Contributed by Sara Coelho
Like everyone else in the bankruptcy world, we have been following the amendment process to Bankruptcy Rule 2019, a rule that addresses disclosures required by cooperating creditors and equity holders. In a post yesterday, we described the new rule and its requirements, which go into effect today. We also discussed how the rule may apply to ad hoc committees, attorneys, advisors and parties that share counsel. In this post, we consider how the rule may apply in the case of official committees, agents, indenture trustees and other representatives. We also consider one of the limitations in how the rule defines a “disclosable economic interest.”
Unlike under the old rule, official committees will no longer be excluded from the requirement to file a 2019 statement. The information required for the 2019 statements filed by official committees will, however, be far more limited than information in the 2019 statements of other parties. Generally, official committees must disclose the names, addresses and disclosable economic interests (discussed below) of each member, but they are excluded from disclosure requirements relating to the circumstances of the committee’s formation, for whom the committee has agreed to act and about the economic interests held by the creditors that the committee represents. Unlike ad hoc committee members, the members of an official committee are able to claim to represent entities outside the committee without being subject to the additional requirement that each member provide information about the date that they acquired their claims.
Indenture trustees, agents and other representatives
Absent a court order, the new rule excuses entities from filing a 2019 statement “solely because” of their status as indenture trustees, agents under a credit agreement, class action representatives and governmental units. It is not clear what circumstances would take these parties out of this safe harbor, but the Advisory Committee’s note states that the rule carves out these entities because they represent creditors or equity holders under “formal legal arrangements of trust and contract law that preclude them from acting on the basis of conflicting economic interests.” It cites as an example, an indenture trustee whose “responsibilities are defined by the indenture” and whose representation is not affected by the “individual interests of bondholders.” This implies that if a creditor representative has interests in the case beyond fulfilling its obligations under a formal legal arrangement, or is influenced by the positions of the individual creditors that it represents, it may be subject to the rule, notwithstanding this carve out.
It is notable that the provision for agents is drafted broadly to include entities acting as “agent for one or more other entities under an agreement for the extension of credit.” Although the Advisory Committee memorandum says that the role of administrative agents motivated the exclusion, this text is arguably broad enough to cover other types of creditor agents, such as collateral agents and special servicers, when they are acting as the agent of creditors under some form of credit agreement.
The breadth of the disclosable interests
Under the old Rule 2019, there was occasional concern that creditors could take a position with respect to one set of claims while they held undisclosed interests in other parts of the debtor’s enterprise or capital structure, or in short positions. The expansive definition of “disclosable economic interest” is meant to capture these situations and make a creditor’s real economic interests transparent. The entire definition is qualified however by language saying that the disclosable economic interest grants “the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest.” In some situations parties may wonder which interests are “economic” in nature and which interests are “affected” by the value, acquisition or disposition of an interest. Certain kinds of rights, such as governance rights, contractual rights, and tort claims may come under the definition in one set of circumstances, but not another.
With a substantially revised rule, it is difficult to predict how parties will interpret some of the standards created by the rule and whether parties will still find these disclosures significant enough to bring disputes to court. Therefore, even though the revised rule brings a lot more clarity to these disclosure questions than existed before, the most practical understanding of the extent and scope of the rule will come after practice becomes established and courts hear and decide disputes under the rule.