June 17, 2011
Law Committee -- Business Law Section of the State Bar of California -- Bankruptcy e-Bulletin
June 16, 2011
Dear Insolvency Law Committee Constituency List members:
The following is an Ebulletin prepared on a case of interest by members of
the Insolvency Law Committee constituency list:
On April 26, 2011, the Supreme Court approved an Amendment to Rule 2019 of
the Federal Rules of Bankruptcy Procedure ("FRBP") with an effective date of
December 1, 2011.
RATIONALE FOR AMENDMENT
According to the Advisory Committee Reports, the purpose for the amendment
to Rule 2019 was to "expand disclosure requirements to facilitate openness
and transparency by revealing potentially divergent economic interest within
groups of creditors or equity security holders and on the putative
representatives of other stakeholders." The amendment requires committees,
groups or entities that consist of or represent creditors or equity security
holders who are acting in concert to identify "their disposable economic
interests" as it relates to the debtor.
The amended rule begins with a new definition section in subparagraph (a).
Therein the term "disclosable economic interest" is now defined in Rule
2019(a)(1) to be more expansive than only a claim or interest.
The next added definition is "represent" or "represents" which is explained
to mean the taking of a position before the court or to solicit votes
regarding the confirmation of a plan on behalf of another. According to the
Advisory Committee, these terms require active participation in the case.
Focusing on disclosures, Rule 2019(b)(1) now requires a verified statement
by every group or committee that consists of or represents, and every entity
that represents, multiple creditors or equity security interests, that are
(A) acting in concert to advance their common interests and (B) not composed
entirely of affiliates or insiders of one another. This change clarifies
that groups comprised entirely of affiliates or insiders of one another are
exempt from the rule.
Also, specifically excluded from the disclosure requirements explained in
subpart (b)(2) are: (a) an indenture Trustee; (b) an agent for one or more
other entities under an agreement for the extension of credit; (c) a class
action representative; or (d) a governmental unit that is not a person.
The reason for the exclusion of these entities is that their representation
occurs under formal legal arrangements of trust or contract law that
precludes them from acting on the basis of conflicting economic interests.
Rule 2019(c) sets forth the information required by a verified statement.
The amended rule (i) deleted the requirement to disclose the amount paid to
acquire the disclosable economic interest as contained in prior Rule
2019(a)(4) and (ii) modified the acquisition date disclosure provision by
requiring disclosure only by quarter and year.
Concerning disclosure of the price paid, the Advisory Committee noted input
received from interested parties that pricing information was highly guarded
by distress-debt purchasers who feared that its disclosure could give
industry participants unfair insight into a competitor's trading strategies.
As to the acquisition date disclosure provision, it was modified to require
disclosure only by quarter and year. This is a departure from the prior
rule 2019(a)(2) which required disclosing the amounts paid and time of the
acquisition unless it was acquired more than one year prior to the filing.
WHAT THE AMENDED RULE DOES NOT REQUIRE
Still missing from Rule 2019 is its application to Chapter 7 cases. While
the disclosure requirements are understandable as they relate to the Chapter
11 and Chapter 9 confirmation process, is the importance of disclosure any
less critical in the administration of a complex Chapter 7 case? Recent
statistics on bankruptcy filing trends confirm that scheduled asset values
are far greater collectively in Chapter 7 business filings than there were
in Chapter 11 business filings, even in the years of the largest Chapter 11
reorganization cases, including years in which General Motors and Lehman
Brothers filed for bankruptcy relief.
These materials were prepared by Gary B. Rudolph and James P. Hill of the
Sullivan Hill Lewin Rez & Engel law firm in San Diego, California.
Thank you for your continued support of the Committee.
Insolvency Law Committee
The Insolvency Law Committee of the Business Law Section of the California
State Bar provides a forum for interested bankruptcy practitioners to act
for the benefit of all lawyers in the areas of legislation, education and
promoting efficiency of practice. For more information about the Business
Law Standing Committees, please see the standing
<http://businesslaw.calbar.ca.gov/StandingCommittees.aspx> committees web
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