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Ad Hocracy

posted by John Pottow

A storyline in the AMR bankruptcy is exposing how confusing it's becoming (at least to me) to keep track of negotiating groups in chapter 11.  (Here's a good recent story from WSJ.)  Gone are the days of the simple Creditors Committee.  Now we have Ad Hoc groups of bondholders.  While there was some initial dust-up about disclosure requirements when these sorts of groups emerged, that's settled somewhat.  What I am now baffled about is the Ad Hoc group in AMR, which does not apparently see eye-to-eye with a non-Ad Hoc ad hoc group of hedge funds.   Apparently these funds were invited to join the Ad Hoc group (but declined? why??) and now are complaining that the Ad Hoc group is getting special treatment in negotiations during the exclusivity period.  (I wonder how the Creditors Committee feels?)

The broader point that has me head-scratching is why are these groups assembled (presumably for negotiating leverage) and why do they have intra-class divergence along the lines we're seeing in AMR?  Is it cultural (don't want to work with certain funds)?  Strategic (don't want to be dragged down to USAiways merger by funds with a stake there)?  Other?

Speculations welcome, because it all just devolves for me into unhappy recollection of the cliquishness of high school.  Splitters!


1) Creditors' committees are frequently arbitrary constructs of the U.S. Trustee's office;
2) Creditors had relationships with each other prior to filing;
3) These relationships are not going to change simply because of the simplistic priorities of the Code; and
4) #3 is reinforced by the realities of Chapter 11, especially first-day motions that reprioritize pre-petition debts, and the continuing operations of the debtor that perpetuate pre-petition relationships while creating post-petition claims;

therefore, it doesn't surprise me a bit to find all sorts of alliances forming and shifting within a case.

The main reasons these groups form are 2:

One is that large cases are usually jointly administered as one and thus a single official committee represents all unsecureds as to all estates. This is more efficient in many ways than multiple debtor counsel and FA's matched by multiple committees. But in fact different estates may have different creditors and different recovery prospects. The debtors' professionals and the UCC will be conflicted in addressing these disparities and so an ad hoc committee or two needs to form to do so.

2) By forming an ad hoc and hiring a single law firm and FA to appear in court and do negotiations for them, creditors pool resources and save costs. But in addition, were the funds to deal directly with the debtor, they might get, or be accused of getting, material nonpublic info that would affect their ability to trade in the debtor's securities, which is anathema. So the ad hoc professionals serve as a wall of sorts for the traders.

3) As to why there are multiple ad hocs, see #1 in some cases. Otherwise, keep in mind that business is down and a lot of professionals are looking for work.

the imperialist creditor nations -- which placed themselves permanently in charge of the IMF and World Bank when they created them after WWII

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