Regina Kelbon and Lora M. Epstein
Recently, the Supreme Court adopted amendments to Rule 2019 of the Federal Rules of Bankruptcy Procedure (“New Rule 2019”) which will largely affect debt traders, equity traders and other creditors who for many years have been able to take positions in bankruptcy cases without disclosing private information about their financial transactions, trading procedures and habits and economic claims and interests. New Rule 2019 expands the disclosures required by creditors or equity traders who, acting in concert, participate in Chapter 9 or 11 bankruptcy cases and broadens the scope of the rule to reach unofficial committees and informal groups. This disclosure rule is in response to the recent influx of bankruptcies over the past few years that have resulted in confusing and inconsistent decisions as to whom must disclose and what information they must provide.
If approved by Congress, New Rule 2019 will require disclosures by every group or committee that consists of or represents, and every entity that represents, multiple creditors or equity traders acting in concert, as well as each creditor or equity trader who is a member of such group or committee, regarding, among other things:
- Formation of the committee or group; or
- Employment of the entity; and
- Name and address, nature and amounts of each “disclosable economic interest” held in relation to the debtor and in special circumstances, the quarter and year in which each “disclosable economic interest” was acquired.
This clearly delves deep into areas of financial transactions that creditors prefer to keep confidential. In limiting the disgorgement of information, the amendments do not require disclosure on the price paid for the claims, an important exclusion that came out of lobbying from debt traders and other creditors following the initial proposal of the amendments 18 months ago. Though New Rule 2019 falls short of such price disclosure, it nevertheless expands the scope and the requirements of the rule as it currently stands.
Additionally, since New Rule 2019 applies to groups as well as committees, debt traders or equity traders who form an informal group will have a difficult time avoiding the disclosure requirements by arguing, as they have done in the past, that they are not a committee. Moreover, the disclosure requirements are no longer aggregate holdings but rather must be reported on an individual basis. New Rule 2019 also requires updated disclosures by any party if facts materially change after the initial disclosure is made.
New Rule 2019 also makes it harder for stakeholders to avoid disclosure given the intentionally broad definition of “disclosable economic interest” as “any claim, interest, pledge, lien, option, participation, derivative instrument, or 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”.
As well, New Rule 2019 defines “represents” as taking “a position before the court or to solicit votes regarding the confirmation of a plan on behalf of another”, thereby reaching a broad universe.
Certain exemptions from reporting include groups or committees composed entirely of affiliates or insiders of one another and exemptions from reporting for each of the following entities solely because of its status as: (i) indenture trustee, (ii) an agent for one or more other entities under an agreement for the extension of credit, (iii) a class action representative or (iv) a governmental unit that is not a person. This exception parts with the current rule that includes an indenture trustee in the disclosure requirements but it is worth noting that the “solely because” language in the rule indicates that there might be circumstances where the exempted parties could be required to disclose under the rule.
Furthermore, while certain provisions of the New Rule 2019 expressly do not apply to official committees, other more limited provisions may apply.
Importantly, the court still has discretion in imposing sanctions for failing to comply with the rule, including disallowing certain participation in the case or invalidating a vote on a reorganization plan.
Congressional approval is anticipated such that the amendments should be effective on December 1, 2011. Though the effect of New Rule 2019 remains to be seen, it does require broader disclosure and more transparency. This outcome may deter creditor participation in bankruptcy cases or the trading of distressed debt. Likewise, the rule could potentially discourage creditors from working together as a group, which would be an unintended workaround to avoid all the disclosure required under the rule and would effectively negate the rule itself.
For more information on Rule 2019 and the proposed amendments, please contact Regina Stango Kelbon, 302-425-6424.
A copy of the proposed rule is available at: http://www.supremecourt.gov/orders/courtorders/frbk11.pdf