U.S. Supreme Court Adopts Revised Bankruptcy Rules; Amendments To Bankruptcy Rule 2019 Will Requires Extensive Disclosure

The United States Supreme Court recently adopted a number of changes to the Federal Rules of Bankruptcy Procedure, including Bankruptcy Rule 2019. Unless Congress decides to make some of its own changes, the Supreme Court's version will become effective December 1, 2011.

Bankruptcy Rule 2019 has been around in one form or another since the 1930s and until 2007 never garnered much attention. In fact, compliance with Rule 2019 was often incomplete, if not altogether ignored. Then in the Northwest Airlines case in 2007, the Debtors requested that the Court require compliance with Rule 2019 by an ad hoc committee of creditors and equity security holders. The Court ultimately required compliance by the ad hoc committee finding that it had played an important role in the case, had spoken on behalf of the representative groups, and had asked the Court to give it credibility because the group ostensibly spoke for a large number of constituents. In a number of subsequent cases the same issue was addressed, but not always with the same outcome. These decisions started a national discussion about whether Rule 2019 should be amended or possibly repealed altogether. After much debate, Rule 2019 remains in effect, but it has been amended in a few notable areas. The following summarizes the changes:

• Rule 2019 now requires disclosure by every entity group or committee that consists of or represents, and any entity that represents, multiple creditors or equity security holders who are (A) acting in concert to advance their common interests, and (B) not composed entirely of affiliates or insiders of one another.
• • This means the Rule now extends to groups or committees that consist of more than one creditor or equity security holder acting in concert regardless of whether they call themselves a committee.
  • "Represents" means to take a position before the Court or to solicit votes regarding confirmation of a plan. So with respect to an entity, such as an attorney who might represent more than one creditor, the entity is not required to file a Rule 2019 disclosure unless it takes one of these actions on behalf of one the parties.
  • The Rule no longer excludes official committees, except as specifically indicated. Some of the information an unofficial committee or group and its members are required to disclose is not required of an official committee and its members.
• The Rule no longer applies to, among others, indenture trustees or agents under a credit agreement (unless the court orders otherwise).
• The Rule now requires, among other things, disclosure by each member of a group or committee the nature and amount of each disclosable economic interest as of the date the group or committee was formed. In addition, in some instances the date of acquisition of the disclosable economic interest by quarter and year is also required, unless the interest was acquired more than one year before the petition date. The Rule also requires disclosure of the nature and amount of each disclosable economic interest as of the date of the statement of any party represented by an entity, group or committee. So if there are parties who are represented by the group or committee, but who are not necessarily members of the group or committee, their respective disclosable economic interests must be separately disclosed.
• • "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 broad enough to cover any economic interest that could affect the legal and strategic positions of a stakeholder, including short positions, credit default swaps, and total return swaps.
  • The Rule no longer requires disclosure of the precise date of acquisition nor the price paid for the interest. Of course, this information may still be obtained through discovery to the extent it is relevant.
• If there has been a failure to comply with the Rule, the Court can impose a number of sanctions, including refusing to permit the entity, group or committee to be heard; holding invalid any action taken by the entity, group or committee; or granting such other appropriate relief.
• • The changes to the sanctions provisions appear to be more stylistic than substantive, although they do appear to eliminate the Court's authority to determine whether the entity, group, or committee has violated any other applicable law regulating the activities or personnel.

Conclusion

It remains to be seen how the changes adopted by the Supreme Court will effect future Chapter 11 cases. But one thing is clear: the Rule is here to stay and given all the attention it has received, it is more likely than ever to be enforced going forward.

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