Bankruptcy Rule 2019: An Unsettled Issue That Can Have an Enormous Impact on Chapter 11 Cases and Buyers of Distressed Debt
March 17, 2010
Similarly situated creditors in bankruptcy proceedings often organize into informal groups or ad hoc committees for a variety of reasons — coordinating efforts, sharing costs or attempting to have more influence given the gravitas of speaking on behalf of a large number of creditors. This practice is particularly common in large chapter 11 cases where ad hoc groups of creditors increasingly participate in the bankruptcy process.
Recent litigation over the disclosure requirements of Federal Rule of Bankruptcy Procedure 2019 and proposed changes to this rule might have an enormous impact on chapter 11 practice, for if the rule is interpreted to require distressed debt buyers to disclose the purchase price and date of purchase of debt, many major financial firms that had been extremely active in distressed debt markets may either abandon this market or radically change the way in which they participate in bankruptcy cases.
In this Alert, we briefly review the uncertain current state of the law, describe the proposed changes to the rule and explore some extremely important, but largely undecided, issues that lurk in the background.