Bankruptcy Code Amendments Pass the House in Appropriations Bill

On July 7, the House of Representatives passed an appropriations bill (H.R. 5485) that includes a revised version of H.R. 2947, the Financial Institution Bankruptcy Act (FIBA), which passed the House by voice vote earlier this year. This bill, which the Roundtable has covered previously (here and here), would add to Chapter 11 of the Bankruptcy Code a “Subchapter V” to facilitate the bankruptcy resolution of troubled financial institutions. The inclusion of FIBA in the appropriations bill suggests there could be a substantial effort to pass the bankruptcy bill this year.

The version of FIBA included in the appropriations bill is largely the same as the bill that was introduced in the House last July. Importantly, however, the current version of the bill, which passed the House by voice vote this past spring, no longer allows the Board of Governors of the Federal Reserve System (the Board) to force a financial institution into bankruptcy. The role of federal regulators in the initiation and conduct of bankruptcy proceedings has been a controversial issue in debates about how to adapt the Bankruptcy Code to handle failed financial institutions more effectively. As included in the appropriations bill, FIBA permits only the debtor to file for bankruptcy. At the same time, the current bill would still provide for federal financial regulators, including the Board, to appear and be heard in any case under Subchapter V.

Although the bill aims to make bankruptcy feasible for large financial institutions, Subchapter V has been designed to facilitate a two-day, single-point-of-entry (SPOE) resolution strategy. FIBA’s proposed changes to the Bankruptcy Code would not support financial institutions during a lengthier path through bankruptcy. As the two-day bankruptcy resolution of a large, complex firm has no precedent, it is unclear whether the resolution strategy contemplated by Subchapter V would prove workable in practice. Thus, FIBA may not go as far as its proponents claim in making bankruptcy feasible for systemically important financial institutions (SIFIs).

H.R. 5485 is now in the Senate, which will consider it after the summer recess.

For a link to the full text of H.R. 5485, click here.

(This post was authored by Rebecca Green, J.D. ’17.)

House Judiciary Committee Approves Bill to Amend Chapter 11 for Financial Institution Bankruptcies

On February 11, 2016, the House of Representatives Judiciary Committee approved H.R. 2947—the Financial Institution Bankruptcy Act (FIBA)—which would amend the Bankruptcy Code to accommodate more smoothly the resolution of systemically important financial institutions (SIFIs). Introduced in July 2015, the current bill is essentially identical to an earlier version that passed the House in December 2014 (discussed in a Roundtable post here).

Like two pending Senate proposals, FIBA focuses on facilitating the recapitalization of a SIFI through a “single point of entry” (SPOE) approach similar to the strategy the FDIC has developed for implementing the Orderly Liquidation Authority (OLA) created in Title II of the Dodd-Frank Act. During an SPOE resolution, most of the failing SIFI’s assets would be transferred to a non-debtor bridge holding company to continue operations, leaving long-term debt and equity behind in the original holding company to be liquidated. (For a previous Roundtable post describing SPOE, click here.) Although both the House and the Senate bills would adapt the Bankruptcy Code to support recapitalization, FIBA differs from the Senate proposals in some important ways.

First, unlike the Senate proposals, FIBA does not repeal the OLA’s regulatory resolution process. FIBA would eliminate some of the major differences between the OLA and the current Bankruptcy Code to make bankruptcy a more viable route for failing SIFIs, but the OLA would remain an option for regulators.

Second, FIBA does not address either private or public financing for the bridge company. The Senate Judiciary Committee’s proposal, on the other hand, explicitly prohibits federal government funding. The bill pending in the Senate Banking, Housing, and Urban Affairs Committee also prohibits financing by Federal Reserve banks.

At the same time, FIBA and the Senate bills both impose a 48-hour stay on the exercise of contractual rights to terminate, liquidate, and offset qualified financial contracts to allow their transfer to a bridge company. At present, safe harbors in the Bankruptcy Code exempt such contracts from the automatic stay, and even the OLA imposes a stay of only one business day.

The full text of FIBA may be found here.

(This post was authored by Rebecca Green, J.D. ’17.)

House Advances Bipartisan Financial Institution Bankruptcy Act

By Stephen D. Adams, Editor, HLS Bankruptcy Roundtable

On September 10, 2014, the House Judiciary Committee approved H.R. 5421, the Financial Institution Bankruptcy Act of 2014, in a voice vote with bipartisan support. The bill would amend Chapter 11 of the Bankruptcy Code by adding Subchapter V, targeting large financial institutions.  Subchapter V reflects the principles of the Single Point of Entry framework developed for the Orderly Liquidation Authority, which include the following: 1) an expedited involuntary commencement process that may be initiated by a regulator (in addition to a voluntary process), 2) a special transfer of estate property, including an assignment of executory contracts, leases, swaps and the like, to a new holding company, and 3) a brief but broad automatic stay on a wide variety of instruments in order to enable the special transfer.  As a result, the subsidiaries of the bank holding company are in and out of bankruptcy quickly, but the parent holding company remains.  To enable this special transfer, Subchapter V transfers may assign licenses, permits, and registrations, and are exempt from most avoiding powers.  In addition, the prospective statute empowers judges to consider the effects of their decisions on financial stability, a power strengthened by authorization of the Federal Reserve, the SEC, the OCC, and the FDIC (but not the CFTC, it seems), to be heard on any issue in the case or proceeding.  Finally, the bill would create a special category of judges who would handle these cases.

The approval statement of the House Judiciary Committee is here.  The text of the bill can be found here, and you may track the bill’s progress here.  Previously, the Roundtable covered a draft of the bill in the Senate in connection with Bruce Grohsgal’s discussion of the limits of the proposal, then called Chapter 14.  David Skeel’s post today provides a comparison of an earlier (though substantially similar) proposal with the Single Point of Entry plan for the OLA.

Practitioners, Academics, and a Judge Testify about Safe Harbors before Congress

Author: Stephen D. Adams

The House Judiciary Subcommittee on Regulatory Reform, Commercial, and Antitrust Law has held two sets of hearings in recent months on the bankruptcy safe harbors for repos and derivatives from the automatic stay, from preference and fraudulent conveyance law, and from the limitations on ipso facto clauses.

This past Wednesday, March 26, Judge Christopher Sontchi, Seth Grosshandler, Jane Vris, Thomas Jackson, and Michelle Harner testified. Last December, Jeffrey Lacker, Donald Bernstein, and Mark Roe testified.

Judge Sontchi argued that the 546(e)’s exception for all settlement transactions is too broad and also urged Congress to narrow the safe harbors for repos. Seth Grosshandler, of Cleary Gottlieb, reported on the work of the ABI safe harbors advisory committee (which includes both Judge Sontchi and Prof. Roe) and warned that the safe harbors are complex and potentially costly to alter.  Jane Vris, representing the National Bankruptcy Conference (NBC), and Thomas Jackson, professor at the University of Rochester, testified on bankruptcy of SIFIs as an alternative to Dodd Frank resolution of bail-out.  Michelle Harner, professor at University of Maryland School of Law, testified in her role as the Reporter to the ABI Commission on Bankruptcy Reform about the Commission.

Mark Roe, professor at Harvard Law School, testified that the safe harbors facilitate excessive short-term funding of financial institutions and impede effective resolution of large financial failures, like that of Lehman in 2008.  Donald Bernstein, of Davis Polk, a member of the ABI bankruptcy commission, testified about the bankruptcy adjustments needed to adapt bankruptcy law to the FDIC’s Single Point of Entry resolution mechanisms.  Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, testified about the importance of bankruptcy reform to reduce the problem of too-big-to-fail and reduce reliance on short-term debt.

The written testimonies are linked above, and the video of the oral testimonies for the March 26th hearing will be found here once it has been posted, and is here for the December 3rd hearing.

For more on the bankruptcy safe harbors for derivatives and repurchase agreements, please see the post by Steven L. Schwarcz and Ori Sharon summarizing their recent paper, The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis, and the post by Kathryn Borgeson, Mark Ellenberg, Lary Stromfeld, and John Thompson, entitled Lehman Bankruptcy Court Issues Safe Harbor Decision, summarizing a recent Lehman case decision on the safe harbors, both published Tuesday.

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