Last month, many distressed investors and chapter 11 professionals viewed Judge Mary Walrath’s decision on Bankruptcy Rule 2019 as a possible tipping point in the ongoing debate regarding the reach of Rule 2019’s disclosure requirements  with respect to so-called ad hoc committees.  These typically are groups of holders of a particular tranche of a debtor’s public bonds or bank debt that band together to gain negotiating strength and to defray legal expenses, but otherwise do not purport to speak for any larger constituency.  Judge Walrath, writing in the Washington Mutual case, determined that an ad hoc committee was subject to the requirements of Rule 2019, which mandates certain disclosures with respect to claims held, including “the amounts paid therefor”,  by "every entity or committee representing more than one creditor or equity security holder[.]" 

This ruling, from a respected judge on one of the two most influential bankruptcy courts in the country, looked as though it could be determinative in resolving the highly controversial issue of whether Bankruptcy Rule 2019 can be used to require members of ad hoc committees in Chapter 11 cases to disclose the amount that they paid to acquire their claims.  For distressed traders, such information can be tantamount to disclosing a proprietary trading strategy.  Unquestionably, some debtors and other interested parties are requesting such disclosures as a way to seek to neutralize aggressive tactics by distressed investors.

Last week, however, Judge Christopher Sontchi of the same court reached the opposite conclusion in the Six Flags cases.  Judge Sontchi declined to read the language of Rule 2019 as requiring disclosure by ad hoc committees based on his view that the term "committee" as used in the rule denotes a subset of a larger group that is expressly authorized to act on the larger group’s behalf.   

This continues an ongoing judicial debate that began in 2007 in the Northwest Airlines case.  SDNY Judge Alan Gropper held that a group of hedge fund equity holders represented by common counsel constituted a "committee" for purposes of Rule 2019. The equity holders were therefore required to provide information setting forth "the amount of claims or interests owned by the members of the committee, the times acquired, the amounts paid therefor, and any sales or dispositions thereof[.]"  Not long afterwards, however, Judge Richard Schmidt in the Pacific Lumber Chapter 11 case reached the opposite conclusion on this question, and refused to require an ad hoc group of bondholders to disclose details of their trades of Pacific Lumber debt securities. 

The recent Delaware decisions come against the backdrop of the consideration by the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States ("Rules Committee") of an amendment to Rule 2019.  Evidently acting in response to a letter sent by SDNY Judge Robert Gerber, the Rules Committee is weighing language that would expressly expand the scope of Rule 2019 to apply to every "entity, group or committee" that represents or consists of more than one creditor. 

Rule 2019 unquestionably plays an important role in furthering transparency, which is a key underpinning of the chapter 11 process.  As Judge Gerber noted in his letter to the Rules Committee, a party that seeks "to influence the outcome of the case" should at least be required to reveal its claims against the debtor.  Judge Gerber also appears to be focused on getting disclosure of derivative positions, which are not claims against the debtor but which can be determinative of the motives of a particular creditor or creditor group.  

However, requiring disclosure of the price paid by a purchaser that bought for less than par does not seem to offer any of the same systemic benefit to the chapter 11 process.  A bona fide purchaser of a debt instrument may enforce it against a debtor for its full face value, regardless of the price for which it was bought.  Judge Gerber fully noted in his letter to the Rules Committee that "disclosure of what investors paid for their claims or for the bonds they hold is rarely relevant . . . ."  Requiring disclosure that could amount to revealing proprietary information appears to serve no purpose except to provide other constituents with a weapon to use against distressed investors.  Courts (and, if it acts, the Rules Committee) weighing arguments regarding the scope of Rule 2019 should find the type of common sense middle ground that Judge Gerber appears to be advocating, between promoting transparency in chapter 11 cases while not discouraging or prejudicing parties that are legitimately acting to protect their rights and further their interests.