On April 26, 2011, the Supreme Court of the United States adopted amended Federal Rule of Bankruptcy Procedure 2019 (“Rule 2019”). Rule 2019 governs 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 in a Chapter 9 or Chapter 11 bankruptcy case. Absent congressional action to the contrary, amended Rule 2019 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.
Significant Differences From Current Rule
The amended rule includes the term “disclosable economic interest,” which is intended to clarify and expand the scope of the rule beyond direct claims or interests to include derivatives, participations, pledges, options and other indirect interests held by entities, committees and groups that fall within the disclosure obligations of the rule.
The amended rule defines the meaning of “represent” in connection with a case under Chapter 9 or Chapter 11 of the Bankruptcy Code, which definition clarifies 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. The amended rule modifies the disclosure requirements under the current rule by reducing the level of specificity of information required concerning the prices and dates of acquisition of claims and interests in the debtor — the amended rule requires only the disclosure of disclosable economic interests by date of employment of the representing entity or formation of the committee, or under certain circumstances, quarter and year of acquisition. The amended rule does not require the disclosure of price paid for a disclosable economic interest.
Rule 2019, in its current form, requires any entity or committee, other than an official committee, representing more than one creditor or equity security holder, to disclose, among other things: (i) the amounts of claims or interests owned by the members of the committee, (ii) the time of acquisition of such claims or interests, (iii) the amounts paid for such claims or interests and (iv) any sales or other dispositions of such claims or interests. Bankruptcy Courts for the Southern District of New York, the District of Delaware and several other jurisdictions have recently issued a series of sometimes inconsistent decisions concerning the application of the rule to ad hoc committees and informal groups of creditors and equity security holders. See, e.g., In re Northwest Airlines Corp., 363 B.R. 701, 703 (Bankr. S.D.N.Y. 2007) (requiring an ad hoc committee of equity security holders to supplement its Rule 2019 statement to disclose the amounts of claims or interests owned by the members of the committee, the times when acquired, the amounts paid, and any sales or other disposition); In re Washington Mutual, Inc., 419 B.R. 271, 274 (Bankr. D. Del. 2009) (holding that a “group” of noteholders constituted an ad hoc committee subject to the disclosures required by Rule 2019, despite the argument of the noteholders that they were simply a group of creditors sharing the cost of counsel and without authority to speak for or bind one another); cf. In re Premier Int’l Holdings, Inc., 423 B.R. 58, 63 (Bankr. D. Del. 2010) (denying the motion of the official committee of unsecured creditors seeking to compel an informal committee of noteholders of Six Flags Operations, Inc. to comply with Rule 2019, because the informal committee was not a “committee” for purposes of Rule 2019 as it did not represent any persons other than its members by consent or operation of law).
Amended Rule 2019
The amended rule provides clearer guidance regarding required disclosures for creditors and equity security holders participating in chapter 9 and chapter 11 cases. In particular, 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. Whether the stakeholders title themselves as an “ad hoc committee,” “group,” or any other name is irrelevant for purposes of application of the amended rule.
As noted above, the amended rule includes two new definitions:
- “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.” The definition of “disclosable economic interest” 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.
- “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. The definition of “represent” clarifies 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 amended rule.
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.
Unless the court orders otherwise, the amended 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, 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.
Under the amended rule, the time of acquisition of a disclosable economic interest is required to be disclosed only by (i) an entity representing multiple creditors or equity security holders, and each member of a group or committee (including official committees), and (ii) each member of a committee that claims to represent any entity in addition to the members of the committee (along with certain disclosures by non-members who are represented by the group or committee). With respect to the former, the required disclosure is limited to the disclosable economic interest held as of the date the entity was employed or the group or committee was formed. With respect to the latter, the required disclosure is limited to the quarter and year in which each disclosable economic interest was acquired, except the time of acquisition need not be disclosed for disclosable economic interests acquired more than one year prior to the filing of the petition.
Importantly, the amended rule does not require the disclosure of the price paid for a disclosable economic interest. However, as explained in the advisory committee note to the amended rule, nothing in the amended rule precludes either the discovery of that information when it is relevant or its disclosure when ordered by the court pursuant to authority outside of the amended rule.