The U.S. House of Representatives spent Cyber Monday in session rather than online shopping. On December 1, 2014, the House passed H.R. 5421, aka the Financial Institutions Bankruptcy Act of 2014. The bipartisan bill was introduced in September. It received support from both sides of the aisle in the House as well as the support of the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
If the bill receives approval by the Senate and the signature of the President, it would amend the Bankruptcy Code as it pertains to insolvent financial institutions by adding Subchapter V to chapter 11. This would offer alternatives to the current provisions of the Dodd-Frank Act
Under the Dodd-Frank Act, the U.S. government may take action to place large financial institutions into receivership immediately if the institution is nearing failure or has failed. Dodd-Frank was designed to give the FDIC discretion to swiftly and efficiently liquidate financial institutions tottering on the edge of insolvency in order to protect the financial stability of the United States.
The Cyber Monday legislation gives an option to failing bank holding companies and large financial institutions with consolidated assets of at least $50 billion to proceed under the Bankruptcy Code rather than a FDIC receivership. Under the new law, the holding company would have the option to file a chapter 11 bankruptcy. The institutions could also be subject to involuntary bankruptcy proceedings instituted by the FDIC.
The holding company’s operating subsidiaries would remain outside of the bankruptcy. A bridge company would be formed. The subsidiaries would be recapitalized and continue to function.
Under the Subchapter V, the Bankruptcy Court would have authority to:
- Transfer property, contracts and leases from the bank holding company or financial institution to the bridge company to prevent national financial instability.
- Allow for a temporary stay of certain contractual rights tied to the financial condition of the failed institution.
- Prevent counter-parties from modifying or terminating debt, contracts, leases, licenses, permits, or registrations upon failure of the financial institution, and instead allow for their transfer to a bridge company.
- The bill also allows for the appointment of new bankruptcy judges specializing in this area.
Under the proposed law, the equity securities in the bridge company would be transferred to a qualified and independent special trustee. It would be the job of the special trustee to hold the equity securities in trust for the sole benefit of the bankruptcy estate. The assets held in trust would be distributed by the special trustee in accordance with a chapter 11 plan confirmed by the Bankruptcy Court.