Rule 2019 Update, Jones Day Business Restructuring Review
In the July/August 2010 edition of the Business Restructuring Review (Vol. 9, No. 4), we reported on significant changes to Rule 2019 of the Federal Rules of Bankruptcy Procedure ("Rule 2019") recommended by the Advisory Committee on Bankruptcy Rules (the "Rules Committee"). In its present form, Rule 2019 contains various disclosure requirements that must be complied with by "every entity or committee representing more than one creditor or equity security holder" in a chapter 9 or 11 case (except for official committees appointed under section 1102 or 1114 of the Bankruptcy Code).
Whether these disclosure requirements apply to ad hoc, or informal, creditor groups has been the subject of vigorous dispute in the bankruptcy courts during the last three years, with courts lining up on both sides of the divide in roughly equal numbers. Amendments to Rule 2019 originally proposed by the Rules Committee would have increased the scope of required disclosures by ad hoc committees, including information regarding each committee member’s "disclosable economic interest," a term defined to mean "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." Under the initial recommendation, the bankruptcy court would also have been given the authority to order the disclosure of amounts paid for claims or interests.
The Rules Committee’s final recommendation for changes to Rule 2019 (issued May 27, 2010), however, retreated from the "precipice of full pricing disclosure." Instead, the recommendation adopts substantially all of the changes lobbied for by trading-industry watchdogs, such as the Loan Syndications and Trading Association and the Securities Industry and Financial Markets Association, which have been actively seeking to repeal or alter Rule 2019 since 2007. Among other things, the amended rule (as compared to the Rules Committee’s initial recommendation) would: (i) remove any absolute requirement to disclose the price paid for a bankruptcy claim or reveal the claimant’s disclosable economic interest; (ii) delete any requirement to disclose the acquisition date of the claimant’s disclosable economic interest, except in rare cases where an unofficial group or committee claims to represent any entity other than its members (and even then, only the quarter and the year must be reported); and (iii) eliminate the authority of the court to order disclosure of the purchase price paid for a disclosable economic interest.
Although the Rules Committee has unanimously recommended that these changes be approved, the recommended revisions to Rule 2019 must be approved by the Standing Committee on Rules of Practice and Procedure, the Judicial Conference, and the U.S. Supreme Court before they become effective. At present, such approval is anticipated so that revised Rule 2019 will become effective as of December 1, 2011.
In the meantime, the debate concerning Rule 2019’s application to ad hoc committees continues in the nation’s bankruptcy courts. On September 15, 2010, an Ohio bankruptcy court made yet another contribution to the Rule 2019 jurisprudence. In In re Milacron, Inc., an ad hoc group of a chapter 11 debtor-corporation’s noteholders consisting of distressed debt and hedge funds sought derivative authority to prosecute various causes of action against the company’s officers and directors on behalf of the bankruptcy estate. One of the defendants sought an order of the bankruptcy court directing the noteholders, pursuant to Rule 2019, to disclose their economic interest in the derivative claims as part of the required showing that the claims against the defendants were colorable.
Relying on a Pennsylvania bankruptcy court’s 2010 ruling in In re Philadelphia Newspapers, LLC, the noteholders contended that Rule 2019 does not apply to them because they are neither an "entity" nor a "committee," and they do not "represent more than one creditor or equity security holder." The bankruptcy court acknowledged that the decision supports the noteholders’ position but explained that it is not binding and, on the basis of decisions to the contrary issued by other courts, observed that "the courts that have gone before us offer no clear path." The court ultimately granted the defendant’s Rule 2019 motion, holding that: (i) the language used by the noteholders in their response to the motion indicated that they were acting as "an entity representing more than one creditor," a conclusion bolstered by the Rules Committee’s recommendations for changes to Rule 2019; and (ii) given the context of their request for derivative standing to prosecute estate claims, the noteholders will have to "identify their members with more transparency" in order to demonstrate that they have colorable claims and that the debtor’s refusal to bring such claims is unjustified. According to the court, unlike in Philadelphia Newspapers, where the group of lenders may not have been considered an "entity" because they were only "steering" a bankruptcy case, Milacron’s noteholders "are plaintiffs intending to bring a lawsuit," and full disclosure of their identities "is warranted and not prejudicial." This conclusion is further supported, the bankruptcy court wrote, "by the general proposition that the Bankruptcy Court is a public place."
In re Northwest Airlines Corp., 363 B.R. 701 (Bankr. S.D.N.Y. 2007).
In re Scotia Development LLC, Case No. 07-20027-C-11 (Bankr. S.D. Tex. Apr. 18, 2007).
In re Washington Mutual, Inc., 419 B.R. 271 (Bankr. D. Del. 2009).
In re Premier Int’l Holdings, Inc., 423 B.R. 58 (Bankr. D. Del. 2010).
In re Accuride Corp., Case No. 09-13449 (Bankr. D. Del. Jan. 20, 2010).
In re Philadelphia Newspapers, LLC, 422 B.R. 553 (Bankr. E.D. Pa. 2010).
In re Milacron, Inc., 436 B.R. 515 (Bankr. S.D. Ohio 2010).