As increasing numbers of hedge funds compete for investment opportunities, it has become even more critical for fund managers to keep their holdings and investment strategies close to the vest. For instance, many hedge funds that focus on distressed investments more actively participate in bankruptcy proceedings, but remain loath to disclose sensitive information about the precise nature of their holdings. As a result, Federal Rule of Bankruptcy Procedure 2019 – a seemingly ministerial rule mandating disclosures by creditors in specified circumstances – has become a source of hotly-contested litigation for these funds. According to Rule 2019, “every entity or committee representing more than one creditor” must file a verified statement disclosing certain information about its claims. That information includes, among other things, (i) the nature and amount of its claims or interests, (ii) the date of acquisition of its claims or interests acquired in the year before filing of the bankruptcy cases, (iii) the amount paid, and (iv) any subsequent sales of claims or interests. For more background on Rule 2019, see “Would the Expanded Disclosures Required by Proposed Amendments to Federal Rule of Bankruptcy Procedure 2019 Deter Hedge Funds from Investing in Distressed Debt? (Part Three of Three)
,” Vol. 2, No. 39 (Oct. 1, 2009); “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)?
,” Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009); and “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 Two of Three)
,” Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009). In an abrupt change of course from the December 2, 2009 Washington Mutual
decision, on January 9, 2010, the Delaware Bankruptcy Court held that the members of an ad hoc
committee of noteholders did not have to comply with the disclosure requirements of Bankruptcy Rule 2019. See In re Premier International Holdings, Inc.
Case No. 09-12019 (Bankr. D. Del. Jan. 9, 2010); see also “As Debate over Amendment of Bankruptcy Rule 2019 Continues, Delaware Bankruptcy Court Finds that Current Rule 2019(a) Mandates Disclosure of Economic Interest of ‘Loose Affiliation’ of Washington Mutual Creditors
,” Hedge Fund Law Report, Vol. 2, No. 49 (Dec. 10, 2009). Judge Christopher S. Sontchi reasoned that the plain meaning and legislative history of Rule 2019 does not contemplate ad hoc
committees. This article details the background of the action, the court’s legal analysis and its potential implications for the hedge fund community.