Revised Bankruptcy Rule 2019, which governs disclosure requirements for groups and committees in Chapter 9 and 11 bankruptcy cases, went into effect on Dec. 1, 2011. The following is a summary of a few key facets of the new rule.
The new Rule 2019 requires certain disclosures by “every group or committee that consists of or represents, and every entity that represents, multiple creditors or equity securities 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 broadened scope of the rule puts an end to the ongoing debate under the prior rule as to whether it applied to ad hoc “groups” or only to formal committees. However, revised Rule 2019 leaves open the meanings of “acting in concert” and “common interests,” adding back some uncertainty as to the rule’s applicability (and providing a means for clever participants to structure their dealings with other creditors so as to avoid coming under the rule for as long as possible). Importantly for debt lenders and secondary-market participants, the rule specifically exempts indenture trustees and credit agreement agents from the new disclosure requirements.
A Rule 2019 disclosure statement now must include the “pertinent facts and circumstances” related to the formation of the group or committee, including the name of each entity that caused the formation or for what entities the group or committee is acting. The statement must also include each member’s name, address, and the nature and amount of its “disclosable economic interest” as of the date of formation. The rule defines disclosable economic interest as “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.” Although not specified in the rule, the Advisory Committee notes indicate that the definition is intended to be broad enough to incorporate short positions, CDSs and TRSs. This expansive scope is a critical element of the new rule, as a driving force behind the move to revise Rule 2019 was a concern that members of groups or committees could be outwardly active in the reorganization process while having (unbeknownst to the debtor or other creditors) larger,undisclosed short positions, such that the members would derive a greater benefit from the debtor’s failure than from a successful restructuring. Importantly, the rule does not require the disclosure of the price or the timing of the entities’ coming into the interest.2
The disclosure requirement under new Rule 2019 is triggered as soon as members of a group or committee begin “acting in concert to advance their common interests” without the necessity of the members becoming active in the case or taking a position before the court. Further, after a group or committee has filed a Rule 2019 statement, it will be required to file a supplemental statement whenever it takes a position before the court, if there have been any material changes to its prior disclosure.
What Is the Impact?
Failure to comply with the new Rule 2019 can have serious ramifications. Any party in interest may seek a determination, or the bankruptcy court itself may inquire on its own, whether there has been a failure to comply with the rule. If the court finds such a failure, it may: (1) refuse to permit the group or committee to be heard or to intervene in the case; (2) “hold invalid any authority, acceptance, rejection, or objection given, procured, or received by the group of committee”; or (3) fashion any other relief it deems appropriate. Given the breadth and nature of the new disclosure requirements and the potentially serious consequences of non-compliance, a creditor or equity holder needs to carefully consider whether the benefits of concerted action, such as increased influence and shared counsel fees, outweigh the associated burdens imposed by the revised rule