Recent Developments

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Business Bankruptcy Issues Recent Developments

Going Up: Bankruptcy Dollar Amounts Will Increase On April 1, 2013

It hasn’t gotten much publicity yet, but certain dollar amounts in the Bankruptcy Code will be increased for new cases filed on or after April 1, 2013. Follow this link for a chart listing all of the changes on this Federal Register page, which printed this month’s official notice from the Judicial Conference of the United States.

Among the most meaningful increases for Chapter 11 and other business bankruptcy cases:

  • The total amount of claims required to file an involuntary petition rises to $15,325 from $14,425;
  • The employee compensation and benefit plan contribution priorities under Sections 507(a)(4) and 507(a)(5) both increase to $12,475 from $11,725;
  • The consumer deposit priority under Section 507(a)(7) rises to $2,775 from $2,600;
  • The dollar amount in the bankruptcy venue provision, 28 U.S.C. Section 1409(b), which requires that actions to recover for non-consumer, non-insider debt be brought against defendants in the district in which they reside, has increased to $12,475 from $11,725;
  • The minimum amount required to bring a preference claim against a defendant in a non-consumer debtor case, specified in Section 547(c)(9), rises from $6,225 from $5,475; and
  • The total debt amount in the definition of small business debtor in Section 101(51D) will rise to $2,490,925.

Other adjustments will affect consumers more than business debtors. For example, the debt limit for an individual to be able to qualify to file a Chapter 13 bankruptcy case will rise to $1,149,525 of secured debt, and certain exemption amounts will also rise.

Although the changes aren’t substantial, be sure to keep them in mind when assessing cases filed after April 1st.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

Summer 2012 Edition Of Bankruptcy Resource Now Available

The Summer 2012 edition of the Absolute Priority newsletter, published by the Bankruptcy & Restructuring group at Cooley LLP, of which I am a member, has now been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy and insolvency topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • Decisions from courts in Delaware and California interpreting the Supreme Court’s 2011 Stern v. Marshall decision and its impact on the ability of bankruptcy courts to enter final judgments in fraudulent transfer and other cases;
  • The Section 546(e) defense to fraudulent transfer claims; and
  • Issues involving the recharacterization of a non-insider’s loans as equity.

This edition also reports on some of our recent representations, including our work for official committees of unsecured creditors in Chapter 11 cases involving major retailers and others. Recent committee cases include Ritz Camera & Image, Blockbuster, Orchard Brands, Wave 2 Wave Communications, Signature Styles, Urban Brands, and Mervyn’s Holdings, among others.

I hope you find the latest edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

Seventh Circuit Bankruptcy Ruling Is Big Win For Trademark Licensees

On July 9, 2012, the U.S. Court of Appeals for the Seventh Circuit issued its decision in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, and in doing so handed a major victory to trademark licensees whose licenses are rejected in bankruptcy by trademark owners. A copy of the opinion is available through this link. However, before discussing the details of the opinion, it’s important to put it in context first. And for that, we need to journey back to the 1980s.

A History Of Rejection. Back in 1985, the U.S. Court of Appeals for the Fourth Circuit issued a decision in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985). The Fourth Circuit held that Lubrizol, a nonexclusive patent licensee whose patent license was rejected as an executory contract in the bankruptcy case of Lubrizol’s licensor, debtor Richmond Metal Finishers, could not "rely on provisions within its agreement with [the debtor] for continued use of the technology."  According to the Lubrizol court, when Congress enacted Section 365(g) of the Bankruptcy Code, governing the effect of rejection of an executory contract, "the legislative history of § 365(g) makes clear that the purpose of the provision is to provide only a damages remedy for the non-bankrupt party," and no specific performance remedy. The Fourth Circuit held that, as a result, when the debtor rejected the contract, Lubrizol, as the patent licensee, lost its rights under the license.

Congress Protects Certain IP Licensees. In reaction to the Lubrizol decision and the concerns of the decision’s potential impact on patent and other technology licensees, in 1988 Congress added Section 365(n) to the Bankruptcy Code, expressly permitting licensees of intellectual property to elect to retain their rights to the intellectual property. However, Congress also added to the Bankruptcy Code its own definition of "intellectual property" for Section 365(n) purposes, and decided not to include trademarks in Section 101(35A)’s definition. As a result, trademark licensees have none of the protections of Section 365(n). Follow the link for more on Section 365(n) and its protections for licensees.

Back To The Future. With that history in mind, it’s time to come back to the future, or at least the present. Lubrizol’s decision that a licensee cannot rely on the provisions of its license agreement for continued use of the intellectual property, together with the fact that Section 365(n)’s protections do not extend to trademark licenses, has for years left trademark licensees at great risk of losing all trademark rights if the license is rejected. That is, it seemed that way until just the past couple of years.

  • A 2010 decision from the U.S. Court of Appeals for the Third Circuit in the In re: Exide Technologies case held that when a trademark license was provided in connection with the sale of a business, and that sale had been substantially performed, the trademark license was no longer executory, could not be rejected, and the licensee could continue to use the trademarks.
  • In a concurring opinion in Exide Technologies, Judge Ambro went further, concluding that rejection of a trademark license should not deprive the licensee of all rights. In enacting Section 365(n) but leaving trademarks outside the definition of "intellectual property," Congress did not intend that Lubrizol’s result apply to trademark licenses and instead courts should use equitable powers to protect licensees.
  • Last year, in the case that led to the Seventh Circuit’s decision here, the bankruptcy court in In re Lakewood Engineering & Manufacturing Co., Inc, 459 B.R. 306 (Bankr. N.D. Ill. 2011), decided to "step into the breach," follow Judge Ambro’s reasoning, and begin the "development of equitable treatment" of trademark licensees that it concluded Congress had anticipated would occur. In so doing, it held that despite rejection of a manufacturing and supply agreement that included a trademark license, the licensee could continue to sell trademarked goods as it had been licensed to do.

The Seventh Circuit’s Decision. The bankruptcy court’s decision was taken up on appeal to the Seventh Circuit. In its July 9, 2012 opinion, written by Chief Judge Frank H. Easterbrook, the Seventh Circuit disagreed with the bankruptcy court’s analysis but ultimately affirmed its decision. In its opinion, however, the Seventh Circuit took aim directly at the Lubrizol decision and reasoning.

The facts of the Sunbeam case are fairly straightforward. Lakewood Engineering & Manufacturing Co. made various consumer products, including box fans, which were covered by its patents and trademarks. Lakewood contracted with Chicago American Manufacturing ("CAM") to make its fans for 2009, granting CAM a license to the relevant patents and trademarks. In recognition of both the investment CAM would have to make to manufacture the fans and Lakewood’s own distressed financial condition, the agreement authorized CAM to sell directly any of the 2009 production of box fans that Lakewood did not purchase. A few months after the agreement was signed, Lakewood was forced into involuntary bankruptcy and a trustee was appointed. The trustee sold Lakewood’s assets, including the patents and trademarks, to Sunbeam Consumer Products, which wanted to sell its own fans and not have to compete with CAM’s sales. The trustee rejected the CAM agreement and, when CAM continued to sell the remaining fans, Sunbeam sued CAM for infringement.

The issue on appeal was the effect of the trustee’s rejection of the CAM agreement, and specifically the trademark license, on CAM’s ability to sell the fans. The Seventh Circuit’s focus on the Lubrizol decision was apparent:

Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), holds that, when an intellectual-property license is rejected in bankruptcy, the licensee loses the ability to use any licensed copyrights, trademarks, and patents. Three years after Lubrizol, Congress added §365(n) to the Bankruptcy Code. It allows licensees to continue using the intellectual property after rejection, provided they meet certain conditions. The bankruptcy judge held that §365(n) allowed CAM to practice Lakewood’s patents when making box fans for the 2009 season. That ruling is no longer contested. But “intellectual property” is a defined term in the Bankruptcy Code: 11 U.S.C. §101(35A) provides that “intellectual property” includes patents, copyrights, and trade secrets. It does not mention trademarks. Some bankruptcy judges have inferred from the omission that Congress codified Lubrizol with respect to trademarks, but an omission is just an omission. The limited definition in §101(35A) means that §365(n) does not affect trademarks one way or the other. According to the Senate committee report on the bill that included §365(n), the omission was designed to allow more time for study, not to approve Lubrizol. See S. Rep. No. 100–505, 100th Cong., 2d Sess. 5 (1988). See also In re Exide Technologies, 607 F.3d 957, 966–67 (3d Cir. 2010) (Ambro, J., concurring) (concluding that §365(n) neither codifies nor disapproves Lubrizol as applied to trademarks). The subject seems to have fallen off the legislative agenda, but this does not change the effect of what Congress did in 1988.

Chief Judge Easterbrook’s opinion noted that the bankruptcy court had permitted CAM to continue using the trademarks on equitable grounds, but rejected that approach as going beyond what the Bankruptcy Code permits. The Seventh Circuit then directly addressed the Lubrizol decision:

Although the bankruptcy judge’s ground of decision is untenable, that does not necessarily require reversal. We need to determine whether Lubrizol correctly understood §365(g), which specifies the consequences of a rejection under §365(a). No other court of appeals has agreed with Lubrizol—or for that matter disagreed with it. Exide, the only other appellate case in which the subject came up, was resolved on the ground that the contract was not executory and therefore could not be rejected. (Lubrizol has been cited in other appellate opinions, none of which concerns the effect of rejection on intellectual-property licenses.) Judge Ambro, who filed a concurring opinion in Exide, concluded that, had the contract been eligible for rejection under §365(a), the licensee could have continued using the trademarks. 607 F.3d at 964–68. Like Judge Ambro, we too think Lubrizol mistaken.

After observing that outside of bankruptcy a licensor’s breach does not terminate a licensee’s right to use intellectual property, and Section 365(g) provides that rejection is breach, the Seventh Circuit turned to the impact of Section 365(g) and rejection in bankruptcy:

What §365(g) does by classifying rejection as breach is establish that in bankruptcy, as outside of it, the other party’s rights remain in place. After rejecting a contract, a debtor is not subject to an order of specific performance. See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984); Midway Motor Lodge of Elk Grove v. Innkeepers’ Telemanagement & Equipment Corp., 54 F.3d 406, 407 (7th Cir. 1995). The debtor’s unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized. Consider how rejection works for leases. A lessee that enters bankruptcy may reject the lease and pay damages for abandoning the premises, but rejection does not abrogate the lease (which would absolve the debtor of the need to pay damages). Similarly a lessor that enters bankruptcy could not, by rejecting the lease, end the tenant’s right to possession and thus re-acquire premises that might be rented out for a higher price. The bankrupt lessor might substitute damages for an obligation to make repairs, but not rescind the lease altogether.

The Court then distinguished rejection from avoidance powers, which might lead to rescission or termination of an agreement, observing that "rejection is not ‘the functional equivalent of a rescission, rendering void the contract and requiring that the parties be put back in the positions they occupied before the contract was formed.” Thompkins v. Lil’ Joe Records, Inc., 476 F.3d 1294, 1306 (11th Cir. 2007). It ‘merely frees the estate from the obligation to perform’ and ‘has absolutely no effect upon the contract’s continued existence’. Ibid. (internal citations omitted)." Follow the link for more background on the Thompkins decision.

The Seventh Circuit referenced scholarly criticism of the Lubrizol decision before turning back to the Fourth Circuit’s opinion: 

Lubrizol itself devoted scant attention to the question whether rejection cancels a contract, worrying instead about the right way to identify executory contracts to which the rejection power applies.

Lubrizol does not persuade us. This opinion, which creates a conflict among the circuits, was circulated to all active judges under Circuit Rule 40(e). No judge favored a hearing en banc. Because the trustee’s rejection of Lakewood’s contract with CAM did not abrogate CAM’s contractual rights, this adversary proceeding properly ended with a judgment in CAM’s favor.

A Significant Decision. The Seventh Circuit’s opinion in the Sunbeam case not only creates a circuit split that could potentially lead the Supreme Court to address the issue, but more significantly represents the first court of appeals decision in 27 years to challenge Lubrizol’s view of how rejection impacts an intellectual property license. Although binding only in the Seventh Circuit (much like, in theory, Lubrizol was binding only in the Fourth Circuit), the Sunbeam decision has the potential to impact licensee rights in cases across the country. Licensees, and especially trademark licensees, will be arguing that rejection does not terminate their license rights. Debtors and purchasers of trademarks may well argue otherwise. If followed by other courts, the Sunbeam decision and its potential interplay with Section 365(n) raises a number of questions, including:

  • Aside from the right to use the licensed trademarks, does the licensee keep other rights under its agreement, such as exclusivity if applicable?
  • How long does the right to the trademarks continue, the full term of the license agreement plus any extensions, or some shorter period?
  • If royalties are required under a trademark license, must the trademark licensee continue to pay them post-rejection to use the licensed trademarks, as an IP licensee covered by Section 365(n) is required to do, or can the trademark licensee argue that rejection is a material breach excusing that performance?
  • Since under Sunbeam rejection does not terminate trademark license rights, does the same analysis apply to intellectual property other than trademarks, including those covered by Section 365(n)?
  • Are licensees of patents, copyrights, or trade secrets, otherwise protected by Section 365(n), required to follow Section 365(n)’s statutory scheme to retain their rights, or can they rely on the Sunbeam decision’s analysis of the effect of rejection as an alternative approach? 
  • How will purchasers of trademarks and other assets react to the potential continued use of the marks by licensees under rejected trademark licenses?

Conclusion. As these questions suggest, the full impact of the Seventh Circuit’s Sunbeam decision is yet to be determined. It remains to be seen how other circuits — and bankruptcy courts in important venues such as Delaware and the Southern District of New York — will react. Given the circuit split now created, it’s possible the Supreme Court could address the issue, either in Sunbeam or a later case. In the meantime, however, a long-standing and often accepted view of the impact of rejection on intellectual property licenses, and especially on trademark licenses, has been upended. It will likely take courts, licensors, and licensees some time to sort through how the new, post-Sunbeam state of the law will play out. This could get interesting — stay tuned.

Business Bankruptcy Issues Recent Developments

Supreme Court Bids Adieu To Plans Denying Secured Creditors The Right To Credit Bid

On May 29, 2012, only a little more than a month after the April 23, 2012 oral argument in the case, the U.S. Supreme Court issued its decision in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank on the question of "credit bidding." You can get a copy of the opinion by following the link in this sentence. (You are also welcome to follow my Twitter feed @BobEisenbach for updates; I tweeted a link to the opinion the afternoon it was issued.)

The Circuit Split. The Supreme Court took the case to resolve a split between the circuits on this issue. In an earlier case, In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), the Third Circuit had confirmed a plan of reorganization that prevented credit bidding, and the Fifth Circuit had done so in a case involving an asset transfer under a plan, which was considered to be a sale. However, in the RadLAX case, decided as River Road Hotel Partners, LLC, et al. v. Amalgamated Bank, 651 F.3d 642 (2011), the Seventh Circuit took the opposite view. It rejected proposed bidding procedures that would have precluded the secured creditor from credit bidding at an auction contemplated by the plan of reorganization.  For more analysis of these issues and the split in the circuits, follow the link in this sentence to the Winter 2012 edition of Cooley’s Absolute Priority newsletter.

The Supreme Court’s Decision. By an 8-0 vote (Justice Kennedy did not participate), the Supreme Court held that a secured creditor has a right to credit bid its secured debt under a Chapter 11 plan of reorganization that provides for a sale of its collateral. The decision affirmed the Seventh Circuit’s decision rejecting the bidding procedures in the RadLAX case.

  • The issue is important because with a "credit bid," a secured creditor is able to acquire the assets being sold by using its debt, up to the amount it’s owed, without having to pay cash upfront for the assets. It can be challenging for secured creditors to raise large amounts of cash, especially when a syndicate of lenders (or, as the Supreme Court noted, the Federal Government) is involved, even though presumably they will later be paid back out of the sale proceeds.
  • Secured creditors argue that, without the right to credit bid, for these reasons they would be unable to participate in the sale and their collateral could be sold for an unreasonably low price.
  • Debtors argue that a secured creditor’s credit bid could chill bidding by third parties, particularly if the secured creditor’s debt, and thus potential credit bid, is substantially higher than what a cash bidder would be likely to pay.

Indubitable What? The Bankruptcy Code requires that if a secured creditor objects to a plan, it must receive "fair and equitable" treatment, a term of art under Section 1129(b)(2)(A) of the Bankruptcy Code. That section provides that "fair and equitable" means that a secured creditor must either (i) retain its lien and be paid deferred cash payments, (ii) be entitled to credit bid at a sale of its collateral, or (iii) realize the "indubitable equivalent" of its claim. The RadLAX debtor was attempting to sell its assets (the secured creditor’s collateral) without permitting the secured creditor to credit bid, pay the resulting sale proceeds to the secured creditor, and "cram down" this treatment over the secured creditor’s objection, arguing that it constituted the "indubitable equivalent" of its claim. 

The legal issue at the core of the decision involved the interpretation of Section 1129(b)(2)(A)(ii) and (iii) of the Bankruptcy Code. In RadLAX, although the Supreme Court did not decide what "indubitable equivalent" means, it held that even though Section 1129(b)(2)(A)(iii) may appear to permit a plan to provide a secured creditor with the "indubitable equivalent" of its claim, when a plan provides for a sale of the secured creditor’s collateral, it must permit the secured creditor to credit bid under Section 1129(b)(2)(A)(ii).

  • Section 1129(b)(2)(A)(ii) provides that when a plan of reorganization calls for a sale of a secured creditor’s collateral, the sale is "subject to Section 363(k)," which permits a credit bid as discussed below.
  • The Supreme Court held that the "indubitable equivalent" alternative may be available in some situations, but it’s not an option when the Chapter 11 plan of reorganization calls for a sale of the secured creditor’s collateral.
  • Although the RadLAX case involved a Chapter 11 plan sale, typical bankruptcy sales do not. Far more often, sales are conducted, separately from a plan, under Section 363 of the Bankruptcy Code. Section 363(k) specifically provides that a secured creditor has a right to credit bid and offset its secured claim at such a non-plan Section 363 sale, absent "cause" to take that right away. No such "cause" was present in the RadLAX case, and the Supreme Court held that Section 363(k)’s credit bid right applied.

An "Easy" Decision. Ultimately, as the unanimous decision reflects, the Supreme Court held that this was "an easy case," that the debtor’s reading of Section 1129(b)(2)(A) was "hyperliteral and contrary to common sense," and that the more specific provisions of subsection (ii) controlled over the general "indubitable equivalent" language of subsection (iii). The Supreme Court’s decision should put to rest efforts to sell a secured creditor’s collateral without allowing for credit bids, except in cases where there are issues with the validity of the secured creditor’s secured claim or cause exists under Section 363(k) of the Bankruptcy Code.

Business Bankruptcy Issues Recent Developments

Winter 2012 Edition Of Bankruptcy Resource Now Available

The Winter 2012 edition of the Absolute Priority newsletter, published by the Bankruptcy & Restructuring group at Cooley LLP, of which I am a member, has recently been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy and insolvency topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • The Supreme Court’s recent Stern v. Marshall decision and its impact on the ability of bankruptcy courts to enter final judgments in certain cases;
  • Recent decisions on the ability of secured creditors to credit bid their debt in bankruptcy asset sales;
  • Issues involving the recharacterization of debt as equity; and
  • The ability of directors and officers to obtain coverage under a D&O liability policy purchased by a bankrupt company.

This edition also reports on some of our recent representations, including our work for official committees of unsecured creditors in Chapter 11 cases involving major retailers and others. Recent committee cases include Blockbuster, Orchard Brands, Alexander Gallo Holdings, Claim Jumper, Signature Styles, Urban Brands, and Mervyn’s Holdings, among others.

I hope you find the latest edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

Amendments To Federal Bankruptcy Rules, Official Forms, And Federal Rules Of Evidence Are Now In Effect

Bankruptcy Rule Amendments. As reported in a post last month, this year’s amendments to the Federal Rules of Bankruptcy Procedure have now taken effect today, December 1, 2011.

Amended Official Bankruptcy Forms. In addition to the national bankruptcy rules, revisions have been made to a number of the official bankruptcy forms. This sentence contains a link to a set of these updated official forms.

Amended Federal Rules Of Evidence. Finally, a restyled edition of the Federal Rules of Evidence also goes into effect today; follow the link in this sentence for the revised evidence rules. Although the substance of the rules of evidence has not changed, revisions in the numbering of some subsections and the style of how the rules are phrased have been implemented.

Business Bankruptcy Issues Recent Developments

Amendments To The Federal Bankruptcy Rules, Including Rule 2019, To Take Effect December 1, 2011

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.