant such relief as the committee requests, as this court intends to hold the committee to full and strict compliance with its fiduciary obligations. For example, if members of the committee are allowed to trade in the securities of the debtor, regardless of how the creditor internally divides its office, there is an appearance of impropriety—to the extent that such trading information is made public, the trades of a creditor-company which sits on an official committee of unsecured creditors could influence non-members in the marketplace who may not be aware that the creditor has a screening wall or other such device in place.
Hindsight is always 20/20, and this court rues the day it opened the Pandora’s Box in Iridium. This court has very strong reservations about the relief requested, but will not deny the application at this time.
Spiegel, *5 (citations omitted). The court also expressed concerns about whether any relief, if granted, should apply to an ex-officio committee member questioning the circumstances under which such party became an ex-officio member and the motive for taking on such status.
We will not know whether the court could have been persuaded to approve the committee’s application despite its stated reservations. After the decision, the committee withdrew its motion. However, the case shows that such orders will not necessarily be routinely granted, and financial institutions looking for such protections should consider whether they are willing to serve on a committee without such an order in place.