A motion filed last week in the Chapter 11 case of Dura Automotive Systems, Inc. demonstrates clearly that the effort to wield Bankruptcy Rule 2019 against so-called “distressed investors” is heating up. Until earlier this year, Federal Rule of Bankruptcy Procedure 2019, a procedural device for disclosing when an entity or committee purports to represent the interests of more than one creditor, rarely generated any significant controversy. That has now changed, however, as Chapter 11 debtors are seeking to turn the Rule into a weapon to compel disclosure in bankruptcy cases by distressed investors (typically hedge funds that pursue a strategy of buying debt in bankrupt companies) of the details of their claim purchases. Many hedge funds view this information, which includes the time of purchase and the amount paid, as proprietary and confidential. Accordingly, a willingness by courts to accept the new interpretation of Rule 2019 that is being put forward could sharply affect the decisions of hedge funds that pursue distressed investment opportunities.
Creditors holding similar claims often band together in large cases into informal ad hoc committees for purposes of hiring common counsel and sharing expenses, but they do not seek to represent any person’s interests but their own. The detailed disclosure requirements set forth in Rule 2019 were long believed to address only situations where an entity or committee was purporting to act on behalf of a similarly situated creditors or interest holders, such that it was assuming fiduciary duties on behalf of such group.
Earlier this year, however, in the Northwest Airlines Chapter 11 case, the court agreed with the debtor that the plain language of Rule 2019 does not distinguish between a group of creditors or interest holders acting solely on their own behalf and a committee purporting to represent the interests of others in a fiduciary capacity. The court accordingly required an ad hoc group of equity holder hedge funds that had engaged common counsel to disclose not only the amount of their holdings, but also the times when acquired and the amounts paid. Subsequently, in the Scotia Development Chapter 11 case, the court reached the opposite conclusion and ruled in favor of the distressed investors.
Now, in Dura Automotive, the influential U.S. Bankruptcy Court for the District of Delaware has a chance to weigh in. This case will be closely watched by the distressed investing community.