New Bankruptcy Rule 2019: Boon or Bane for Distressed Investors?

Abstract

Recent changes to Federal Rule of Bankruptcy Procedure 2019 clarify and significantly alter disclosure requirements for creditors and equity holders that act in concert in Chapter 11 bankruptcy proceedings.  These changes, which took effect on December 1, 2011, primarily impact hedge funds and other distressed investors who regularly choose to participate in Chapter 11 proceedings via membership in an official or ad hoc committee.  New Rule 2019 requires every member of an official or ad hoc committee to publicly disclose each economic interest it holds “in relation to the debtor.”  As a result, those distressed investors who elect to participate in Chapter 11 cases via committee membership are now required to disclose short and derivative positions in claims against, and securities of, the debtor.  This Note describes the factors that spurred reform of Rule 2019, explains recent changes to Rule 2019, and describes how these changes will affect members of ad hoc committees.  Additionally, this Note analyzes the potential impact the recent changes on distressed investors, with particular attention to how these changes will affect distressed investors’ return on investment.  The Note concludes that distressed investors’ broad-based support for New Rule 2019 is explained by the fact that distressed investors, as a class, stand to realize several important benefits from the recent changes to Rule 2019, without any significant corresponding costs.