On April 26, 2011, the Supreme Court of the United States adopted a completely revamped version of Rule 2019 of the Federal Rules of Bankruptcy Procedure to govern disclosure requirements for groups and committees that consist of or represent multiple creditors or equity security holders, as well as lawyers and other entities that represent multiple creditors or equity security holders, acting in concert to advance common interests in a chapter 9 or chapter 11 bankruptcy case. The revised rule should end years of inconsistent and controversial case law regarding the current rule's scope and the nature of its disclosure requirements with respect to unofficial committees and groups. The Supreme Court's order promulgating these amendments provides that they will take effect on December 1, 2011, and will govern in all proceedings in bankruptcy cases thereafter commenced and, "insofar as just and practicable," all proceedings then pending.

Definitions

The amended rule contains the following new definitions:

  • A new term, "disclosable economic interest," is added to the rule to clarify and expand the information that must be disclosed by entities, committees and groups that fall within the scope of the rule. "Disclosable economic interest" means "any claim, interest, pledge, lien, option, participation, derivative, instrument, or any other right or derivative right granting the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest." This definition is intended to be sufficiently broad to cover any economic interest that could affect the legal and strategic positions a stakeholder takes in the bankruptcy case. A "disclosable economic interest" extends beyond claims and interests owned by a stakeholder and includes, among other types of holdings, short positions, credit default swaps, and total return swaps.
  • The amended rule, for the first time, clarifies when an entity "represents" multiple creditors or equity security holders. "Represent" or "represents" means to take a position before the court or to solicit votes regarding the confirmation of a plan on behalf of another. This definition is intended to convey that representation requires active participation in the case or in a proceeding on behalf of another entity – either by taking a position on a matter before the court or by soliciting votes on the confirmation of a plan. Thus, for example, an attorney who is retained and consulted by several creditors or equity security holders to monitor the case, but who does not advocate any position before the court or engage in solicitation activities on behalf of clients, does not represent the creditors or equity security holders for purposes of Rule 2019 and would not have to make disclosures under the rule.

Entities, Committees and Groups Falling Within the Scope of the Rule

Under the amended rule, a verified statement making the required disclosures must be filed by every group or committee that consists of or represents, and every entity that represents, multiple creditors or equity security holders that are (i) acting in concert to advance their common interests, and (ii) not composed entirely of affiliates or insiders of one another. It does not matter whether the multiple stakeholders call themselves an "ad hoc committee" or use any other title.

Although the current rule excludes official committees appointed by the United States trustee, the amended rule will include official committees within its scope so that members of official committees will be required to disclose their disclosable economic interests. Creditors with an opportunity to serve on an official committee should consider the new disclosure requirements before accepting an appointment to the committee.

Despite the inclusion of entities that represent multiple creditors or equity security holders within the scope of the amended rule, unless the court orders otherwise, the rule does not require disclosure by an indenture trustee, an agent for one or more other entities under an agreement for the extension of credit (such as an agent bank), a class action representative, or most governmental units. Even though these entities may represent multiple creditors or equity security holders, they do so under formal legal arrangements of trust or contract law that precludes them from acting on the basis of conflicting economic interests. For example, an indenture trustee's responsibilities are defined by the indenture, and individual interests of bondholders would not affect the trustee's representation.

As indicated above, the amended rule will not apply to committees or groups of multiple stakeholders consisting entirely of affiliates or insiders of one another. Thus, a group of affiliated corporations represented by one attorney, or a group of affiliated funds represented by one attorney or fund manager, would not be required to make disclosures under the amended rule.

Information Required to be Disclosed

The amended rule requires the filing of a verified statement including the following:

  • with respect to a group or committee, other than an official committee, the facts and circumstances regarding its formation, including the name of each entity at whose instance the group or committee was formed or for whom the group or committee has agreed to act;
  • with respect to an entity representing multiple creditors or equity security holders, the facts and circumstances regarding the employment of the entity, including the name of each creditor or equity security holder at whose instance the employment was arranged;
  • with respect to an entity representing multiple creditors or equity security holders, and each member of a group or committee (including official committees), the name and address of the person, and the nature and amount of each disclosable economic interest held (not in the aggregate) in relation to the debtor as of the date the entity was employed or the group or committee was formed;
  • with respect to each member of a group or committee, other than an official committee, that claims to represent any entity in addition to the members of the group or committee, the quarter and year in which each disclosable economic interest was acquired by each member of the committee or group, except for disclosable economic interests acquired more than one year prior to the filing of the petition. Also, in such cases, the name and address and nature and amount of disclosable economic interests must be disclosed by those non-members who are represented by the group or committee; and
  • a copy of the instrument, if any, authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

It is worth noting that the amended rule differs from the current rule, which requires members of unofficial committees to disclose the price and date of acquisition of claims and interests in the debtor. Such disclosure will not be required under the amended rule. However, as explained in the committee note to the amended rule, nothing in the amended rule precludes either the discovery of that information or its disclosure when ordered by the court pursuant to authority outside the amended rule.

Supplemental Statements

The amended rule requires a supplemental statement to be filed whenever an entity, group, or committee takes a position before the court or solicits votes on a plan if there has been a material change in any of the information contained in its last filed statement. The supplemental verified statement will need to set forth the material changes that have occurred regarding the information required to be disclosed.

Remedies for Failure to Comply

On motion of any party in interest, or on its own motion, the court may determine whether there has been a failure to comply with any provision of the amended rule. If the court finds such a failure to comply, it may:

  • refuse to permit the entity, group, or committee to be heard or to intervene in the case;
  • hold invalid any authority, acceptance, rejection, or objection given, procured, or received by the entity, group, or committee; or
  • grant other appropriate relief.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.