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From Banking and Finance Law Daily, September 11, 2014

House Judiciary Committee unanimously approves Financial Institution Bankruptcy Act

By Thomas G. Wolfe, J.D.

The House Judiciary Committee has unanimously approved the “Financial Institution Bankruptcy Act of 2014.” The proposed legislation seeks to amend the Bankruptcy Code to facilitate the resolution of insolvent financial institutions—particularly large, multi-national financial firms—in bankruptcy. In keeping with the Judiciary Committee’s oversight of U.S. bankruptcy laws and as underscored in the Committee’s Sept. 10, 2014, release, the Financial Institution Bankruptcy Act “incorporates the recommendations of hearing witnesses, regulators and experts from three Committee hearings on the subject over the past year.”

Sponsors’ reaction. The bipartisan bankruptcy reform bill regarding financial institutions was introduced by House Judiciary Committee Chairman Bob Goodlatte (R-Va), Ranking Member John Conyers (D-Mich), and Regulatory Reform Subcommittee Chairman Spencer Bachus (R-Ala).

In a joint statement, the sponsoring congressmen praised the House Judiciary Committee’s approval of the bill, commenting, “We strongly support the Committee’s passage of the bipartisan Financial Institution Bankruptcy Act…This bill was carefully calibrated to strengthen our nation’s bankruptcy laws and to ensure that the bankruptcy process is well equipped to resolve companies of all operations and sizes. This legislation enhances the Bankruptcy Code and its ability to resolve financial institutions in an efficient and value-maximizing manner for the benefit of the U.S. and global economies, employees, creditors, and customers.”

H.R. 5421. The Financial Institution Bankruptcy Act of 2014 (H.R. 5421) adds a new subchapter V (entitled “Liquidation, Reorganization, or Recapitalization of a Covered Financial Corporation) to Chapter 11 (Reorganization) of the Bankruptcy Code. The measure sets forth a definition of a “covered financial corporation” to include a bank holding company under the Bank Holding Company Act or a corporation that “exists for the primary purpose of owning, controlling and financing its subsidiaries” and having total consolidated assets of $50 billion or more, while satisfying other requirements concerning annual gross revenues and consolidated assets.

Under the proposed legislation’s specified procedures, a bankruptcy petition concerning a covered financial corporation may be brought not only by the pertinent “debtor” financial institution, it also may be initiated by the Federal Reserve Board. Moreover, in addition to the Fed, the Securities and Exchange Commission, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation “may raise and may appear and be heard on any issue in any case or proceeding” under the new subchapter for covered financial corporations.

Notably, the measure provides that a covered financial company’s members of the board of directors—or its functional equivalent—“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 brought under the new subchapter, or “for any reasonable action taken in good faith” in connection with the bankruptcy petition or a transfer allowed by the new subchapter. In addition, there is a section providing a limited “exemption from securities laws” for a security of a bridge company.

Further, among other things, the proposed Financial Institution Bankruptcy Act calls for the Chief Justice of the U.S. Supreme Court to designate certain federal bankruptcy judges to hear cases and to designate certain federal appellate judges to hear appeals in relation to the new subchapter.

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