The Advisory Committee on Bankruptcy Rules recently issued a report to the Standing Committee on Rules of Practice and Procedure on amendments and new rules that were published for comment the previous year. The Advisory Committee’s report recommends substantial revisions to the amendments that were initially proposed to Bankruptcy Rule 2019. The revisions are responsive to the numerous comments, suggestions and objections made by hedge funds, institutional investors and other distressed debt investors.
Background
Not long ago, Rule 2019’s application was being fiercely litigated in courts around the country. Due to the rule’s ambiguous language, courts disagreed on whether Rule 2019’s disclosure requirements applied to informal and ad hoc committees. The level of disclosure required when Rule 2019 requires some information significantly affects the willingness of hedge funds, institutional investors and other distressed investors (who often make up such committees) to participate in bankruptcy proceedings.
Indeed, requiring detailed and public disclosure of their claims and interests would endanger proprietary and confidential information that is closely protected as part of their investment strategy. Some have argued that Rule 2019 was being used as a litigation tactic against such informal or ad hoc committees. The possibility for misuse became increasingly evident — and in some cases, outright criticized — with the conflicting decisions in In re Northwest Airlines Corp., In re Scotia Development, LLC, In re Washington Mutual, Inc., In re Premier Int’l Holdings, Inc. and In re Philadelphia Newspapers, LLC.1
Against this backdrop, the Advisory Committee proposed amendments last year that would clear up any ambiguity. Rule 2019’s operative definition of “disclosable economic interest” would now include, among other things, any claim, interest, pledge, lien, option, participation and derivative instrument. Most importantly, Rule 2019 would now explicitly apply to informal and ad hoc committees.
While the overwhelming majority of commentators supported clarifying and reinvigorating Rule 2019, there was concerted opposition on what types of information should be required under subsection (c). As proposed, the amendments would have required disclosure of (i) the amount paid for each disclosable economic interest, and (ii) the date when each disclosable economic interest was acquired (if not more than one year before the filing of the petition).
Most of the opposition came from hedge funds, institutional investors and other distressed debt investors, who testified that disclosing the purchase amount would allow competing firms to determine the disclosing party’s trading strategy. They further testified that disclosing the purchase date would allow competing firms to extrapolate the purchase amounts. Thus, the required disclosure of the purchase date would result in the purchase amounts being revealed, and in turn, the trading strategy. They argued that compromising their trading strategies would discourage their participation in bankruptcy proceedings and the purchase of distressed debt overall and an amended Rule 2019 could accomplish its goals of openness and transparency without such information.
Revised Amendments
Ultimately, the Advisory Committee was highly responsive to the concerns of these groups and made several revisions to the proposed amendments. While these revisions would preserve Rule 2019’s explicit application to informal and ad hoc committees, the Advisory Committee eliminated the disclosure requirement of the purchase amount of the disclosable economic interest. With respect to the disclosure requirement of the purchase date, the requirement would be limited only to the quarter and year of acquisition.
In addition, other substantive revisions to the proposed amendments include (i) limiting the application of Rule 2019 only to those entities or groups that are actively taking positions before the court, thereby removing entities that are only passively involved from coverage under the rule, (ii) exempting indenture trustees, administrative agents under credit agreements, class action representatives and certain governmental units from Rule 2019’s disclosure requirements (unless the court ordered otherwise), and (iii) limiting subsection (d)’s requirement of updated supplemental statements, only when there was a material change to any fact disclosed in its most recently filed 2019 statement.1
Conclusion
These revisions to the proposed amendments resolve many of the issues that have led to the recent controversy and split in the courts under current Rule 2019. The revised and amended Rule 2019 as it now stands, must still be approved by the Standing Committee on Rules of Practice and Procedure, the Judicial Conference of the United States and the U.S. Supreme Court before being reviewed by Congress and becoming effective. This will take several months but a final revised Rule 2019 should eventually take effect around December 1, 2011. Until then, current Rule 2019 still remains in full force and effect.
