Almost every year, changes are made to the set of rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The changes address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. There are seven amendments to the national bankruptcy rules this year. Some affect bankruptcy cases involving individuals but major revisions have been made to Rule 2019, which governs disclosures by ad hoc committees and groups of creditors or equity security holders in Chapter 11 business bankruptcy cases and in Chapter 9 municipality cases. All of the new amendments will take effect on December 1, 2011, barring unlikely action by Congress.

Read All About It. A copy of the Advisory Committee’s report, together with a redline of the new rule amendments, is available by following the link in this sentence. The report also includes the Advisory Committee’s notes on each new or amended rule.

Significant Revisions to Rule 2019: Controversy Resolved? Over the past several years, Rule 2019, the national bankruptcy rule regarding disclosure by unofficial committees and groups of hedge fund and other investors, has been the subject of much litigation and a number of conflicting court decisions, including opposite views from different bankruptcy judges in Delaware. Follow the link in this sentence for a collection of previous posts on the blog discussing those past decisions and the controversy surrounding old Rule 2019.

In an attempt to put the controversy to rest, the Advisory Committee drafted, and the Supreme Court has approved, a new Rule 2019, which will take effect on December 1, 2011. It requires disclosure in Chapter 11 and Chapter 9 cases by unofficial committees, groups and entities consisting of or representing multiple creditors or equity security holders that are (1) acting in concert to advance common interests, and (2) not composed entirely of affiliates or insiders of each other, and which take a position before the court or solicit votes on confirmation of a plan.

The new rule focuses on the nature and purpose of the committee or group, rather than how it names itself. In contrast, old Rule 2019 covered entities and committees, leading to disputes over whether a self-designated "group" had to make disclosures. Also dropped from the final version of new Rule 2019 was language from the initial proposed rule amendments that would have permitted the court to require disclosure of the amount paid for a disclosable economic interest, another topic of much prior controversy. 

Disclosable Economic Interest. Amended Rule 2019 is built around the defined term "disclosable economic interest," which is defined to mean the following:

Any claim, interest, pledge, lien, option, participation, derivative instrument, or any other right or derivative right granting the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest.

Required Disclosures Under Rule 2019. A covered group or committee will be required to file a verified statement disclosing facts and circumstances on the following topics listed in new Rule 2019(c):

  • The group or committee’s formation;
  • Any entity’s employment and the party at whose instance the employment was arranged;
  • Each member’s and entity’s name, address, and nature and amount of their disclosable economic interest;
  • For each member of a group or committee claiming to represent any entity beyond the group’s members, the date of acquisition by quarter and year of each disclosable economic interest, unless acquired more than a year before the bankruptcy petition was filed; and
  • Where applicable, a copy of any instrument authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

If any material changes have occurred since the group or committee’s last statement, a supplemental statement must be filed whenever the group or committee takes a position before the court or solicits votes on confirmation of a plan.

Consequences of Non-Compliance With Rule 2019. A party in interest or the court on its own motion can determine whether there has been any failure to comply with the new Rule 2019’s requirements. If so, the court may refuse to permit the group or committee from being heard in the case and/or hold invalid any authority, objection, or plan votes made or obtained by the non-complying entity, group or committee, as well as grant any other appropriate relief.

Other Business Bankruptcy Rule Amendments. In addition to Rule 2019, three of the other new amendments directly impact business bankruptcy cases.

  • New Rule 1004.2 applies in Chapter 15 cross-border bankruptcy cases. It requires that any petition for recognition of a foreign proceeding under Chapter 15 of the Bankruptcy Code state the center of the debtor’s main interests (aka, "COMI"), as well as each country in which a foreign proceeding involving the debtor is pending. The rule is designed to help identify whether the foreign proceeding is a foreign main or nonmain proceeding.
  • Amended Rule 2003(e) will require the United States Trustee or designee to file a statement specifying the date and time to which any Section 341(a) meeting of creditors has been adjourned. This rule amendment was included to be sure that creditors who did not attend a meeting of creditors could learn when the continued meeting will take place, information that sometimes was known only to those who attended the original meeting.
  • Rule 6003, discussed in this prior blog post on the 2007 rule amendments, has been amended to clarify that although a court cannot, absent immediate and irreparable harm, enter an order during the 21 days after a petition has been filed on certain matters, including employment of professionals, it can enter an order after those first 21 days that grants relief effective as of a date prior to entry of the order, i.e., as of the petition date.

Rule Amendments for Individual Bankruptcy Cases. The balance of the new rule amendments involve cases in which the debtor is an individual.

  • Amended Rule 3001(c), governing proofs of claim, requires in an individual debtor’s case that an itemized statement of interest, fees, expenses or other charges be filed with the proof of claim. If a security interest is claimed in the debtor’s property, a statement must also be included giving the amount required to cure any default. If the property involved is the debtor’s principal residence, the proof of claim must attach, and give the information required by, a new official form addressing this rule change, and also must include information related to any escrow account. Penalties for non-compliance can include barring the claimant from presenting the omitted information in any contested matter or adversary proceeding, and an award of reasonable attorney’s fees and expenses caused by the failure.
  • New Rule 3002.1, related to claims secured by a Chapter 13 debtor’s principal residence, sets forth a number of additional requirements when the claim is provided for under Section 1322(b)(5) of the Bankruptcy Code. The new rule details required information related to post-petition fees, expenses, and charges, as well as procedures for determining those amounts and the final cure amount.
  • Rule 4004(b) has been amended to allow a party in interest, under certain circumstances, to seek an extension of time to file an objection to a debtor’s discharge after the deadline for filing such objections to discharge has already expired.

Updated Official Forms. As mentioned, some of the pending amended rules will require revisions in official bankruptcy forms. You can find the proposed revised forms, which will be formally released on December 1, 2011 (unless Congress surprises us and prevents the amendments from taking effect), by following the link in this sentence.

Conclusion. For business bankruptcy professionals, and companies and investors involved in Chapter 11 bankruptcy cases, the most important change to the Federal Rules of Bankruptcy Procedure this year is the newly revised Rule 2019. However, several of the other amendments also will impact Chapter 11 cases, and all are worthy of note.