Knowing When to Walk Away
Yesterday, the House of Representatives passed H.R. 5421, the "Financial Institution Bankruptcy Act of 2014" or "FIBA." FIBA would amend the Bankruptcy Code (and certain sections of title 28) to create a Subchapter V to Chapter 11, to be utilized for the resolution of involvent bank holding companies. FIBA is designed as an alternative to the Orderly Liquidation Authority established under Dodd-Frank. The text of the bill can be found here.
FIBA would apply to any "covered financial institution," defined as any bank holding company (under the Bank Holding Company Act of 1956) or any holding company whose subsidiaries hold $50 billion in consolidated assets, 85% of which are "financial in nature" (as defined by the BHCA) or 85% of its consolidated annual revenues arise from activities which are "financial in nature."
FIBA's amendments would add a number of interesting (and some wild) amendments to Chapter 11 and title 28, including :
Requiring the Chief Justice of the United States to designate not fewer than 10 bankruptcy judges qualified to preside over a Subchapter V proceeding. The Chief Judge of the Court of Appeals in the Circuit in which the Subchapter V proceeding is commenced would select the presiding judge, and if there is no qualified judge in the district of filing, temporarily re-assign on to the district of filing.
Allowing only the Board of Governors of the Federal Reserve to commence an involuntary Subchapter V petition, and establish a series of hyper-accelerated timelines. The bankruptcy judge must hold a hearing on the petition in 16 hours or less after filing, and issue an order for relief or dismissal order within 18 hours of the petition filing.
Establishing a special appelate panel to review the bankruptcy judge's relief/dismissal ruling. The deadline to file that appeal? One hour!
Permitting the transfer of all of the Debtor's assets/contracts to a "bridge company" under Sections 363/365, the equity securities of which would be transferred to a "qualified and independent special trustee." After the transfer to the bridge company, the transferred assets would not constitute property of the estate, but the equity securities of the bridge company would.
Imposing a 48 hour stay on the netting/acceleration of any derivatives or other qualified financial contracts.
Adding a new requirement to Section 1129(a), which would require the bankruptcy judge to find that confirmation of a plan of reorganization is "not likely to cause serious adverse effects on financial stability in the United States."
Some other good analysis of the bill, and the political dynamics behind it, can be found in this article by Ronald Orol at The Deal.