On December 1, 2011, a substantially amended Federal Rule of Bankruptcy Procedure 2019, which contains disclosure requirements for certain representative entities and the creditors and equity security holders they represent, went into effect. Amended Bankruptcy Rule 2019 generally clarifies the groups, committees, and other entities that must make disclosures. It also broadens the types of economic interests that must be disclosed (to include, among other things, derivative instruments) but at the same time scales back disclosure requirements pertaining to claims pricing, one of the more controversial aspects of the prior iteration of the rule.

Background

Rule 2019 was promulgated in connection with the adoption of the Bankruptcy Code in 1978. Prior to its recent amendment, Rule 2019 obligated "every entity or committee representing more than one creditor or equity security holder and, unless otherwise directed by the court, every indenture trustee" to file a verified statement disclosing information about its claims. This statement required each such entity, committee and indenture trustee to disclose "the amounts of claims or interests owned by the entity, the members of the committee or the indenture trustee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof." If a verified statement did not include this information, on motion of any party-in-interest or on its own initiative, the court could, among other things, refuse to permit the entity, committee or indenture trustee to be heard further or intervene in the cases and hold invalid any authority, acceptance, rejection, or objection, given, procured or received by it.

The requirements of Rule 2019 went undisputed for years until the rise of so called "ad hoc" groups or committees of creditors formed to share costs and to increase influence in chapter 11 cases as a result of collective action. Historically, ad hoc groups sought to comply with Rule 2019 by disclosing only the names of committee members and the aggregate amount of the claims held by such members. That practice was challenged, however, as ad hoc committees began to play an increasingly active and important role in chapter 11 cases and debtors and other parties in interest sought to curtail their influence. The first decision addressing the scope of Rule 2019 was published in 2007 and bankruptcy courts ever since have issued conflicting rulings on how strictly the rule must be followed, who must disclose, and the type of information that must be provided.1

In response to these inconsistent decisions, in August 2009, the Advisory Committee on Bankruptcy Rules proposed amendments to Rule 2019. This proposed amended rule was commented on by the public, revised in response to such comments, and passed through various committees for approval. Most of the debate surrounding the amendments was focused on disclosure of the date when economic interests were acquired and the amount paid for such interests with many commentators arguing that such information was generally irrelevant to any issue in a chapter 11 case and prone to strategic use. In addition, some commentators argued that, among other things, agents and indenture trustees should not be required to disclose individual lender and bondholder information. Finally, in April of this year, the Supreme Court reviewed and approved the amended Rule and, as there was no Congressional veto of it, the amended Rule went into effect on December 1, 2011.

Amended Rule 2019

Amended Rule 2019 applies to "every group or committee that consists of or represents, and every entity that represents, multiple creditors or equity security holders that are (A) acting in concert to advance their common interests, and (B) not composed entirely of affiliates or insiders of one another." The addition of "group" and "consists of" serves to resolve the split in the pre-amendment case law with respect to the applicability of Rule 2019 to ad hoc groups and parties operating informally in concert. Given that the phrase "acting in concert" is not defined by the amended rule, however, it is likely that there will be future disputes as to its meaning.

The inclusion of "consists of" also creates a disparity in the way amended Rule 2019 treats "groups and committees" on the one hand and "entities" on the other. Namely, amended Rule 2019 applies to groups or committees that "consist of or represent" but only to entities that "represent" multiple creditors or equity security holders acting in concert to advance their interests and that are not composed entirely of affiliates or insiders. Amended Rule 2019 defines "represent" as to "take a position before the court or to solicit votes regarding the confirmation of a plan on behalf of another." The net effect is that, unlike entities, groups or committees may have to make Rule 2019 disclosures regardless of whether they appear before the court or actively engage in the plan solicitation process.

As a result of modifications made following the comment period, amended Rule 2019 is now clear that indenture trustees, administrative agents under credit agreements, and groups of insiders or affiliates are exempt from its disclosure requirements. Additionally, in a significant change to the existing rule, groups, committees and entities subject to amended Rule 2019 will be required to disclose, among other things, credit default swaps and similar positions, as a result of the expansion of the rule to cover all "disclosable economic interests." The term "disclosable economic interests" is defined broadly to include not only claims or interests, but all economic rights and interests that could affect the legal and strategic positions that a party in interest takes in a case, including pledges, liens, options, participations, and derivative instruments, as well as "any other right or derivative right that grants the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest."

Although amended Rule 2019 generally increases disclosure requirements, it does limit the information that needs to be provided regarding a party's acquisition of a "disclosable economic interest." Under amended Rule 2019, a party is no longer required to provide the date on which an interest in the debtor was acquired except in limited circumstances, although where a group or committee purports to represent the interests of parties beyond its members that the members are required to disclosure the quarter and year in which their respective interests were acquired. Furthermore, amended Rule 2019 eliminates the prior pricing disclosure requirement; however, the Advisory Committee Notes to the amendment do state that "[a]lthough the rule no longer requires the disclosure of the precise date of acquisition or the amount paid for disclosable economic interests, nothing in this rule precludes the discovery of that information when it is relevant or its disclosure when ordered by the court pursuant to its authority outside this rule."

Similar to the old Rule 2019, amended Rule 2019 contains an obligation to update the information contained in the verified statement if there are material changes. Likewise, if there is a failure to comply, amended Rule 2019 provides that the court can, among other things, refuse to permit the entity, group or committee to be heard further or intervene in the cases and hold invalid any authority, acceptance, rejection, or objection, given, procured or received by it.

Amended Rule 2019 went into effect on December 1, 2011 and applies in all proceedings in bankruptcy cases commenced on or after December 1, 2011. Amended Rule 2019 may also be applied in pending cases, unless a party demonstrates that application of such rule would be inappropriate under the circumstances.

Footnote

1 In re Northwest Airlines Corp., 363 B.R. 701 (Bankr. S.D.N.Y. 2007) (holding that an ad hoc committee of equity security holders (which was made up of hedge funds and other investment entities) was obligated to supplement their initial Rule 2019 disclosure and provide detailed information of each member's claims as required by Rule 2019); In re Scotia Development LLC, No. 07-20027 (Bankr. S.D. Tex. April 18, 2007) (holding that Rule 2019 did not apply to an ad hoc group of noteholders and therefore they were not required to file a supplemental Rule 2019 statement describing each member's claims); In re Washington Mutual, 419 B.R. 271 (Bankr. D. Del. 2009) (holding that Rule 2019 applied to an informal group of noteholders and therefore extensive disclosure was required); In re Premier International Holdings, Inc. (Six Flags), 423 B.R. 58 (Bankr. D. Del. 2010) (holding that disclosure under Rule 2019 was not required for an informal bondholders' committee); In re Accuride Corp., Case No. 09-13449 (Bankr. D. Del. Jan. 20, 2010) (holding that an ad hoc noteholders committee was required to disclose information concerning their interests under Rule 2019); In re Philadelphia Newspapers, LLC, 422 B.R. 553 (Bankr. E.D. Penn. 2010) (holding that Rule 2019 did not apply to a lenders' steering committee and therefore, it was not required to supplement its initial disclosure with the date or price at which the debt was acquired); In re Milacron, Inc., 436 B.R. 515 (Bankr. S.D. Ohio 2010) (holding that a noteholder group was acting as an "entity" and therefore full disclosure under Rule 2019 was warranted).

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