What's in a Name? Proposed Amendments to Bankruptcy Rule 2019 Attempt to Clarify Whether a Committee by any Other Name Is Still a Committee
Federal Rule of Bankruptcy Procedure (“Rule 2019”) has garnered increased attention in recent years in light of the impact of its disclosure requirements on distressed investors participating in Chapter 11 cases. Although Rule 2019 has been part of the Bankruptcy Code since its enactment in 1978, discussion of the scope of the Rule and its attendant disclosure requirements has been minimal. However, with the advent of secondary market investors, in particular hedge funds, becoming actively involved in corporate restructuring, a thorny issue has surfaced as to whether unofficial or ad hoc “committees” are subject to the mandates of Rule 2019.
Rule 2019 is a disclosure rule aimed at fostering greater transparency in the bankruptcy process. It imposes certain disclosure requirements on committees purporting to represent more than one creditor or equity security holder in Chapter 11 cases. Rule 2019 directs a committee to file detailed public disclosures concerning its members' financial position including, what they bought and sold, on what date, and what price they paid for their position.
The notion of mandating disclosures concerning the acquisition of distressed debt pursuant to Rule 2019 has caused considerable consternation among secondary market investors. In recent years, hedge funds have participated more aggressively in corporate restructurings, while at the same time opposed attempts to force disclosure of their investment positions through Rule 2019. Based on the confidential and proprietary nature of these investment practices, these parties maintain an interest in participating in the bankruptcy process without having to “show their hands” concerning their debt investment strategies.
In light of these competing interests, an interesting debate has emerged with respect to whether informal ad hoc committees, often comprised of secondary market investors, are subject to the mandates of Rule 2019. Proposed amendments to Rule 2019 which ostensibly will settle the question of whether such ad hoc committees must comply with Rule 2019 are on the horizon. The proposed revisions to Rule 2019, which are in the latter stages of the amendment process, currently are slated to take effect in December 2011. This article will review the current debate over the scope of Rule 2019, examine the likely impact of the proposed amendments in terms of bringing such ad hoc committees within the purview of revised Rule 2019, and the fallout which could occur in terms of the participation of distressed debt investors in Chapter 11 cases.