How Can Hedge Funds that Invest in Distressed Debt Keep Their Strategies and Positions Confidential in Light of the Disclosures Required by Federal Rule of Bankruptcy Procedure 2019(a)? (Part One of Three)
Federal Rule of Bankruptcy Procedure 2019(a) (Rule 2019(a)) generally requires disclosure by an “entity or committee representing more than one creditor” of the identity of each creditor involved, the nature and amount of its interest, the times when the entity’s interests were acquired and the amounts paid for them. This rule has relevance for hedge funds that invest in distressed debt because the timing of an acquisition of such debt and the amounts paid for it may provide insight into the fund’s trading strategy – information that can be used by other market participants to the detriment of the disclosing fund in debt transactions and bankruptcy negotiations. The scope of disclosure required under Rule 2019(a) has been in doubt since two decisions by the U.S. Bankruptcy Court for the Southern District of New York in the Northwest Airlines bankruptcy in 2007, and another decision shortly thereafter by the U.S. Bankruptcy Court for the Southern District of Texas in the Scotia Pacific Company (Scopac) matter. The issue has come to the fore again recently in the bankruptcy of Washington Mutual Inc. (WMI). This article examines the caselaw on the subject as it relates to distressed debt trading by hedge funds, and the disclosures required in connection with such trading. In particular, we offer a detailed examination of the relevant points from the WMI bankruptcy, the Northwest Airlines cases, the Scopac case and the May 2008 Sea Containers case in the U.S. Bankruptcy Court for the District of Delaware. This article is part one of a two-part series, and focuses primarily on the cases. Part two will focus on analysis of the cases and issues, incorporating the views of leading practitioners in bankruptcy and other relevant legal areas.