Restructuring

Contributed by Sara Coelho
It is not easy for a Bankruptcy Rule to achieve fame, particularly when it is a bankruptcy disclosure rule.  Yet Bankruptcy Rule 2019 became infamous in recent years as a tool to tweak distressed debt investors in bankruptcy litigation.  Amid this controversy, the Advisory Committee on Bankruptcy Rules proposed revisions to the rule, which we described when the rule was finalized, and when the Supreme Court passed it along to Congress.  Our previous articles described a rule-making process whereby new rules wind their way through various reviewers in the court system, are referred to Congress, and become effective if none of these entities objects.  Congress has not shown the bankruptcy community’s zeal for arguing over the good and evil that becomes of bankruptcy disclosures and has not stepped in.  Therefore, the new rule is set to become effective automatically on December 1.  This is the first of two posts sharing some thoughts on how the new rule might apply to the usual players in corporate bankruptcy cases.
A recap of the rule
Bankruptcy Rule 2019 requires certain disclosures about the economic interests of creditors and equity holders in bankruptcy cases.  For a long time, many people were not even aware that the rule was lurking in the Bankruptcy Code, but in recent years there has been litigation over whether ad hoc groups of creditors are bound by it and over the scope of its requirements.  The Advisory Committee undertook a review of the rule, including an extensive public comment process, and proposed a substantially amended rule that is more tailored to the constituencies and controversies in modern bankruptcy cases and that expands the list of parties subject to disclosure requirements and the types of information that must be disclosed.
Generally, the rule requires disclosure of economic interests held by creditors or equity holders that are “acting in concert,” and “entities” that represent them.  Under the rule, “represent” means to take positions in the bankruptcy court or solicit votes on a plan “on behalf of another.”  Economic interests are defined very broadly and include claims, interests, liens, derivatives, options, participations and any “right or derivative right granting the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest.”  In sum, just about every interest must be disclosed if the rule is triggered.
Among other things, disclosures must include information about the formation of the group or committee, and the employment of the entity.  They must also include information about the identities and claims of three levels of participants: (i) the creditors or equity holders represented by the committee, group or entity, (ii) the members of the group or committee, and (iii) any entity representing a group or committee.  When a group claims to represent parties outside the group, the members must also reveal the year and quarter in which they acquired their economic interests (unless acquired more than a year before the commencement of the bankruptcy case).  Supplemental disclosures are required for material changes in the disclosed facts when any entity or group takes a position before the court or solicits votes on a plan.  The rule allows the court to impose penalties in the event of noncompliance, including by refusing to hear, or invalidating acceptances and rejections given by, the entity, group or committee.  Although the rule gives the court discretion to grant other appropriate relief, it is notable that the enumerated penalties apply to entities, groups and committees, rather than to the individual interest holders represented by them.
Ad hoc creditor groups
The previous version of Rule 2019 applied to “every entity and committee representing more than one creditor . . .” and thus spawned litigation over a semantic question.  What is a committee?  One does not have to be a language philosopher or even to have read the decisions to know that the decisions on the point would conflict with one another.  The new Rule 2019 still refers to “committees,” but also uses the word “group” to sidestep this controversy and sweep in parties that previously claimed they were exempt from the rule’s requirements because they did not represent parties outside the group or operated informally.  Accordingly, ad hoc committees are likely to accept that they are bound to file disclosures under the rule, and the grounds for controversy are likely to shift.
Notably, the rule does not require a group to take positions in court before the disclosure requirement is triggered.  All that is required is that the members be “acting in concert to advance their common interests, and . . . not composed entirely of affiliates or insiders of one another.”  Accordingly, there is bound to be argument over what constitutes “acting in concert,” particularly in early phases of a case where creditors begin negotiating and coordinating with each other, but have not agreed on positions or strategy, or taken any action in the court.  Creditors are also likely to be very careful about how they coordinate and communicate to avoid coming under the rule for as long as possible.
Additionally, the new rule does not require disclosure of the date that group members acquired their claims — a point that investors and sympathetic commentators lobbied for vigorously — so long as the group does not claim to “represent” anyone beyond the group.  Only when such a claim is made, will the members of the group be required to disclose the timing of their purchases, and, even then, the members need only reveal the quarter of their purchases.  Still, sometimes understanding that a purchase was within a three month date range will allow other parties to establish a price range of what the creditor paid for its position, and investors in distressed debt have been apoplectic over the possibility of revealing this information.  Therefore, attorneys for ad hoc creditor groups will probably drop the arguments, now commonplace, that a vocal and organized group’s positions should be heeded by the court for the protection of silent creditors holding the same claims.
Attorneys and advisors
Although professionals were subject to the old 2019, with few exceptions, professionals were mostly spared under the old Rule 2019 wars.  Generally litigation focused on disclosures by debt holders.  The new rule, however, drags in entities that represent creditors and equity interest holders acting in concert if such entities take positions in court, or solicit votes on a plan.  Attorneys are the representatives usually taking positions in court, but the rule may now apply to experts and advisors who testify before the court as well, if such testimony is seen as taking “a position before the court.”  Similarly, where such advisors advocate for support of a plan, they may be soliciting votes and may come within the rule.
Trade creditors, and other interested parties sharing attorneys
It is common for multiple creditors of the same type and who share similar interests (for example, landlords) to share an attorney to monitor the case.  In most instances the primary motivation for this coordination is probably to control costs, but these arrangements also allow objectors to turn up the volume of their objections by ensuring a chorus of voices is ready to join.  Will the mere fact of sharing an attorney to monitor and advise on the case trigger the need to file a Rule 2019 statement?
The Advisory Committee memorandum points to the addition of the definition of “represent” during the rule-making process, which limits, for purposes of the new rule, the definition to situations where an entity takes a position in court or solicits votes on a plan.  The purpose of adding the definition is to remove “entities that are only passively involved in a case from the coverage under the rule.”  This comment is in tension however with the disclosure requirement being triggered by interest holders “acting in concert to advance their common interests” because this “acting in concert” standard requires no active participation in the case.  Thus, creditors who share an attorney and take concerted actions other than taking positions in court or soliciting votes may trigger the disclosure requirements.  Trade creditor constituencies protecting specific interests are already fairly transparent about their interests and are unlikely to be troubled by additional disclosure requirements.  Nonetheless, creditors sharing attorneys should take care to avoid concerted actions if they wish to avoid the expense and trouble of filing a 2019 statement.
The new Rule 2019 is clearer than the old rule and was formulated to accommodate the primary concern expressed by distressed debt investors of maintaining the privacy of debt purchase prices.  It may prove easier to apply than the old rule, and with the understanding that debt prices generally will not be disclosed, parties may be less inclined to litigate over the required disclosures.  Some elements of the rule however, particularly the “acting in concert” language, leave room for interpretation, and so we will be watching to see if the old disputes over the scope of the rule live on in new form.  We will keep you posted.