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A Rule Change That Might Really Matter: Rule 2019 Disclosure Update

Posted on: June 7, 2010

It is quite rare that the interpretation of a Bankruptcy Rule actually matters to clients (as opposed to just us Bankruptcy Dorks), but since Rule 2019 potentially requires the disclosure of trading history and strategy, this is one that we know many of you have been following closely! It’s certainly one that we have been keeping up with (recent client alert), and if you’ve read our writings on the subject, you know that we do not think that Rule 2019 was intended to apply to ad hoc committees such as note-holders and lender groups.

Courts have been split on this issue, which could get resolved through amendments now under consideration by the Advisory Committee on Bankruptcy Rules. In the meantime, though, a new opinion has been issued in the Washington Mutual bankruptcy proceeding that sheds some light on the contours of Rule 2019.

The ruling came down on May 19, 2010, when Judge Walrath upheld, from the bench, an objection of the Washington Mutual Bank Noteholder Group (represented by Bracewell & Giuliani LLP) to the application of Rule 2019. The Judge used the ruling as an opportunity to provide some more generalized guidance on when Rule 2019 applies, and to identify what a group of debt or equity security holders is required to disclose under Rule 2019.

Specifically, Judge Walrath held that:

  • Bankruptcy Rule 2019 generally applies only to groups of creditors who share a similar economic interest, such as a bondholder group or a shareholder group.
  • Rule 2019 does not apply, however, to a bondholder group or other group of similarly situated creditors whose only participation in a Chapter 11 case is to file a consolidated proof of clam and engage common counsel to defend against objections to the proof of claim.
  • In addition, Rule 2019 does not apply to counsel representing more than one creditor if those creditors do not share similar interests. For example, counsel representing three trade creditors on their individual trade claims need not comply with Rule 2019, nor does counsel representing different creditors as defendants in unrelated adversary proceedings.
  • Where Rule 2019 does apply—for instance, to a group of bondholders—it is not sufficient to report a range of bond trading dates and a range of trading prices. Instead, the statement must include, on a holder-by-holder basis, the date of each trade, and the price paid/received in such trade.
  • In addition, creditors in a Rule 2019 group must also report other economic interests they may have. For example, if a member of the Washington Mutual, Inc. (WMI) senior bondholder group also holds WMI subordinated bonds or equity, it must disclose the subordinated bonds or equity.