[House Report 113-630]
[From the U.S. Government Publishing Office]
113th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 113-630
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FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2014
_______
December 1, 2014.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Goodlatte, from the Committee on the Judiciary,
submitted the following
R E P O R T
[To accompany H.R. 5421]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (H.R. 5421) to amend title 11 of the United States Code in
order to facilitate the resolution of an insolvent financial
institution in bankruptcy, having considered the same, reports
favorably thereon without amendment and recommends that the
bill do pass.
CONTENTS
Page
Purpose and Summary.............................................. 1
Background and Need for the Legislation.......................... 2
Hearings......................................................... 6
Committee Consideration.......................................... 7
Committee Votes.................................................. 7
Committee Oversight Findings..................................... 7
New Budget Authority and Tax Expenditures........................ 7
Congressional Budget Office Cost Estimate........................ 7
Duplication of Federal Programs.................................. 9
Disclosure of Directed Rule Makings.............................. 10
Performance Goals and Objectives................................. 10
Advisory on Earmarks............................................. 10
Section-by-Section Analysis...................................... 10
Changes in Existing Law Made by the Bill, as Reported............ 16
Purpose and Summary
The U.S. bankruptcy process is not optimally designed for
the orderly resolution of financial institutions for many
reasons, including these institutions' interconnectedness and,
in the case of larger and more interconnected institutions, a
potential to pose ``systemic risk'' to the broader financial
system. H.R. 5421, the ``Financial Institution Bankruptcy Act
of 2014,'' amends chapter 11 of the Bankruptcy Code to address
better the unique challenges presented by the insolvency of a
financial institution and better allow such an institution to
be resolved through the bankruptcy process.
Background and Need for the Legislation
A. BRIEF OVERVIEW OF CHAPTER 11
Chapter 11 of the Bankruptcy Code is designed primarily to
allow a business to restructure its debt obligations while
maintaining its operations. The underlying principle is that a
business in its entirety is more valuable than its assets each
valued independently. Preservation of a business through
chapter 11, and in turn its enterprise value, can benefit both
creditors, who should receive a higher recovery as a result of
a debtor's restructuring than they would otherwise obtain
through a liquidation, and debtors, who benefit from the
ability to continue their business operations. Employees,
suppliers, customers and others can also benefit if debtors
continue their business operations.
A chapter 11 case begins by the filing of a petition for
relief with the relevant bankruptcy court. Once the petition is
filed, an ``automatic stay'' is put into place that prevents,
with some exceptions, creditors from taking actions to recover
their debts. The automatic stay allows a debtor the breathing
room necessary to organize its operations, negotiate with
creditors, and achieve consensus on a chapter 11 plan. The
inflection point of a chapter 11 case is the chapter 11 plan,
which dictates what each of the creditors will receive as a
recovery. The chapter 11 plan must be approved by the debtor's
creditors and the bankruptcy court. Once a chapter 11 plan is
approved, creditors of the debtor may only pursue recoveries as
provided by the chapter 11 plan, and the reorganized company is
treated as a new corporate entity.
There are generally two primary paths for a debtor to
restructure under chapter 11. The first path is a traditional
reorganization of a debtor's capital structure. A simple
example of this type of reorganization would involve a debtor's
shareholders not receiving any recovery on account of their
shares, and the debtor's secured creditors becoming the new
equity holders of the reorganized company. The second path is a
sale of a debtor's primary business, with the proceeds of the
sale used to provide recoveries to the debtor's creditors. The
sale of a business as a whole is distinct from a liquidation,
in that the enterprise typically will continue to operate in a
substantially similar form under new, third party ownership. In
a liquidation, the debtor's assets can be sold in piecemeal
fashion or simply handed over to creditors.
B. THE EXISTING BANKRUPTCY CODE AND ADDRESSING FINANCIAL INSTITUTION
INSOLVENCIES
The bankruptcy process has been the traditional mechanism
for handling the orderly resolution of distressed companies in
the U.S. because of bankruptcy's established history of laws,
precedent and impartial administration. According to a report
by the Federal Deposit Insurance Corporation (FDIC) and the
Bank of England, ``[t]he U.S. would prefer that large financial
organizations be resolvable through ordinary bankruptcy.''\1\
However, the report added that ``the U.S. bankruptcy process
may not be able to handle the failure of a systemic financial
institution without significant disruption to the financial
system.''\2\ Of note, smaller financial institutions can also
restructure their operations under the Bankruptcy Code in the
event of material financial distress or failure.
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\1\See Federal Deposit Insurance Corporation and the Bank of
England, Resolving Globally Active, Systemically Important, Financial
Institutions (Dec. 10, 2012), available at http://
www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf.
\2\Id.
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In the wake of the 2008 financial crisis, the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Pub. L. No.
111-203, directed the Board of Governors of the Federal Reserve
System (Federal Reserve) and the Governmental Accountability
Office (GAO) to study the Bankruptcy Code and international
issues related to the insolvency of financial institutions as
part of an overall effort to reduce systemic risk within the
financial sector.\3\ The studies identified a number of issues
specific to the resolution of insolvent financial institutions
and discussed theories regarding how to address such issues,
without offering specific recommendations or independent
opinions regarding potential revisions to the Bankruptcy
Code.\4\
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\3\Pub. L. No. 111-203 Sec. Sec. 202(e), 216, 217 (2010)
\4\See the Board of Governors of the Federal Reserve System, Study
on the International Coordination Relating to Bankruptcy Process for
Nonbank Financial Institutions (July 2011); see also Government
Accountability Office, Complex Financial Institutions and International
Coordinate Pose Challenges (July 2011).
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Following these reports, the FDIC published a notice
detailing its intended method for implementing its resolution/
orderly liquidation authority under Title II of the Dodd-Frank
Act, a non-bankruptcy resolution process the Dodd-Frank
legislation made available for large, ``systemically
important'' financial institutions.\5\ The FDIC's method,
referred to as ``single point of entry,'' relies on placing a
parent holding company into receivership while maintaining the
operations and solvency of its operating subsidiaries.\6\ Under
this approach, the FDIC would be appointed as the receiver of
the parent holding company and could transfer the parent
company's assets into a bridge financial holding company,
impose losses on the shareholders and creditors of the parent
company, and eventually transition ownership of the bridge
financial company into private hands.\7\
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\5\Resolution of Systemically Important Financial Institutions: The
Single Point of Entry Strategy, 78 Fed. Reg. 76,614 (Dec. 18, 2013).
\6\Id.
\7\Id.
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Some commentators have suggested that the ``single point of
entry'' approach should also be made available in the
Bankruptcy Code.\8\ One of the proposed methods to amend the
Bankruptcy Code to facilitate the use of this approach creates
an entirely new subchapter within chapter 11, referred to as
``subchapter V,'' dedicated to addressing the insolvency of a
financial institution.\9\
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\8\See The Bankruptcy Code and Financial Institution Insolvencies:
Hearing Before the Subcomm. on Regulatory Reform, Commercial and
Antitrust Law of the H. Comm. on the Judiciary, 113th Cong. 12 (2013)
[hereinafter the ``December Bankruptcy Hearing''] (statement of Donald
S. Bernstein).
\9\Another leading proposal is referred to as ``chapter 14'' and
would introduce an entirely new chapter to the Bankruptcy Code, with
substantially similar amendments to the Bankruptcy Code as subchapter
V. One significant difference between these two approaches is that
chapter 14 may not incorporate the relevant case law related to other
components of chapter 11 that remain undisturbed under both approaches,
while subchapter V clearly maintains such case law.
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As explained in additional detail below, the subchapter V
proposal is designed to address the unique issues presented by
a financial institution's bankruptcy. Subchapter V would, among
other elements: apply to financial institutions; allow not just
the debtor institution, but also the financial institution's
primary regulator, to initiate and have standing in the
institution's bankruptcy proceeding; designate a select group
of appellate and bankruptcy judges to oversee these
bankruptcies; and, provide specialized treatment for derivative
contracts. Advocates of this approach argue that a transparent
judicial process that allows for the reorganization, rather
than liquidation, of a large financial institution is a
preferable resolution strategy because of, among other things,
the benefits of due process.
C. THE CHALLENGES PRESENTED BY A FINANCIAL INSTITUTION INSOLVENCY AND
HOW THE FINANCIAL INSTITUTION BANKRUPTCY ACT ADDRESSES THESE CHALLENGES
There are a number of challenges posed by the insolvency of
a financial institution, particularly the insolvency of a
large, multi-national financial institution. The resolution of
a financial institution must be swift, transparent, and account
for the potential impact on the general financial system, due
to the typically liquid and quickly transferable assets of a
financial institution. While the existing Bankruptcy Code
possesses many of the provisions necessary to resolve a large,
failing firm, commentators have suggested that improvements are
necessary to resolve effectively a financial institution.\10\
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\10\See, e.g., Too Big To Fail: The Role for Bankruptcy and
Antitrust Law in Financial Regulation Reform (Part I): Hearing before
the Subcomm. on Commercial and Administrative Law of the H. Comm. on
the Judiciary, 111th Cong. 64-79 (2009) (statement of Harvey R.
Miller).
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As explained above, commentators generally agree that the
``single point of entry'' approach is the most efficient
proposal to provide for an expeditious resolution of a
financial firm.\11\ H.R. 5421, the ``Financial Institution
Bankruptcy Act of 2014'' (referred to herein as ``Subchapter
V'') adopts the proposed method of creating a new subchapter
within chapter 11 of the Bankruptcy Code to allow the ``single
point of entry'' approach to be utilized in the bankruptcy
process. H.R. 5421 allows the debtor holding company that sits
atop the financial firm's corporate structure to transfer its
assets, including the equity in all of its operating
subsidiaries, to a newly-formed bridge company over a single
weekend.\12\ The debt, any remaining assets, and equity of the
holding company will remain in the bankruptcy process and
absorb the losses of the financial institution. Identifying the
debt and equity to remain in the bankruptcy process allows
existing creditors of the debtor to price appropriately their
dealings and investment with the debtor prior to any bankruptcy
proceeding.
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\11\See, e.g., H.R. ____, the ``Financial Institution Bankruptcy
Act of 2014'': Hearing Before the Subcomm. on Regulatory Reform,
Commercial and Antitrust Law of the H. Comm. on the Judiciary, 113th
Cong. (2014) (statements of Donald Bernstein and Thomas Jackson).
\12\Given the sensitivity of banking relationships and the
financial marketplace, practicalities dictate that this transfer must
be performed over the course of a period when the financial markets are
not open.
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Furthermore, the Subchapter V ``single point of entry''
approach allows all of the financial institution's operating
subsidiaries to remain out of the bankruptcy process. Keeping
these entities out of an insolvency proceeding is particularly
helpful for multi-national firms that otherwise could be
required to comply with multiple, and potentially conflicting,
insolvency jurisdictions.
The amendments to the Bankruptcy Code contained in H.R.
5421 also account for the potential of a financial firm's
insolvency to impact the general financial markets, often
referred to as systemic risk. One such amendment included in
H.R. 5421 is the ability of the Federal Reserve to initiate a
bankruptcy case. In order to commence a case over the objection
of the subject financial institution, the Federal Reserve must
demonstrate to the presiding bankruptcy court, which must agree
with the Federal Reserve's assessment, that initiation of a
Subchapter V case is ``necessary to prevent serious adverse
effects on financial stability in the United States.''\13\ By
allowing the Federal Reserve to commence a Subchapter V case,
subject to careful judicial oversight, a near-failing financial
firm may be resolved quickly and potentially in advance of its
losses spreading to the financial markets.
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\13\Subchapter V, Sec. 1183.
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An additional element of H.R. 5421 intended to address
systemic risk is Bankruptcy Code amendments designed to deal
with the types of transactions through which systemic contagion
can most readily spread and that financial institutions engage
in routinely--derivative and similarly-structured transactions.
Currently, the Bankruptcy Code contains exemptions for
counterparties to derivative and similarly-structured
transactions to collect on outstanding debts notwithstanding
the commencement of a chapter 11 case and the consequent
``automatic stay.'' This exemption stands in contrast to the
treatment of other contracts and debts under the Bankruptcy
Code, which typically requires creditors to wait until a
chapter 11 plan is approved before they receive a recovery on
account of their relationship with the debtor. H.R. 5421
overrides the exemption for derivative and similarly-structured
transactions contained in the Bankruptcy Code by imposing a
temporary 2-day stay that would allow for the effective
transfer of the financial institution's operations to a bridge
company. Without this override of the existing exemption,
counterparties to derivatives and similarly-structured
transactions could terminate their relationships with a
financial institution debtor upon the commencement of a
bankruptcy case, which likely would endanger the successful
transfer and continued operation of the bridge company and
potentially threaten other entities within the broader
financial system.\14\
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\14\See H.R. ____, the ``Financial Institution Bankruptcy Act of
2014'': Hearing Before the Subcomm. on Regulatory Reform, Commercial
and Antitrust Law of the H. Comm. on the Judiciary, 113th Cong. 12
(2014) (statement of Stephen E. Hessler).
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H.R. 5421 also expressly acknowledges the speed by which a
financial institution must be resolved in order to mitigate
financial contagion. To that end, the legislation includes
specific and expedient timeframes for the commencement of a
case as well as court approval of the transfer of assets to the
bridge company.
The bill also recognizes that overseeing a Subchapter V
case requires a presiding bankruptcy judge or a judge sitting
on appeal in such a case to have a certain level of expertise
and experience with either financial industry cases or large
corporate reorganizations. To that end, H.R. 5421 contains
provisions that require the advance designation of select
bankruptcy and appellate judges who can be available to hear
these cases and appeals from them.
Hearings
The Committee conducted two separate hearings on the topic
of enhancing the Bankruptcy Code to address the resolution of a
financial institution through the bankruptcy process. On
December 3, 2013, the Subcommittee on Regulatory Reform,
Commercial and Antitrust Law (hereinafter, the
``Subcommittee'') conducted a hearing entitled ``The Bankruptcy
Code and Financial Institution Insolvencies.''\15\ The
witnesses at the hearing were: the Honorable Jeffrey M. Lacker,
President of the Federal Reserve Bank of Richmond; Professor
Mark J. Roe, David Berg Professor of Law, Harvard Law School;
and Donald S. Bernstein, Esq., partner and head of Davis Polk &
Wardwell LLP's Insolvency and Restructuring Practice and past
chair of the National Bankruptcy Conference. At the hearing,
witnesses testified that a financial institution's bankruptcy
presents unique issues that the existing Bankruptcy Code could
be equipped better to address. On March 26, 2014, the
Subcommittee conducted a hearing entitled ``Exploring Chapter
11 Reform: Corporate and Financial Institution Insolvencies;
Treatment of Derivatives.''\16\ The witnesses at the hearing
were: Professor Michelle Harner, Reporter for the American
Bankruptcy Institute Commission to Study the Reform of Chapter
11, University of Maryland; Professor Thomas H. Jackson,
William E. Simon School of Business, University of Rochester;
the Honorable Christopher Sontchi, U.S. Bankruptcy Court for
the District of Delaware; Seth Grosshandler, Esq., Partner,
Cleary Gottlieb Steen & Hamilton, LLP; and Jane Vris, Millstein
& Co, on behalf of the National Bankruptcy Conference. During
this hearing, the Committee received testimony in support of
amending the Bankruptcy Code to create a subchapter V under
chapter 11 to allow the resolution of a financial institution
through the bankruptcy process, using the single-point-of-entry
approach.\17\
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\15\December Bankruptcy Hearing.
\16\Exploring Chapter 11 Reform: Corporate and Financial
Institution Insolvencies; Treatment of Derivatives: Hearing Before the
Subcomm. on Regulatory Reform, Commercial and Antitrust Law of the H.
Comm. on the Judiciary, 113th Cong. (2014).
\17\Id. (testimony of Prof. Jackson).
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In addition, on July 15, 2014, the Subcommittee conducted a
hearing on a discussion draft of the Financial Institution
Bankruptcy Act. The witnesses at the hearing were: Donald S.
Bernstein, Esq., partner and head of Davis Polk & Wardwell
LLP's Insolvency and Restructuring Practice and past chair of
the National Bankruptcy Conference; Stephen E. Hessler, Esq.,
Partner, Kirkland & Ellis, LLP; Professor Thomas H. Jackson,
William E. Simon School of Business, University of Rochester;
and, Professor Stephen J. Lubben, Seton Hall University School
of Law. All four witnesses, including the Minority witness,
testified that they believed the Financial Institution
Bankruptcy Act, subject to certain modifications, should be
enacted into law.
Following the hearing, the Committee received informal
staff-level comments on the discussion draft of the Financial
Institution Bankruptcy Act from, among others, the Federal
Reserve, the FDIC, the Office of the Comptroller of the
Currency, the Administrative Office of the U.S. Courts, the
National Conference of Bankruptcy Judges, the National
Bankruptcy Conference, and the International Swaps and
Derivatives Association. The comments received from these
parties served as the basis for revisions to the discussion
draft that was the subject of the July 15 Subcommittee hearing,
and which ultimately became H.R. 5421.
Committee Consideration
On September 10, 2014, the Committee met in open session
and ordered the bill H.R. 5421 favorably reported without
amendment, by voice vote, a quorum being present.
Committee Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises that there
were no recorded votes during the Committee's consideration of
H.R. 5421.
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority or increased tax
expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 5421, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 7, 2014.
Hon. Bob Goodlatte, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman:
The Congressional Budget Office has prepared the enclosed
cost estimate for H.R. 5421, the ``Financial Institution
Bankruptcy Act of 2014.''
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Daniel
Hoople, who can be reached at 226-2800.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure
cc:
Honorable John Conyers, Jr.
Ranking Member
H.R. 5421--Financial Institution Bankruptcy Act of 2014.
As ordered reported by the House Committee on the Judiciary
on September 10, 2014.
H.R. 5421 would modify the bankruptcy process for certain
large financial institutions. Pay-as-you-go procedures apply
because enacting the legislation would lower the probability
that such an institution would be liquidated by the Federal
Government upon failure, potentially having a small effect on
direct spending and revenues. However, CBO expects that
failures handled through the bankruptcy code under the bill
would not affect the net cash flows of the Federal Government
under current law. Thus, we estimate that H.R. 5421 would have
no significant effect on the budget, including discretionary
spending, over the next 10 years.
Under current law, the Federal Government may place certain
large and interconnected financial institutions, upon failure,
into receivership of the Federal Deposit Insurance Corporation
(FDIC). Similar to its historical role as receiver of
commercial banks and thrifts, the FDIC may sell the failed
institution's assets, merge it with a healthy institution,
continue operations through a bridge company, or some
combination thereof. Most likely, the receivership will require
short-term (and in some cases long-term) financing to quell the
liquidity and insolvency concerns that result in the
institution's failure. Under current law, such funding is
available through the Treasury. While this borrowing must be
repaid in full, CBO believes that repayment generally will
occur over multiple years. As such, CBO estimates that this
authority (also known as Orderly Liquidation Authority, or OLA)
will have no net budget effect over time, but will increase
deficits in some years. CBO's most recent baseline projects
that use of OLA will increase deficits by about $19 billion
over the 2015-2024 period. (This projection assumes a low
probability that OLA will be triggered in each year. Actual
cash flows will be zero in most years and much higher in years
when OLA is used.)
H.R. 5421 would establish a separate bankruptcy process for
bank holding companies and certain large financial
institutions. This process would differ from current law in
several ways. First, the court would have the authority to
transfer certain property, contracts, and leases of the estate
to a bridge company, if necessary to prevent serious adverse
effects on the financial stability of the United States (That
property could not include unsecured debt or equity, which
instead would remain with the estate.) The legislation also
would allow for a temporary stay of certain contractual rights
tied to the financial condition of the failed institution--for
example, collection of collateral, acceleration of debt, or
close-out netting of derivatives. Similarly, other leases,
contracts, licenses, permits, or registration could not be
modified or terminated upon failure, instead transferring to
the bridge company.
CBO believes that the changes made by H.R. 5421 would
establish a viable alternative to the use of OLA in some
circumstances and would increase the probability that a failure
would be handled through the bankruptcy code rather than by the
FDIC, causing a small change in the FDIC's workload. However,
those circumstances are likely to occur when the use of OLA
under current law would have generated little to no Federal
cash flows--for example, the failure of a single entity during
a relatively stable economy. More severe situations requiring
significant capital or liquidity to proceed probably would
continue to be handled by the FDIC under the bill because
private debtor-in-possession financing would be difficult to
obtain, particularly during economic contractions. Because we
expect H.R. 5421 to only affect failures that would otherwise
have no budgetary impact under current law, CBO estimates that
enacting this legislation would have no significant effect on
the Federal budget.
H.R. 5421 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA).
H.R. 5421 would impose a private-sector mandate, as defined
in UMRA, on entities that have certain types of contracts with
a bank holding company or a large financial institution that
has entered the bankruptcy process established under the bill.
The bill would limit the contractual rights that those entities
have under current law by imposing a temporary stay on actions
to terminate or modify such contracts for 48 hours after a
bankruptcy petition is filed. The cost of the mandate would
amount to any losses sustained by such parties as result of the
stay. Because of uncertainty about both the number and size of
contracts that would be affected and the amount of losses that
would occur as a result of this provision, CBO cannot determine
whether the cost of the mandate would exceed the annual
threshold established in UMRA for private-sector mandates ($152
million in 2014, adjusted annually for inflation).
The CBO staff contacts for this estimate are Daniel Hoople
(for Federal costs) and Paige Piper-Bach (for the private-
sector impact). The estimate was approved by Theresa Gullo,
Deputy Assistant Director for Budget Analysis.
Duplication of Federal Programs
No provision of H.R. 5421 establishes or reauthorizes a
program of the Federal Government known to be duplicative of
another Federal program, a program that was included in any
report from GAO to Congress pursuant to section 21 of Public
Law 111-139, or a program related to a program identified in
the most recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rule Makings
The Committee estimates that H.R. 5421 specifically directs
to be completed no specific rule makings within the meaning of
5 U.S.C. 551.
Performance Goals and Objectives
The Committee states that pursuant to clause 3(c)(4) of
rule XIII of the Rules of the House of Representatives, H.R.
5421 amends title 11 of the United States Code in order to
facilitate the resolution of an insolvent financial institution
in bankruptcy.
Advisory on Earmarks
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 5421 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as defined in clause 9(e), 9(f) or 9(g) of Rule XXI.
Section-by-Section Analysis
The following discussion describes the bill as reported by
the Committee.
Section 1. Short Title.
Sets forth the short title of the legislation as the
``Financial Institution Bankruptcy Act of 2014.''
Section 2. General Provisions Relating to Covered Financial
Corporations.
Subsection (a) amends Bankruptcy Code section 101, which
defines various terms used throughout the Bankruptcy Code, to
add the definition of ``covered financial corporation.'' In
sum, the term is defined as a bank holding company, as defined
in the Bank Holding Company Act of 1956 (BHCA),\18\ or a
corporation that: exists for the primary purpose of owning
subsidiaries; has consolidated assets of $50 billion or more;
and derives annual gross revenues from activities that are
financial in nature as defined in the BHCA or with respect to
which at least 85% of the company's consolidated assets are
financial in nature as defined in the BHCA.\19\
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\18\See 12 U.S.C. Sec. 1841(a) (2014).
\19\See 12 U.S.C. Sec. 1843(k) (2014).
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Subsection (b) provides that subchapter V of chapter 11 (as
added by the legislation) will only apply to chapter 11 cases
in which a covered financial corporation is the debtor. To be
clear, to the extent a covered financial corporation could
utilize the chapter 11 process and chooses not to invoke the
subchapter V process, that covered financial corporation can
still choose to pursue a ``traditional'' chapter 11 case.
Subsection (c) amends Bankruptcy Code section 109, which
sets forth the eligibility criteria for a bankruptcy debtor, to
provide that a covered financial corporation is eligible to be
a chapter 11 debtor.
Subsection (d) amends Bankruptcy Code section 1112, which
authorizes conversion of a chapter 11 case to chapter 7 or
dismissal of the chapter 11 case, under certain, specified
circumstances. This subsection adds new subsection (g) to
section 1112 to permit the conversion of a subchapter V case to
a chapter 7 case, if: (1) a transfer approved under section
1185 (as added by the bill) has been consummated; (2) the court
has ordered the appointment of a special trustee under section
1186 (as added by the bill); and (3) the court finds that such
conversion is in the best interest of creditors and the estate.
Subsection (e)(1) amends Bankruptcy Code section 726(a)(1)
to accord first payment priority to the fees, costs and
expenses of a special trustee appointed under section 1186.
Subsection (e)(2) makes two amendments to Bankruptcy Code
section 1129(a), which sets forth the requirements for
confirmation of a chapter 11 case. First, it requires the fees,
costs and expenses of a special trustee to have been paid or
for the subchapter V plan to provide for such payment. Second,
it requires the court to find that confirmation of a subchapter
V plan is not likely to cause adverse effects on financial
stability in the United States.
Subsection (f) provides that a U.S. Trustee will recommend
to the court the amount of a bond necessary in the event of a
trustee appointment in a subchapter V case.
Section 3. Liquidation, Reorganization, or Recapitalization of a
Covered Financial Corporation.
Section 3 inserts a new subchapter V into chapter 11
designed to address a bankruptcy of a covered financial
corporation. All further references are to the new sections
added to chapter 11 by the bill.
Sec. 1181. Inapplicability of other sections.
Specifies that Bankruptcy Code sections 303 (authorizing
the commencement of an involuntary bankruptcy case, under
certain circumstances) and 321(c) (which permits the United
States Trustee to serve as a trustee in a bankruptcy case) do
not apply to a subchapter V case.
Sec. 1182. Definitions for this chapter.
Defines the following terms: Board; bridge company; capital
structure debt; contractual right; qualified financial
contract; and special trustee.
Sec. 1183. Commencement of a case concerning a covered
financial corporation.
Subsection (a) authorizes the voluntary commencement of a
subchapter V case if the debtor states under penalty of perjury
that it is a covered financial corporation. In addition, it
allows the involuntary commencement of such a case by the
Federal Reserve against a covered financial corporation if the
Federal Reserve states under penalty of perjury that the
corporation: (1) has incurred losses that will deplete all or
substantially all of the corporation's capital and there is no
reasonable prospect for the corporation to avoid such
depletion; (2) is insolvent; (3) is not, or is unable, to pay
its debts as they become due; or (4) is likely to experience
any of these conditions sufficiently soon. The Federal Reserve
must also certify that the bankruptcy filing is necessary to
effect a transfer of the debtor's assets under section 1185 to
prevent imminent substantial harm to financial stability in the
United States.
If the debtor does not consent to an order for relief,
subsection (b) requires the bankruptcy court to hold a hearing
as soon as practicable, but no later than within 16 hours of
the filing of an involuntary petition, with notice provided to
the debtor, the FDIC, the OCC, and the Treasury Secretary,
which entities, in addition to the Federal Reserve, are the
only ones authorized to participate at such hearing. Subsection
(b) further provides that the Federal Reserve or the debtor may
request that pleadings, hearings, transcripts, and orders be
sealed if their disclosure could create financial instability
in the United States. Access to such documents is only given to
the bankruptcy court, the appellate panel, the debtor, the
FDIC, the OCC, the Treasury Secretary, and the Federal Reserve.
If the case is dismissed, all such documents are permanently
sealed.
A subchapter V case commenced by the debtor constitutes an
order for relief. With respect to a case involuntarily
commenced by the Federal Reserve, subsection (c)(2) requires
the bankruptcy court, within 18 hours after the filing of the
Federal Reserve's involuntary petition, to either: (1) enter an
order of relief, if the Federal Reserve has shown by a
preponderance of the evidence that the criteria specified in
its petition have been satisfied, or the debtor consents to the
Federal Reserve's petition; or (2) enter an order dismissing
the case.
Subsection (d)(1) authorizes the debtor and the Federal
Reserve to appeal directly to the presiding court of appeals an
order granting relief under subchapter V or dismissing a case.
The appeal must be filed within 1 hour after such order has
been entered, with notice to the debtor, the FDIC, the OCC, the
Treasury Secretary, and the Federal Reserve. Such order is
stayed pending appeal. Subsection (d)(2) requires the appellate
panel to hear the appeal within 12 hours of the filing of the
notice of appeal. It specifies that the standard of review is
abuse of discretion. Such panel must enter an order determining
the appeal within 14 hours after the notice of appeal is filed.
Subsection (d)(3) specifies that the court may not delay any
proceeding pertaining to the transfer of the debtor's assets
pursuant to section 1185 because of a pending appeal, except
that the transfer may not be authorized before determination of
such appeal. This allows the bankruptcy court to hear the
motions related to the section 1185 transfer while the appeal
is pending.
Subsection (e) shields a debtor's board of directors from
any liability to shareholders, creditors or other parties in
interest for a good faith filing or consent in good faith to a
subchapter V petition or with respect to a transfer under
sections 1185 and 1186, as added by the bill.
Subsection (f) requires the debtor's counsel or the Federal
Reserve to give confidential notice to the courts regarding the
potential commencement of a subchapter V case in order to allow
the court and the potential bankruptcy judge to make any
necessary preparations in advance of a potential filing.
Sec. 1184. Regulators.
Provides the Federal Reserve, the Securities and Exchange
Commission, the Office of the Comptroller of the Currency of
the Department of Treasury, and the FDIC with standing in a
subchapter V bankruptcy case.
Sec. 1185. Special transfer of property of the estate.
On request of the debtor or Federal Reserve, subsection (a)
authorizes the bankruptcy court to order a transfer of estate
property and the assignment of executory contracts and
unexpired leases to a bridge company after notice and a hearing
that must occur not less than 24 hours after commencement of
the case. This subsection also clarifies that all property
transferred is no longer property of the estate. Subsection (a)
further provides that Bankruptcy Code sections 363 (concerning
sales of bankruptcy case assets) and 365 (executory contracts
and unexpired leases) apply to such transfer, unless otherwise
specified.
Subsection (b) requires not less than 24 hours' notice of
the hearing under subsection (a), to be provided either by
electronic or telephonic means, and identifies who must receive
such notice.
Subsection (c) provides that the court may not order a
transfer unless it determines by a preponderance of the
evidence that: (1) the transfer is necessary to prevent serious
adverse effects on financial stability in the United States;
(2) the transfer does not provide for the assumption of any
capital structure debt by the bridge company; (3) the transfer
does not provide for the transfer of the debtor's equity; (4)
the party requesting the transfer has demonstrated that the
bridge company is not likely to fail to meet the obligations of
any debt, executory contract, qualified financial contract or
unexpired lease assumed and assigned to such company; (5) the
bridge company after the transfer has adequate provision for
fees, costs and expenses of the special trustee; (6) all of the
bridge company's equity securities are transferred to a special
trustee; (7) adequate provision has been made for the payment
of the expenses of the bankruptcy estate and the special
trustee; and (8) the bridge company has governing documents and
initial directors and senior officers that are in the best
interests of creditors and the estate.
With respect to property of the estate that is subject to a
lien securing a debt, executory contract, unexpired lease, or
agreement of the debtor, subsection (c)(3) specifies that the
transfer of this secured property may not be authorized unless:
(A) the bridge company assumes such debt, executory
contract, unexpired lease or agreement, and the
property remains subject to such lien securing such
debt, executory contract, unexpired lease, or agreement
and the court determines that assumption of such debt,
executory contract, unexpired lease, or agreement by
the bridge company is in the best interests of the
estate; or
(B) such property is being transferred to the bridge
company in accordance with the provisions of section
363.
Subsection (d) requires the bridge company to: (1) not have
any property (e.g., executory contracts, unexpired leases) or
debts; and (2) have equity securities that are property of the
estate, which may be sold or distributed subject to the
limitations contained in subchapter V.
Sec. 1186. Special Trustee.
Requires the section 1185 transfer order to provide that
the debtor transfer to the special trustee all of the equity
securities in the bridge company, and for the bridge company's
equity to be held in trust for the sole benefit of the estate,
subject to the payment of the special trustee's fees, costs and
expenses. The court must approve the trust agreement as being
in the best interests of the estate. Subsection (a)(2) requires
the debtor to confirm to the court that the Federal Reserve was
consulted regarding the identity of the proposed special
trustee and advise the court of the results of such
consultation.
Subsection (b) specifies that the trust agreement governing
the trust must satisfy certain requirements. These requirements
include: (1) the trust must provide for the payment of the
special trustee's fees, costs, expenses and indemnities from
the debtor's estate; (2) the special trustee must prepare a
quarterly report to the estate that is filed with the court;
(3) the special trustee must provide information about the
bridge company as reasonably requested by a party in interest;
(4) as long as the equity securities of the bridge company are
held by the trust, the special trustee must file with the court
a notice regarding any change in the management of the bridge
company, its governing documents and any material corporate
action of the company; (5) any sale of any equity securities of
the bridge company may not be consummated until the special
trustee consults with the FDIC and the Federal Reserve
regarding such sale, and discloses the results of such
consultation with the court; and (6) the proceeds of the sale
of any equity securities of the bridge company by the special
trustee must be held in trust for the benefit of, or
transferred to, the estate.
Subsection (c)(1) requires the special trustee to
distribute the trust assets in accordance with a confirmed
chapter 11 plan on its effective date or as ordered by the
court if the subchapter V case is converted to a case under
chapter 7. Subsection (c)(2) specifies that the office of the
special trustee terminates as soon as practicable after final
distribution.
Subsection (d) specifies that after the transfer of the
bridge company's equity is made to the special trustee under
this section, such trustee is subject only to applicable
nonbankruptcy law and the trustee is no longer subject to the
control of the bankruptcy court.
Sec. 1187. Temporary and supplemental automatic stay;
assumed debt.
Extends the ``automatic stay'' triggered by the filing of a
chapter 11 case to creditors who entered into contracts,
leases, agreements and debt contracts with the debtor or its
affiliates. Contrary to the typical automatic stay, which often
can extend for the duration of the bankruptcy case and only is
for the benefit of the entities that file for bankruptcy, the
stay provided for under this section expires after 48 hours or
the transfer of the subject contracts to the bridge company,
and extends both to the debtor and to its affiliates. This
section provides for temporary relief so that the debtor's and
its affiliates' essential contracts, leases and agreements that
are critical for the future operation of the bridge company can
be transferred without disruption.
Qualified financial contracts are excluded from this
section because their treatment is provided for in section
1188. Capital structure debt is also excluded from this section
because that debt remains in the bankruptcy case and those
creditors will receive their recoveries through the traditional
bankruptcy process.
Sec. 1188. Treatment of qualified financial contracts and
affiliate contracts.
Extends the ``automatic stay'' triggered by the filing of a
chapter 11 case to creditors who entered into derivative,
repurchase and similarly constructed contracts with the debtor
and its affiliates. In a typical chapter 11 case, these
contracts are not subject to the automatic stay and creditors
may exercise certain contractual remedies upon the filing of a
bankruptcy case. This section provides that creditors are
prohibited from exercising such rights for 48 hours from the
commencement of the case, until the transfer of the contracts
to the bridge company, or the bankruptcy court's entry of an
order denying the transfer to the bridge company, whichever of
these events occurs earliest.
In order to transfer a qualified contract to the bridge
company, the terms of the contract must continue to be honored
and all of the obligations must continue to be performed.
Furthermore, all of the qualified contracts between the entity
and the debtor and/or its affiliates must be transferred to the
bridge company. This provision is intended to prevent against
``cherry picking'' transfers of only a select number of
contracts. Again, this section is critical to ensure that the
bridge company can continue to operate the debtor's business in
the normal course following the transfer.
Sec. 1189. Licenses, permits, and registrations.
Provides that the bridge company will retain the debtor's
and its affiliates' rights and obligations under the debtor's
and its affiliates' licenses, permits and registrations. In
other words, the bridge company will continue to operate under
these contracts just as the debtor operated prior to the
commencement of the bankruptcy. Furthermore, the bridge company
will be subject to the same regulatory oversight as the debtor
following the transfer. This section also overrides all
nonbankruptcy laws to prevent the termination or modification
of any federal, state or local license, permit, or registration
that the debtor or an affiliate had immediately before the
commencement of the case, if a request is made to transfer
property of the estate under section 1185 and such default is
based on certain ipso facto events.
Sec. 1190. Exemption from securities laws and special tax
provisions.
Provides the same exemption granted to the securities (or
equity) of a typical debtor company to the securities of the
bridge company. Specifically, this provision clarifies that
with respect to Bankruptcy Code section 1145 (which exempts the
offer or sale of securities from certain federal, state and
local laws requiring registration of such offer and sale if it
occurs under a plan), a bridge company's security shall be
deemed to be the security of the debtor's successor under a
plan if the court approves the disclosure statement for the
plan as having adequate information about the bridge company
and its securities.
Sec. 1191. Inapplicability of certain avoiding powers.
Provides for an exemption from the avoidance powers
contained in the Bankruptcy Code for the transfer from the
debtor to the bridge company. In other words, this prevents a
subchapter V transfer, or certain aspects of the transfer, from
being unwound at a later date.
Sec. 1192. Consideration of Financial Stability.
Allows, but does not require, the bankruptcy court to
consider the financial stability of the United States when
rendering decisions related to a subchapter V case.
Section 4. Amendments to Title 28, United States Code.
Sec. 298. Judge for a case under Subchapter V of title 11.
Provides that the Chief Justice of the United States will
designate appellate court judges to hear appeals of decisions
regarding petitions to commence subchapter V bankruptcy cases.
Also, provides that the Chief Justice will designate at least
ten experienced bankruptcy judges to be available to hear
subchapter V bankruptcy cases. Bankruptcy and appellate judges
may request that they be considered for such designation by the
Chief Justice. Further, this provision clarifies that the
district courts will not have jurisdiction over the issues
related to the appointment of a special trustee and the
formation of the bridge company.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, existing law in which no change
is proposed is shown in roman):
TITLE 11, UNITED STATES CODE
* * * * * * *
CHAPTER 1--GENERAL PROVISIONS
* * * * * * *
Sec. 101. Definitions
In this title the following definitions shall apply:
(1) * * *
* * * * * * *
(9A) The term ``covered financial corporation''
means any corporation incorporated or organized under
any Federal or State law, other than a stockbroker, a
commodity broker, or an entity of the kind specified in
paragraph (2) or (3) of section 109(b), that is--
(A) a bank holding company, as defined in
section 2(a) of the Bank Holding Company Act of
1956; or
(B) a corporation that exists for the
primary purpose of owning, controlling and
financing its subsidiaries, that has total
consolidated assets of $50,000,000,000 or
greater, and for which, in its most recently
completed fiscal year--
(i) annual gross revenues derived
by the corporation and all of its
subsidiaries from activities that are
financial in nature (as defined in
section 4(k) of the Bank Holding
Company Act of 1956) and, if
applicable, from the ownership or
control of one or more insured
depository institutions, represents 85
percent or more of the consolidated
annual gross revenues of the
corporation; or
(ii) the consolidated assets of the
corporation and all of its subsidiaries
related to activities that are
financial in nature (as defined in
section 4(k) of the Bank Holding
Company Act of 1956) and, if
applicable, related to the ownership or
control of one or more insured
depository institutions, represents 85
percent or more of the consolidated
assets of the corporation.
* * * * * * *
Sec. 103. Applicability of chapters
(a) * * *
* * * * * * *
(l) Subchapter V of chapter 11 of this title applies only
in a case under chapter 11 concerning a covered financial
corporation.
* * * * * * *
Sec. 109. Who may be a debtor
(a) * * *
(b) A person may be a debtor under chapter 7 of this title
only if such person is not--
(1) * * *
(2) a domestic insurance company, bank, savings
bank, cooperative bank, savings and loan association,
building and loan association, homestead association, a
New Markets Venture Capital company as defined in
section 351 of the Small Business Investment Act of
1958, a small business investment company licensed by
the Small Business Administration under section 301 of
the Small Business Investment Act of 1958, credit
union, or industrial bank or similar institution which
is an insured bank as defined in section 3(h) of the
Federal Deposit Insurance Act, except that an uninsured
State member bank, or a corporation organized under
section 25A of the Federal Reserve Act, which operates,
or operates as, a multilateral clearing organization
pursuant to section 409 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 may be a
debtor if a petition is filed at the direction of the
Board of Governors of the Federal Reserve System; [or]
(3)(A) * * *
(B) a foreign bank, savings bank, cooperative bank,
savings and loan association, building and loan
association, or credit union, that has a branch or
agency (as defined in section 1(b) of the International
Banking Act of 1978) in the United States[.]; or
(4) a covered financial corporation.
* * * * * * *
(d) Only a railroad, a person that may be a debtor under
chapter 7 of this title (except a stockbroker or a commodity
broker), [and] an uninsured State member bank, [or] a
corporation organized under section 25A of the Federal Reserve
Act, which operates, or operates as, a multilateral clearing
organization pursuant to section 409 of the Federal Deposit
Insurance Corporation Improvement Act of 1991, or a covered
financial corporation may be a debtor under chapter 11 of this
title.
* * * * * * *
CHAPTER 3--CASE ADMINISTRATION
* * * * * * *
SUBCHAPTER II--OFFICERS
* * * * * * *
Sec. 322. Qualification of trustee
(a) * * *
(b)(1) * * *
(2) [The] In cases under subchapter V, the United States
trustee shall recommend to the court, and in all other cases,
the United States trustee shall determine--
(A) * * *
* * * * * * *
CHAPTER 7--LIQUIDATION
* * * * * * *
SUBCHAPTER II--COLLECTION, LIQUIDATION, AND DISTRIBUTION OF THE ESTATE
* * * * * * *
Sec. 726. Distribution of property of the estate
(a) Except as provided in section 510 of this title,
property of the estate shall be distributed--
(1) first, in payment of any unpaid fees, costs,
and expenses of a special trustee appointed under
section 1186, and then in payment of claims of the kind
specified in, and in the order specified in, section
507 of this title, proof of which is timely filed under
section 501 of this title or tardily filed on or before
the earlier of--
(A) * * *
* * * * * * *
CHAPTER 11--REORGANIZATION
SUBCHAPTER I--OFFICERS AND ADMINISTRATION
* * * * * * *
Sec. 1112. Conversion or dismissal
(a) * * *
* * * * * * *
(g) Notwithstanding section 109(b), the court may convert a
case under subchapter V to a case under chapter 7 if--
(1) a transfer approved under section 1185 has been
consummated;
(2) the court has ordered the appointment of a
special trustee under section 1186; and
(3) the court finds, after notice and a hearing,
that conversion is in the best interest of the
creditors and the estate.
* * * * * * *
SUBCHAPTER II--THE PLAN
* * * * * * *
Sec. 1129. Confirmation of plan
(a) The court shall confirm a plan only if all of the
following requirements are met:
(1) * * *
* * * * * * *
(17) In a case under subchapter V, all payable
fees, costs, and expenses of the special trustee have
been paid or the plan provides for the payment of all
such fees, costs, and expenses on the effective date of
the plan.
(18) In a case under subchapter V, confirmation of
the plan is not likely to cause serious adverse effects
on financial stability in the United States.
* * * * * * *
SUBCHAPTER V--LIQUIDATION, REORGANIZATION, OR RECAPITALIZATION OF A
COVERED FINANCIAL CORPORATION
Sec. 1181. Inapplicability of other sections
Sections 303 and 321(c) do not apply in a case under this
subchapter concerning a covered financial corporation.
Sec. 1182. Definitions for this subchapter
In this subchapter, the following definitions shall apply:
(1) The term ``Board'' means the Board of Governors
of the Federal Reserve System.
(2) The term ``bridge company'' means a newly
formed corporation to which property of the estate may
be transferred under section 1185(a) and the equity
securities of which may be transferred to a special
trustee under section 1186(a).
(3) The term ``capital structure debt'' means all
unsecured debt of the debtor for borrowed money, other
than a qualified financial contract, for which the
debtor is the primary obligor other than debt secured
by a lien on property of the estate that is to be
transferred to a bridge company pursuant to an order of
the court under section 1185(a).
(4) The term ``contractual right'' means a
contractual right of a kind defined in section 555,
556, 559, 560, or 561.
(5) The term ``qualified financial contract'' means
any contract of a kind defined in paragraph (25),
(38A), (47), or (53B) of section 101, section 741(7),
or paragraph (4), (5), (11), or (13) of section 761.
(6) The term ``special trustee'' means the trustee
of a trust formed under section 1186(a)(1).
Sec. 1183. Commencement of a case concerning a covered financial
corporation
(a) A case under this subchapter concerning a covered
financial corporation may be commenced by the filing of a
petition with the court--
(1) by the debtor under section 301 only if the
debtor states to the best of its knowledge under
penalty of perjury in the petition that it is a covered
financial corporation; or
(2) by the Board only if the Board states to the
best of its knowledge under penalty of perjury in the
petition that--
(A) the debtor is a covered financial
corporation that--
(i) has incurred losses that will
deplete all or substantially all of the
capital of the covered financial
corporation, and there is no reasonable
prospect for the covered financial
corporation to avoid such depletion;
(ii) is insolvent;
(iii) is not paying, or is unable
to pay, the debts of the covered
financial corporation (other than debts
subject to a bona fide dispute as to
liability or amount) as they become
due; or
(iv) is likely to be in a financial
condition specified in clause (i),
(ii), or (iii) sufficiently soon such
that the immediate commencement of a
case under this subchapter is necessary
to prevent serious adverse effects on
financial stability in the United
States; and
(B) the commencement of a case under this
title and effecting a transfer under section
1185 is necessary to prevent serious adverse
effects on financial stability in the United
States.
(b)(1) Unless the debtor consents to an order for relief,
the court shall hold a hearing on the Board's petition under
subsection (a)(2) as soon as practicable but not later than 16
hours after the Board files such a petition, with notice only
to--
(A) the covered financial corporation;
(B) the Federal Deposit Insurance Corporation;
(C) the Office of the Comptroller of the Currency
of the Department of the Treasury; and
(D) the Secretary of the Treasury.
(2) Only the Board and the entities specified in paragraph
(1) and their counsel may participate in a hearing described in
this subsection. The Board or the trustee may request that
pleadings, hearings, transcripts, and orders in connection with
a hearing described in this subsection be sealed if their
disclosure could create financial instability in the United
States.
(3) All pleadings, hearings, transcripts, and orders sealed
under paragraph (2) shall be available to only the court, the
appellate panel, the covered financial corporation, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of
the Currency of the Department of the Treasury, the Secretary
of the Treasury, and the Board. Notwithstanding paragraph (2),
if the case is dismissed, all court documents, including
pleadings, hearings, transcripts, and orders, shall be
permanently sealed.
(c)(1) The commencement of a case under subsection (a)(1)
constitutes an order for relief under this subchapter.
(2) In a case commenced under subsection (a)(2), after
notice and hearing required under subsection (b) and not later
than 18 hours after the filing of the Board's petition, the
court shall enter--
(A) an order for relief--
(i) if the Board has shown at the hearing
under this subsection that the requirements
under subsection (a)(2) are supported by a
preponderance of the evidence; or
(ii) if the debtor consents to the Board's
petition under subsection (a)(2); or
(B) an order dismissing the case.
(d)(1) The covered financial corporation or the Board may
appeal to the court of appeals from an order entered by the
court under subsection (c)(2) not later than 1 hour after the
court enters such order, with notice only to the entities
specified in subsection (b)(1) and the Board. Such order shall
be stayed pending such appeal.
(2) The appellate panel specified under section 298(c)(1)
of title 28 for the judicial circuit in which the case is
pending shall hear the appeal under paragraph (1) within 12
hours of the filing of the notice of appeal under this
subsection. The standard of review shall be abuse of
discretion. The appellate panel shall enter an order
determining the matter that is the subject of the appeal not
later than 14 hours after the notice of appeal is filed.
(3) The court may not, on account of an appeal from an
order for relief under section 1183(d)(1), delay any proceeding
under section 1185, except that the court shall not authorize a
transfer under section 1185 before the determination of the
appeal.
(e) The members of the board of directors (or body
performing similar functions) of a covered financial company
shall have no liability to shareholders, creditors or other
parties in interest for a good faith filing or consenting in
good faith to a petition with respect to a case under this
subchapter, or for any reasonable action taken in good faith in
contemplation of or in connection with such a petition or a
transfer under section 1185 or section 1186, whether prior to
or after commencement of the case.
(f) Counsel to the debtor or the Board shall provide, to
the greatest extent practicable, sufficient confidential notice
to the Office of Court Services of the Administrative Office of
the United States Courts regarding the potential commencement
of a subchapter V case without disclosing the identity of the
potential debtor in order to allow such office to randomly
designate and ensure the ready availability of one of the
bankruptcy judges designated under section 298(b)(1) of title
28 to be available to preside over such subchapter V case.
Sec. 1184. Regulators
The Board, the Securities Exchange Commission, the Office
of the Comptroller of the Currency of the Department of the
Treasury, and the Federal Deposit Insurance Corporation may
raise and may appear and be heard on any issue in any case or
proceeding under this subchapter.
Sec. 1185. Special transfer of property of the estate
(a) On request of the trustee or the Board, and after
notice and a hearing that shall occur not less than 24 hours
after the order for relief, the court may order a transfer
under this section of property of the estate, and the
assignment of executory contracts, unexpired leases, and
qualified financial contracts of the debtor, to a bridge
company. Upon the entry of an order approving such transfer,
any property transferred, and any executory contracts,
unexpired leases, and qualified financial contracts assigned
under such order shall no longer be property of the estate.
Except as provided under this section, the provisions of
sections 363 and 365 shall apply to a transfer and assignment
under this section.
(b) Unless the court orders otherwise, notice of a request
for an order under subsection (a) shall consist of electronic
or telephonic notice of not less than 24 hours to--
(1) the debtor;
(2) the holders of the 20 largest secured claims
against the debtor;
(3) the holders of the 20 largest unsecured claims
against the debtor;
(4) counterparties to any debt, executory contract,
unexpired lease, and qualified financial contract
requested to be transferred under this section;
(5) the Board;
(6) the Federal Deposit Insurance Corporation;
(7) the Secretary of the Treasury and the Office of
the Comptroller of the Currency of the Treasury;
(8) the Securities and Exchange Commission;
(9) the United States trustee or bankruptcy
administrator; and
(10) each primary financial regulatory agency, as
defined in section 2(12) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, with respect to any
affiliate the equity securities of which are proposed
to be transferred under this section.
(c) The court may not order a transfer under this section
unless the court determines, based upon a preponderance of the
evidence, that--
(1) the transfer under this section is necessary to
prevent serious adverse effects on financial stability
in the United States;
(2) the transfer does not provide for the
assumption of any capital structure debt by the bridge
company;
(3) the transfer does not provide for the transfer
to the bridge company of any property of the estate
that is subject to a lien securing a debt, executory
contract, unexpired lease or agreement of the debtor
unless--
(A)(i) the bridge company assumes such
debt, executory contract, unexpired lease or
agreement, including any claims arising in
respect thereof that would not be allowed
secured claims under section 506(a)(1) and
after giving effect to such transfer, such
property remains subject to the lien securing
such debt, executory contract, unexpired lease
or agreement; and
(ii) the court has determined that
assumption of such debt, executory contract,
unexpired lease or agreement by the bridge
company is in the best interests of the estate;
or
(B) such property is being transferred to
the bridge company in accordance with the
provisions of section 363;
(4) the transfer does not provide for the
assumption by the bridge company of any debt, executory
contract, unexpired lease or agreement of the debtor
secured by a lien on property in which the estate has
an interest unless the transfer provides for such
property to be transferred to the bridge company in
accordance with paragraph (3)(A) of this subsection;
(5) the transfer does not provide for the transfer
of the equity of the debtor;
(6) the party requesting the transfer under this
subsection has demonstrated that the bridge company is
not likely to fail to meet the obligations of any debt,
executory contract, qualified financial contract, or
unexpired lease assumed and assigned to the bridge
company;
(7) the transfer provides for the transfer to a
special trustee all of the equity securities in the
bridge company and appointment of a special trustee in
accordance with section 1186;
(8) after giving effect to the transfer, adequate
provision has been made for the fees, costs, and
expenses of the estate and special trustee; and
(9) the bridge company will have governing
documents, and initial directors and senior officers,
that are in the best interest of creditors and the
estate.
(d) Immediately before a transfer under the section, the
bridge company that is the recipient of the transfer shall--
(1) not have any property, executory contracts,
unexpired leases, or debts, other than any property
acquired or executory contracts, unexpired leases, or
debts assumed when acting as a transferee of a transfer
under this section; and
(2) have equity securities that are property of the
estate, which may be sold or distributed in accordance
with this title.
Sec. 1186. Special trustee
(a)(1) An order approving a transfer under section 1185
shall require the trustee to transfer to a qualified and
independent special trustee all of the equity securities in the
bridge company that is the recipient of a transfer under
section 1185 to hold in trust for the sole benefit of the
estate, subject to satisfaction of the special trustee's fees,
costs, and expenses. The trust of which the special trustee is
the trustee shall be a newly formed trust governed by a trust
agreement approved by the court as in the best interests of the
estate, and shall exist for the sole purpose of holding and
administering, and shall be permitted to dispose of, the equity
securities of the bridge company in accordance with the trust
agreement.
(2) In connection with the hearing to approve a transfer
under section 1185, the trustee shall confirm to the court that
the Board has been consulted regarding the identity of the
proposed special trustee and advise the court of the results of
such consultation.
(b) The trust agreement governing the trust shall provide--
(1) for the payment of the fees, costs, expenses,
and indemnities of the special trustee from the assets
of the debtor's estate;
(2) that the special trustee provide--
(A) quarterly reporting to the estate,
which shall be filed with the court; and
(B) information about the bridge company
reasonably requested by a party in interest to
prepare a disclosure statement for a plan
providing for distribution of any securities of
the bridge company if such information is
necessary to prepare such disclosure statement;
(3) that for as long as the equity securities of
the bridge company are held by the trust, the special
trustee shall file a notice with the court in
connection with--
(A) any change in a director or senior
officer of the bridge company;
(B) any modification to the governing
documents of the bridge company; and
(C) any material corporate action of the
bridge company, including--
(i) recapitalization;
(ii) a material borrowing;
(iii) termination of an
intercompany debt or guarantee;
(iv) a transfer of a substantial
portion of the assets of the bridge
company; or
(v) the issuance or sale of any
securities of the bridge company;
(4) that any sale of any equity securities of the
bridge company shall not be consummated until the
special trustee consults with the Federal Deposit
Insurance Corporation and the Board regarding such sale
and discloses the results of such consultation with the
court;
(5) that, subject to reserves for payments
permitted under paragraph (1) provided for in the trust
agreement, the proceeds of the sale of any equity
securities of the bridge company by the special trustee
be held in trust for the benefit of or transferred to
the estate;
(6) the process and guidelines for the replacement
of the special trustee; and
(7) that the property held in trust by the special
trustee is subject to distribution in accordance with
subsection (c).
(c)(1) The special trustee shall distribute the assets held
in trust--
(A) if the court confirms a plan in the case, in
accordance with the plan on the effective date of the
plan; or
(B) if the case is converted to a case under
chapter 7, as ordered by the court.
(2) As soon as practicable after a final distribution under
paragraph (1), the office of the special trustee shall
terminate, except as may be necessary to wind up and conclude
the business and financial affairs of the trust.
(d) After a transfer to the special trustee under this
section, the special trustee shall be subject only to
applicable nonbankruptcy law, and the actions and conduct of
the special trustee shall no longer be subject to approval by
the court in the case under this subchapter.
Sec. 1187. Temporary and supplemental automatic stay; assumed debt
(a)(1) A petition filed under section 1183 operates as a
stay, applicable to all entities, of the termination,
acceleration, or modification of any debt, contract, lease, or
agreement of the kind described in paragraph (2), or of any
right or obligation under any such debt, contract, lease, or
agreement, solely because of--
(A) a default by the debtor under any such debt,
contract, lease, or agreement; or
(B) a provision in such debt, contract, lease, or
agreement, or in applicable nonbankruptcy law, that is
conditioned on--
(i) the insolvency or financial condition
of the debtor at any time before the closing of
the case;
(ii) the commencement of a case under this
title concerning the debtor;
(iii) the appointment of or taking
possession by a trustee in a case under this
title concerning the debtor or by a custodian
before the commencement of the case; or
(iv) a credit rating agency rating, or
absence or withdrawal of a credit rating agency
rating--
(I) of the debtor at any time after
the commencement of the case;
(II) of an affiliate during the
period from the commencement of the
case until 48 hours after such order is
entered;
(III) of the bridge company while
the trustee or the special trustee is a
direct or indirect beneficial holder of
more than 50 percent of the equity
securities of--
(aa) the bridge company; or
(bb) the affiliate, if all
of the direct or indirect
interests in the affiliate that
are property of the estate are
transferred under section 1185;
or
(IV) of an affiliate while the
trustee or the special trustee is a
direct or indirect beneficial holder of
more than 50 percent of the equity
securities of--
(aa) the bridge company; or
(bb) the affiliate, if all
of the direct or indirect
interests in the affiliate that
are property of the estate are
transferred under section 1185.
(2) A debt, contract, lease, or agreement described in this
paragraph is--
(A) any debt (other than capital structure debt),
executory contract, or unexpired lease of the debtor
(other than a qualified financial contract);
(B) any agreement under which the debtor issued or
is obligated for debt (other than capital structure
debt);
(C) any debt, executory contract, or unexpired
lease of an affiliate (other than a qualified financial
contract); or
(D) any agreement under which an affiliate issued
or is obligated for debt.
(3) The stay under this subsection terminates--
(A) for the benefit of the debtor, upon the
earliest of--
(i) 48 hours after the commencement of the
case;
(ii) assumption of the debt, contract,
lease, or agreement by the bridge company under
an order authorizing a transfer under section
1185; or
(iii) a final order of the court denying
the request for a transfer under section 1185;
and
(B) for the benefit of an affiliate, upon the
earliest of--
(i) the entry of an order authorizing a
transfer under section 1185 in which the direct
or indirect interests in the affiliate that are
property of the estate are not transferred
under section 1185;
(ii) a final order by the court denying the
request for a transfer under section 1185; or
(iii) 48 hours after the commencement of
the case if the court has not ordered a
transfer under section 1185.
(4) Subsections (d), (e), (f), and (g) of section 362 apply
to a stay under this subsection.
(b) A debt, executory contract (other than a qualified
financial contract), or unexpired lease of the debtor, or an
agreement under which the debtor has issued or is obligated for
any debt, may be assumed by a bridge company in a transfer
under section 1185 notwithstanding any provision in an
agreement or in applicable nonbankruptcy law that--
(1) prohibits, restricts, or conditions the
assignment of the debt, contract, lease, or agreement;
or
(2) terminates or modifies, or permits a party
other than the debtor to terminate or modify, the debt,
contract, lease, or agreement on account of--
(A) the assignment of the debt, contract,
lease, or agreement; or
(B) a change in control of any party to the
debt, contract, lease, or agreement.
(c)(1) A debt, contract, lease, or agreement of the kind
described in subparagraph (A) or (B) of subsection (a)(2) may
not be terminated or modified, and any right or obligation
under such debt, contract, lease, or agreement may not be
terminated or modified, as to the bridge company solely because
of a provision in the debt, contract, lease, or agreement or in
applicable nonbankruptcy law--
(A) of the kind described in subsection (a)(1)(B)
as applied to the debtor;
(B) that prohibits, restricts, or conditions the
assignment of the debt, contract, lease, or agreement;
or
(C) that terminates or modifies, or permits a party
other than the debtor to terminate or modify, the debt,
contract, lease or agreement on account of--
(i) the assignment of the debt, contract,
lease, or agreement; or
(ii) a change in control of any party to
the debt, contract, lease, or agreement.
(2) If there is a default by the debtor under a provision
other than the kind described in paragraph (1) in a debt,
contract, lease or agreement of the kind described in
subparagraph (A) or (B) of subsection (a)(2), the bridge
company may assume such debt, contract, lease, or agreement
only if the bridge company--
(A) shall cure the default;
(B) compensates, or provides adequate assurance in
connection with a transfer under section 1185 that the
bridge company will promptly compensate, a party other
than the debtor to the debt, contract, lease, or
agreement, for any actual pecuniary loss to the party
resulting from the default; and
(C) provides adequate assurance in connection with
a transfer under section 1185 of future performance
under the debt, contract, lease, or agreement, as
determined by the court under section 1185(c)(4).
Sec. 1188. Treatment of qualified financial contracts and affiliate
contracts
(a) Notwithstanding sections 362(b)(6), 362(b)(7),
362(b)(17), 362(b)(27), 362(o), 555, 556, 559, 560, and 561, a
petition filed under section 1183 operates as a stay, during
the period specified in section 1187(a)(3)(A), applicable to
all entities, of the exercise of a contractual right--
(1) to cause the modification, liquidation,
termination, or acceleration of a qualified financial
contract of the debtor or an affiliate;
(2) to offset or net out any termination value,
payment amount, or other transfer obligation arising
under or in connection with a qualified financial
contract of the debtor or an affiliate; or
(3) under any security agreement or arrangement or
other credit enhancement forming a part of or related
to a qualified financial contract of the debtor or an
affiliate.
(b)(1) During the period specified in section
1187(a)(3)(A), the trustee or the affiliate shall perform all
payment and delivery obligations under such qualified financial
contract of the debtor or the affiliate, as the case may be,
that become due after the commencement of the case. The stay
provided under subsection (a) terminates as to a qualified
financial contract of the debtor or an affiliate immediately
upon the failure of the trustee or the affiliate, as the case
may be, to perform any such obligation during such period.
(2) Any failure by a counterparty to any qualified
financial contract of the debtor or any affiliate to perform
any payment or delivery obligation under such qualified
financial contract, including during the pendency of the stay
provided under subsection (a), shall constitute a breach of
such qualified financial contract by the counterparty.
(c) A qualified financial contract between an entity and
the debtor may not be assigned to or assumed by the bridge
company in a transfer under section 1185 unless--
(1) all qualified financial contracts between the
entity and the debtor are assigned to and assumed by
the bridge company in the transfer under section 1185;
(2) all claims of the entity against the debtor
under any qualified financial contract between the
entity and the debtor (other than any claim that, under
the terms of the qualified financial contract, is
subordinated to the claims of general unsecured
creditors) are assigned to and assumed by the bridge
company;
(3) all claims of the debtor against the entity
under any qualified financial contract between the
entity and the debtor are assigned to and assumed by
the bridge company; and
(4) all property securing or any other credit
enhancement furnished by the debtor for any qualified
financial contract described in paragraph (1) or any
claim described in paragraph (2) or (3) under any
qualified financial contract between the entity and the
debtor is assigned to and assumed by the bridge
company.
(d) Notwithstanding any provision of a qualified financial
contract or of applicable nonbankruptcy law, a qualified
financial contract of the debtor that is assumed or assigned in
a transfer under section 1185 may not be accelerated,
terminated, or modified, after the entry of the order approving
a transfer under section 1185, and any right or obligation
under the qualified financial contract may not be accelerated,
terminated, or modified, after the entry of the order approving
a transfer under section 1185 solely because of a condition
described in section 1187(c)(1), other than a condition of the
kind specified in section 1187(a)(1)(B)(iv)(III) or section
1187(b) that occurs after property of the estate no longer
includes a direct beneficial interest or an indirect beneficial
interest through the special trustee, in more than 50 percent
of the equity securities of the bridge company.
(e) Notwithstanding any provision of any agreement or in
applicable nonbankruptcy law, an agreement of an affiliate
(including an executory contract, an unexpired lease, qualified
financial contract, or an agreement under which the affiliate
issued or is obligated for debt) and any right or obligation
under such agreement may not be terminated or modified, solely
because of a condition described in section 1187(c)(1), other
than a condition of the kind specified in section
1187(a)(1)(B)(iv)(III) or section 1187(b) that occurs after the
bridge company is no longer a direct or indirect beneficial
holder of more than 50 percent of the equity securities of the
affiliate, at any time after the commencement of the case if--
(1) all direct or indirect interests in the
affiliate that are property of the estate are
transferred under section 1185 to the bridge company
within the period specified in subsection (a);
(2) the bridge company assumes--
(A) any guarantee or other credit
enhancement issued by the debtor relating to
the agreement of the affiliate; and
(B) any right of setoff, netting
arrangement, or debt of the debtor that
directly arises out of or directly relates to
the guarantee or credit enhancement; and
(3) any property of the estate that directly serves
as collateral for the guarantee or credit enhancement
is transferred to the bridge company.
Sec. 1189. Licenses, permits, and registrations
(a) Notwithstanding any otherwise applicable nonbankruptcy
law, if a request is made under section 1185 for a transfer of
property of the estate, any Federal, State, or local license,
permit, or registration that the debtor or an affiliate had
immediately before the commencement of the case and that is
proposed to be transferred under section 1185 may not be
terminated or modified at any time after the request solely on
account of--
(1) the insolvency or financial condition of the
debtor at any time before the closing of the case;
(2) the commencement of a case under this title
concerning the debtor;
(3) the appointment of or taking possession by a
trustee in a case under this title concerning the
debtor or by a custodian before the commencement of the
case; or
(4) a transfer under section 1185.
(b) Notwithstanding any otherwise applicable nonbankruptcy
law, any Federal, State, or local license, permit, or
registration that the debtor had immediately before the
commencement of the case that is included in a transfer under
section 1185 shall be valid and all rights and obligations
thereunder shall vest in the bridge company.
Sec. 1190. Exemption from securities laws
For purposes of section 1145, a security of the bridge
company shall be deemed to be a security of a successor to the
debtor under a plan if the court approves the disclosure
statement for the plan as providing adequate information (as
defined in section 1125(a)) about the bridge company and the
security.
Sec. 1191. Inapplicability of certain avoiding powers
A transfer made or an obligation incurred by the debtor to
an affiliate prior to or after the commencement of the case,
including any obligation released by the debtor or the estate
to or for the benefit of an affiliate, in contemplation of or
in connection with a transfer under section 1185 is not
avoidable under section 544, 547, 548(a)(1)(B), or 549, or
under any similar nonbankruptcy law.
Sec. 1192. Consideration of financial stability
The court may consider the effect that any decision in
connection with this subchapter may have on financial stability
in the United States.
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TITLE 28, UNITED STATES CODE
* * * * * * *
PART I--ORGANIZATION OF COURTS
* * * * * * *
CHAPTER 13--ASSIGNMENT OF JUDGES TO OTHER COURTS
Sec.
291. Circuit judges.
* * * * * * *
298. Judge for a case under subchapter V of chapter 11 of title 11.
* * * * * * *
Sec. 298. Judge for a case under subchapter V of chapter 11 of title 11
(a) Notwithstanding section 295, the Chief Justice of the
United States shall designate not fewer than 3 judges of the
courts of appeals in not fewer than 4 circuits to serve on an
appellate panel to be available to hear an appeal under section
1183 of title 11 in a case under such title concerning a
covered financial corporation. Appellate judges may request to
be considered by the Chief Justice of the United States for
such designation.
(b)(1) Notwithstanding section 295, the Chief Justice of
the United States shall designate not fewer than 10 bankruptcy
judges to be available to hear a case under subchapter V of
chapter 11 of title 11. Bankruptcy judges may request to be
considered by the Chief Justice of the United States for such
designation.
(2) Notwithstanding section 155, a case under subchapter V
of chapter 11 of title 11 shall be heard under section 157 by a
bankruptcy judge designated under paragraph (1), who shall be
assigned to hear such case by the chief judge of the court of
appeals for the circuit embracing the district in which the
case is pending. To the greatest extent practicable, the
approvals required under section 155 should be obtained.
(3) If the bankruptcy judge assigned to hear a case under
paragraph (2) is not assigned to the district in which the case
is pending, the bankruptcy judge shall be temporarily assigned
to the district.
(c)(1) The court of appeals shall have jurisdiction of
appeals from all orders for relief and orders of dismissal
under section 1183 of title 11.
(2) Notwithstanding section 295, in an appeal under
paragraph (1) in a case under title 11 concerning a covered
financial corporation shall be heard by--
(A) 3 judges selected from the appellate panel
designated under subsection (a); or
(B) if the 3 judges of such panel are not
immediately available to hear the case, 3 judges
designated under subsection (a) from another circuit
and assigned by the Chief Justice of the United States
to hear the case.
(3) If any of the judges of the appellate panel specified
in paragraph (2) is not assigned to the circuit in which the
appeal is pending, the judges shall be temporarily assigned to
the circuit.
(4) A case under subchapter V of chapter 11 of title 11,
and all proceedings in the case, shall take place in the
district in which the case is pending.
(d) In this section, the term ``covered financial
corporation'' has the meaning given that term in section
101(9A) of title 11.
* * * * * * *
PART IV--JURISDICTION AND VENUE
* * * * * * *
CHAPTER 85--DISTRICT COURTS; JURISDICTION
* * * * * * *
Sec. 1334. Bankruptcy cases and proceedings
(a) * * *
* * * * * * *
(f) This section does not grant jurisdiction to the
district court after a transfer pursuant to an order under
section 1185 of title 11 of any proceeding related to a special
trustee appointed, or to a bridge company formed, in connection
with a case under subchapter V of chapter 11 of title 11.
* * * * * * *