Amended Rule 2019 community, citing the same concerns, Judge Drain - PDF document

44฀Canal฀Center฀Plaza,฀Suite฀400฀฀•฀฀Alexandria,฀VA฀22314฀฀•฀฀(703)฀739-0800฀฀•฀฀Fax฀(703)฀739-1060฀฀•฀฀www.abiworld.org Richard฀Corbi฀is฀an฀associate฀in฀the฀ Jonathan฀M.฀Petts District฀of฀Illinois. U.S.฀Bankruptcy฀Court฀for฀the฀Northern฀ to฀Hon.฀A.฀Benjamin฀Goldgar฀of฀the฀ York.฀Jonathan฀Petts฀is฀the฀law฀clerk฀ Court฀for฀the฀Southern฀District฀of฀New฀ Robert฀D.฀Drain฀of฀the฀U.S.฀Bankruptcy฀ Billy฀Hildbold฀is฀the฀law฀clerk฀for฀Hon.฀ in฀the฀New฀York฀offjce฀of฀Proskauer.฀ Bankruptcy฀and฀Restructuring฀Group฀ Billy฀Hildbold jonathan_petts@ilnb.uscourts.gov Proskauer;฀New฀York U.S.฀Bankruptcy฀Court฀(N.D.฀Ill.);฀Chicago Jonathan฀M.฀Petts william_hildbold@nysb.uscourts.gov U.S.฀Bankruptcy฀Court฀(S.D.N.Y.);฀White฀Plains Billy฀Hildbold rcorbi@proskauer.com Richard฀J.฀Corbi J OURNAL A M E R I C A N B A N K R U P T C Y I N S T I T U T E The Essential Resource for Today’s Busy Insolvency Professional New Rule 2019: Distressed Investors, What Are You Holding? Contributing Editors: For many years, lit- About the Authors igation arising out of strict compliance with Rule 2019 was rare. Instead, ad hoc committees customarily filed statements listing the group’s mem- bership and aggre- gate holdings, but not the individual holdings or trading Editor’s Note: For more information on histories of its members. Beginning this topic, please see the updated Rules in 2007, debtors sought to breathe of Bankruptcy Procedure 2019, which on page 10. new life into Rule 2019 by moving were approved by the Supreme Court on O ver the past 10 years, hedge to enforce its plain terms with respect April 26, 2011. Ad hoc committees are funds and other distressed inves- to ad hoc committees. The handful of required to broadly disclose their eco- tors have become increasingly decisions to consider whether an ad nomic interests in the debtor, including frequent participants in chapter 11 pro- hoc committee is a “committee” under debt and derivatives. ceedings. To maximize their influence, Rule 2019 are split, 4 with each camp distressed investors with similar interests in a bankruptcy case will often organize Feature together in informal groups, known as “ ad hoc committees.” Ad hoc committees’ participation has cre- Current Rule 2019 finding that Rule 2019’s plain lan- ated certain proce- guage supports its view. 5 Bankruptcy Rule 2019 currently dural efficiencies and requires, inter alia , that any “commit- Calls for Reform of Rule 2019 has also led to more tee” representing more than one creditor Northwest Airlines , 6 Washington competitive debtor- or equity securityholder in a bankruptcy Mutual 7 and other cases applying Rule in-possession (DIP) case to file a verified statement disclos- financing terms 2019 to ad hoc committees led the dis- ing (1) the members it represents, (2) because ad hoc com- tressed investment community to call the amount and nature of each mem- mittee members are for reforms to Rule 2019. Distressed ber’s claims, (3) the dates the members often more willing to investors’ push for change was met head acquired their claims and (4) the amounts lend to debtors than traditional banks, but paid for the claims. 1 The disclosure 4 Compare฀In฀re฀Nw.฀Airlines฀Corp., 363 B.R. 701, 703 (Bankr. S.D.N.Y. ad hoc committee members’ aggressive 2007) (Gropper, J.) ( ad฀hoc committee was “committee” under Rule requirements of current Rule 2019 were 2019, requiring disclosure of individual holdings and trading histories pursuit of short-term returns and frequent conceived in the 1930s in response to the of members); In฀re฀Washington฀Mut. , 419 B.R. 271 (Bankr. D. Del. 2009) use of derivatives and other “shorting” (Walrath, J.) (same) with฀In฀re฀Scotia฀Dev.฀LLC , 2007 WL 1192137 abuses of “protective committees” acting (Bankr. S.D. Tex. Apr. 20, 2007) ( ad฀hoc group is not “committee” techniques can also give them different under Rule 2019 where group did not represent interests of anyone on behalf of bondholders in railroad reor- financial incentives from other creditors other than its members); ฀In฀re฀Premier฀Int’l฀Holdings฀Inc. , 423 B.R. 58 ganization cases. 2 Protective committees, (Bankr. D. Del. 2010) (Sontchi, J.) (same); ฀In฀re฀Phila.฀Newspapers฀LLC, in their class and from the estate as a 422 B.R. 553 (Bankr. E.D. Pa. 2010) (same). however, faded into obscurity soon after 5 Compare฀Washington฀Mut. , 419 B.R. at 275 ( ad฀hoc group of notehold- whole in some cases. the Rule’s enactment. 3 ers represented by shared counsel filing joint pleadings was committee Concern for the lack of transparency representing more than one creditor under “the plain language of Rule 2019”), with฀Phila.฀Newspapers, 422 B.R. at 566 (steering group of pre- in ad hoc committees’ participation in 1 Fed. R. Bankr. P. 2019. petition lenders was not “committee” under Rule 2019 because “ordi- 2 In฀re฀Premier฀Int’l฀Holdings฀Inc. , 423 B.R. 58, 65-66 (Bankr. D. Del. bankruptcy proceedings has recently led nary meaning” of word “committee” is “a body appointed by a larger 2010) (discussing origin of Rule 2019’s predecessor rule under former body for some specific purpose” and steering group did not represent to proposed amendments to Federal Rule Bankruptcy Act). any persons other than its members). 3 Id . at 73. 6 In฀re฀Nw.฀Airlines฀Corp. , 363 B.R. 701 (Bankr. S.D.N.Y. 2007).