Creditor Groups Relieved: The New WaMu

At a hearing on May 19, 2010 in the Washington Mutual, Inc. ("WaMu") Chapter 11 case, the Delaware Bankruptcy Court held that Bankruptcy Rule 2019 does not apply to groups of creditors that are only appearing in the relevant bankruptcy case in defense of their proof of claim. 

On behalf of a group of WMB Noteholders, Bracewell & Giuliani and Potter Anderson & Corroon submitted papers arguing, among other things, that while it seemed to be a matter of first impression, there was case law in other contexts that supported the principle that Rule 2019 was not intended to apply to a party who solely filed a proof of claim, but rather parties who were active in a chapter 11 case.  Our submission to the Bankruptcy Court is available here.

The Court held that Rule 2019 was intended to apply to parties that represent multiple creditors with common interests that are acting in concert.  The Court further noted that Rule 2019 was not meant to apply to counsel who represented (1) a group of creditors who appeared solely in the chapter 11 case for the purposes of defending their proofs of claim, (2) multiple defendants in different adversary proceedings; and (3) multiple unrelated creditors. 

Where Rule 2019 applied, the Court held that parties were required to disclosure (1) the names of creditors in the group, (2) detailed debt information, including the price paid for the debt and the date the debt was acquired, and (3) other economic interests in the case.  In the current case, a number of groups had already filed Rule 2019 statements that provided (1) the total amount of debt held by the group, and (2) a range of prices paid for the debt and a range of dates during which the debt was acquired.  The Court noted that such types of 2019 statements are not compliant with the rule, however, the Court determined that based on the information it appeared that no one group represented a sufficiently large class of creditors that would be unduly influential in the case.  Accordingly, the Court decided that for purposes of the WMI case it would accept those previously filed Rule 2019 statements from counsel.

This decision while not a complete about face, certainly narrows the earlier Opinion issued on December 2, 2009 in the WaMu case where the Court held that Bankruptcy Rule 2019 clearly applies to all "ad hoc committees," regardless of their action or how they might try to disclaim collective action. As a result, under the initial Opinion the members of an informal group of WMI bondholders needed to disclose detailed information concerning their holders, including a history of when each of the holders individually bought and sold its bonds, including prices paid. The initial Opinion also introduced a troubling new concept that members of an informal group subject to Rule 2019 disclosure requirements also owed fiduciary duties to other creditors holding the same class of claims but who are not members of the group. Our client alert on the initial WaMu Opinion can be found here.

We have written extensively on Rule 2019 and have come down squarely on the side that Rule 2019 does not apply to ad hoc committees such as noteholder and lender groups or, at least, it should not apply. Efficient organization of informal groups of the debt holders in bankruptcy is crucial in order to ensure broad input from a cross-section of par and secondary holders, including institutional investors and hedge funds. The December 2009 WaMu Opinion made it less likely that informal bondholder and lender groups will form for fear of having to disclose proprietary trading information as well as taking on fiduciary duties to other creditors.  Today's decision protects the rights of creditors to file proofs of claim in a bankruptcy case without additional disclosures.