[Congressional Record Volume 160, Number 144 (Monday, December 1, 2014)]
[House]
[Pages H8174-H8181]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2014
Mr. GOODLATTE. Mr. Speaker, I move to suspend the rules and pass 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, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 5421
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Financial Institution
Bankruptcy Act of 2014''.
SEC. 2. GENERAL PROVISIONS RELATING TO COVERED FINANCIAL
CORPORATIONS.
(a) Definition.--Section 101 of title 11, United States
Code, is amended by inserting the following after paragraph
(9):
``(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.''.
(b) Applicability of Chapters.--Section 103 of title 11,
United States Code, is amended by adding at the end the
following:
``(l) Subchapter V of chapter 11 of this title applies only
in a case under chapter 11 concerning a covered financial
corporation.''.
(c) Who May Be a Debtor.--Section 109 of title 11, United
States Code, is amended--
(1) in subsection (b)--
(A) in paragraph (2), by striking ``or'' at the end;
(B) in paragraph (3)(B), by striking the period at the end
and inserting ``; or''; and
(C) by adding at the end the following:
``(4) a covered financial corporation.''; and
(2) in subsection (d)--
(A) by striking ``and'' before ``an uninsured State member
bank'';
(B) by striking ``or'' before ``a corporation''; and
(C) by inserting ``, or a covered financial corporation''
after ``Federal Deposit Insurance Corporation Improvement Act
of 1991''.
(d) Conversion to Chapter 7.--Section 1112 of title 11,
United States Code, is amended by adding at the end the
following:
``(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.''.
(e)(1) Section 726(a)(1) of title 11, United States Code,
is amended by inserting after ``first,'' the following: ``in
payment of any unpaid fees, costs, and expenses of a special
trustee appointed under section 1186, and then''.
(2) Section 1129(a) of title 11, United States Code, is
amended by inserting after paragraph (16) the following:
``(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.''.
(f) Section 322(b)(2) of title 11, United States Code, is
amended by striking ``The'' and inserting ``In cases under
subchapter V, the United States trustee shall recommend to
the court, and in all other cases, the''.
SEC. 3. LIQUIDATION, REORGANIZATION, OR RECAPITALIZATION OF A
COVERED FINANCIAL CORPORATION.
Chapter 11 of title 11, United States Code, is amended by
adding at the end the following:
``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 for which the debtor is
the primary obligor, other than a qualified financial
contract and 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
[[Page H8175]]
``(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, who is appointed by the court,
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
[[Page H8176]]
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;
``(iii) a final order of the court denying the request for
a transfer under section 1185; or
``(iv) the time the case is dismissed; 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;
``(iii) 48 hours after the commencement of the case if the
court has not ordered a transfer under section 1185; or
``(iv) the time the case is dismissed.
``(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) accelerates, 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 accelerated, terminated, or modified, and any right or
obligation under such debt, contract, lease, or agreement may
not be accelerated, 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 accelerates, 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) Subject to the court's approval, a qualified
financial contract between an entity and the debtor may be
assigned to or assumed by the bridge company in a transfer
under section 1185 if and only if--
``(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;
[[Page H8177]]
``(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(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 accelerated,
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(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 accelerated, 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.''.
SEC. 4. AMENDMENTS TO TITLE 28, UNITED STATES CODE.
(a) Amendment to Chapter 13.--Chapter 13 of title 28,
United States Code, is amended by adding at the end the
following:
``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.''.
(b) Amendment to Section 1334.--Section 1334 of title 28,
United States Code, is amended by adding at the end the
following:
``(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.''.
(c) Technical and Conforming Amendment.--The table of
sections for chapter 13 of title 28, United States Code, is
amended by adding at the end the following:
``298. Judge for a case under subchapter V of chapter 11 of title
11.''.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Virginia (Mr. Goodlatte) and the gentleman from Michigan (Mr. Conyers)
each will control 20 minutes.
The Chair recognizes the gentleman from Virginia.
General Leave
Mr. GOODLATTE. Mr. Speaker, I ask unanimous consent that all Members
may have 5 legislative days within which to revise and extend their
remarks and include extraneous materials on H.R. 5421, currently under
consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Virginia?
There was no objection.
Mr. GOODLATTE. Mr. Speaker, I yield myself such time as I may
consume.
Today, we take an important step toward preventing the taxpayer-
funded bailouts that characterized the 2008 financial crisis. The
legislation before us, the Financial Institution Bankruptcy Act,
enhances the Bankruptcy Code to facilitate the resolution of a failing
financial institution through the bankruptcy process. In doing so, this
will help to ensure that private creditors, not taxpayers, bear the
losses related to a failing financial institution.
The Financial Institution Bankruptcy Act is the culmination of years
of review and research by the Judiciary Committee; other committees;
and experts from the financial, regulatory, legal, and academic
communities who helped to examine how best to prevent another financial
crisis from occurring
[[Page H8178]]
and avert the use of taxpayer moneys to bail out failing firms.
The Judiciary Committee has participated in and promoted this review
with the aim of examining whether the bankruptcy laws could be improved
to enhance the prospects of resolving a financial institution through
the bankruptcy process.
During the course of two oversight hearings this Congress, the
Subcommittee on Regulatory Reform, Commercial, and Antitrust Law
received testimony that the Bankruptcy Code could be improved to better
facilitate a resolution of a financial firm and that an amendment to
chapter 11 to provide for a specialized subchapter would be the most
efficient approach to that goal.
Following these hearings, the committee worked in a bipartisan
fashion to draft legislation that built on this record and integrated
witnesses' and leading experts' recommendations. These efforts
culminated in a discussion draft of the Financial Institution
Bankruptcy Act of 2014, which was the subject of a legislative hearing
on July 15, 2014. All witnesses at the hearing testified that, subject
to a few modifications, the Financial Institution Bankruptcy Act should
be enacted into law.
In connection with the July 15 hearing, the committee circulated the
draft legislation to a number of interested parties, including the
Federal Reserve, the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the Administrative Office of the
United States Courts, the National Conference of Bankruptcy Judges, the
National Bankruptcy Conference, and the International Swaps and
Derivatives Association.
The committee again, in a bipartisan fashion, received, reviewed, and
incorporated multiple comments submitted by these and other parties.
The bill was introduced and approved by the committee by voice vote on
September 10 of this year.
The bill on the floor today is a reflection of the careful,
deliberate, thorough, and bipartisan process the bill received and is
the product of a diverse range of views from a variety of interested
parties.
The Financial Institution Bankruptcy Act makes several improvements
to the Bankruptcy Code in order to enhance the prospect of an efficient
resolution of a financial firm through the bankruptcy process. The bill
allows for a speedy transfer of the operating assets of a financial
firm over the course of a weekend.
This quick transfer allows the financial firm to continue operating
in the normal course, which preserves the value of the enterprise for
the firm's creditors without having a significant impact on the firm's
employees, suppliers, and customers.
The bill also requires an expedited judicial review by judges
designated in advance and selected by the chief justice for their
experience, expertise, and willingness to preside over these complex
cases; furthermore, the legislation provides for key input from the
financial institution's regulators during the process.
The Financial Institution Bankruptcy Act is a bipartisan, balanced
approach that increases transparency and predictability in the
resolution of a financial firm.
I am pleased that the ranking member of the House Judiciary
Committee, Mr. Conyers, joined in introducing this important
legislation, and I want to thank him and his staff for working hand in
hand with us during the development of this bill.
I also would like to thank the chairman of the Subcommittee on
Regulatory Reform, Commercial, and Antitrust Law, Mr. Bachus, for
introducing the Financial Institution Bankruptcy Act.
It is no mistake that the former chairman of the Financial Services
Committee is the lead sponsor of this legislation. Mr. Bachus has been
a longstanding champion of the bankruptcy process, and that was
reflected in the multiple subcommittee hearings he chaired on this
issue.
This legislation is a tribute to his many years dedicated to
financial services and bankruptcy issues, and he will be sorely missed
next Congress. I wish him all the best during the next chapter of his
life.
I urge my colleagues to support this important legislation, and I
reserve the balance of my time.
Mr. CONYERS. Mr. Speaker, I yield myself such time as I may consume.
Ladies and gentlemen of the House, I rise in strong support of H.R.
5421, as amended, the Financial Institution Bankruptcy Act of 2014.
It is intended to ensure that the resolution of large, complex
financial institutions on the verge of insolvency can be better
facilitated under the Bankruptcy Code. I support this legislation for
several reasons.
First, it addresses a real need, which is recognized by the
regulatory agencies, bankruptcy experts, and the private sector, that
the bankruptcy law must be amended, so that it can expeditiously
restore trust in the financial marketplace after the collapse of a
major financial institution.
Such was the case with the failure of Lehman Brothers in 2008, for
example, which caused a worldwide freeze on the availability of credit,
wreaking havoc on Wall Street, as well as on Main Street. The near
collapse of our Nation's economy that resulted from Lehman's failure
revealed that current bankruptcy law is, unfortunately, ill-equipped to
deal with complex financial institutions that are in economic distress.
This legislation, accordingly, creates a court-supervised, orderly
liquidation mechanism that will be guided by the regulators.
In sum, this process will allow a failing financial institution to
transfer its assets to a newly-formed bridge company over a single
weekend, which will promote confidence in the financial marketplace.
The institution's equity and debt will remain in the bankruptcy case
to be administered by a trustee under court supervision. As a result,
value assets will be maximized for the benefit of creditors, and the
marketplace will be stabilized.
Additionally, I support the legislation because it appropriately
recognizes the important role the Dodd-Frank Act has in the regulation
of large financial institutions. Without a doubt, the Great Recession
was a direct result of the regulatory equivalent of the Wild West.
The Dodd-Frank Act goes a long way toward reinvigorating a regulatory
system that makes the financial marketplace more accountable and,
hopefully, more resilient. The act also institutes long-needed consumer
protections that have up until now not been available.
Title II of the Dodd-Frank Act establishes a mandatory
administratively-driven resolution process to wind down large financial
institutions. Title II is a critical enforcement tool for bank
regulators to facilitate compliance with the act's heightened
regulatory requirements for large companies.
Nevertheless, the Dodd-Frank Act clearly recognizes that bankruptcy
should be a first resort and that the title II's orderly liquidation
process should be a last resort.
In fact, title I of the act explicitly requires these companies to
write so-called ``living wills'' that must explain how they will
resolve their financial difficulties in a hypothetical bankruptcy
scenario. This is because bankruptcy law has, for more than 100 years,
enabled some of the Nation's largest companies to regain their
financial footing.
I am from Detroit, and I remember that General Motors and the
Chrysler Corporation were major beneficiaries. H.R. 5421 will ensure
that bankruptcy is a truly viable alternative to the Dodd-Frank Act's
resolution process.
I am pleased to note, as has been referenced by the chairman of the
Judiciary Committee, that this legislation is the product of a very
collaborative, bipartisan, and deliberate process, which should be the
norm, not the exception, when it comes to drafting legislation, so a
tip of my hat to Chairman Goodlatte and to the subcommittee chairman
for the work that they have done in bringing this legislation to this
point.
For example, this bill, unlike similar legislation in the Senate,
doesn't include any controversial provisions aimed at undoing the
important protections of the Dodd-Frank Act.
I should also note, however, that H.R. 5421 does not include any
provision allowing companies to have access to lenders of last resort.
Nearly every expert recognizes that such access, even if it is the
Federal Government, is a
[[Page H8179]]
necessary element to ensure financial stability.
I want to acknowledge the excellent level of cooperation on both
sides of the aisle on the Judiciary Committee in producing the
legislation that is pending before us today, and I urge my colleagues
to support this measure.
I would like to just add that my friend, Spencer Bachus of Alabama,
is a longtime Member who has been particularly active over the years in
the areas of administrative law, as well as immigration and criminal
justice.
I find him an individual of principle who has worked on many
bipartisan initiatives. I understand Representative Bachus' father
often used the adage, ``If you can't say anything nice about a person,
don't say anything at all.''
Mr. Bachus has certainly adhered to that advice, as he was a
consummate gentleman who wielded the gavel with fairness at all times
when it was his turn to sit in the chair.
Mr. Speaker, I reserve the balance of my time.
{time} 1615
Mr. GOODLATTE. Mr. Speaker, at this time, it is my pleasure to yield
5 minutes to the gentleman from Alabama (Mr. Bachus), the chairman of
the Subcommittee on Regulatory Reform, Commercial and Antitrust Law,
and the chief sponsor of this legislation.
Mr. BACHUS. Mr. Speaker, first let me thank Chairman Goodlatte and
Ranking Member Conyers--former Chairman Conyers--for those kind
remarks. I have been fortunate to associate with both of you gentlemen
over the past years and appreciate the confidence you have entrusted in
me, and I take those kind words to heart.
I want to thank both of you for this legislation because, as we know
in the legislative process, this went by regular order, which is how
all bills should proceed. And the gentleman from Tennessee (Mr. Cohen),
who was then my subcommittee ranking member, and now the gentleman from
Georgia (Mr. Johnson) were both very cooperative.
We also know that good legislation has to have a good staff, and on
the subcommittee, we were blessed by three fine individuals and their
support staffs: Anthony Grossi and Daniel Flores on the majority side,
and sitting over there next to Mr. Conyers is Susan Jensen. And they
worked together. They worked for what was best. I saw no partisanship,
no gamesmanship. It was a group effort.
They were also backed by the National Bankruptcy Conference, the
Administrative Office of Courts, the Bankruptcy Judicial Conference, as
well as the attorneys bar both for creditors and debtors, both for
consumers and for the institution. They all came together. We had many
people from the academic world, experts in bankruptcy, and they pretty
much identified how it ought to go.
The history of all of this really is the financial crisis of 2008,
which none of us want to go through again. Now, we may go through
something similar, but we want to do everything we can do to avoid
that, and that is what this bill is all about. It is to proceed under
an established procedure rule of law, which separates the United States
from many, many countries. This bill follows the rule of law.
If you look at Bear Stearns and Lehman Brothers and you see the total
different paths that were taken, if you see in other bankruptcies where
people were put out of jobs unnecessarily--and there were tremendous
job losses--there was a consensus, in looking back, that that could
have been avoided, much of that, except that bankruptcy didn't give us
the tools to address it.
Now, there were two reasons, things that we have heard often during
the financial crisis. One was that term ``derivatives,'' credit default
swaps, straddles, a lot of these new financial instruments. The
Bankruptcy Code simply had not been updated to address derivatives.
And then the global economy. You have almost every large bank holding
company, almost every large financial company which have both foreign
subsidiaries and domestic subsidiaries, so you have got multiple
jurisdictions trying to handle pieces of this. And through, really, a
consensus, we came together and said we are going to let the U.S.
operating subsidiaries and the foreign operating subsidiaries--and that
is where 99 percent of your employees work and probably where 99
percent of the transactions with customers, creditors, debtors, the
general public, that is where they transact. We allow that to continue.
We put the bank holding company alone, through a single point of
entry, goes into bankruptcy. So there are not these tremendous
disruptions that we saw first with Bear Stearns and then in a cascading
effect. We hopefully can avoid a lot of that.
I see my time has almost expired, but let me close by saying this:
Dodd-Frank said let's go to GAO, let's go to the Federal Reserve.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. GOODLATTE. Mr. Speaker, I am happy to yield an additional 2
minutes to the gentleman from Alabama.
Mr. BACHUS. I thank the gentleman from Virginia.
They actually called for us to have this procedure. And that part of
Dodd-Frank--I have sometimes said ``the good, the bad, and the ugly''--
that was a good part. We needed to structure bankruptcy where it could
handle these situations if at all possible.
We consulted with the Comptroller of the Currency, with the Federal
Reserve, with the FDIC, and this is a rare consensus. There is a bill
over in the Senate by Senator Cornyn of Texas and Senator Pat Toomey of
Pennsylvania that is similar to this bill. Hopefully we will have a
conference with the Senate and get this done.
Some people may say, well, it is not enough. Well, we need to do what
we can do in a consensus way and do what we can. It is probably never
enough. Sometimes it is too much. But at least this is in our general
agreement.
With that, I would like to now introduce a memorandum on this bill
which includes the section-by-section comments for the Record. This is
basically a detailed narrative for the courts and those that would look
at this to give illumination to exactly how this works.
H.R. 5421. The ``Financial Institution Bankruptcy Act of 2014''
The orderly resolution of financial companies presents
unique challenges to the U.S. Bankruptcy Code for many
reasons, including these institutions' interconnectedness
and, in the case of larger institutions, a potential to pose
``systemic risk.'' 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.
I. BACKGROUND
A. Brief Overview of Chapter 11
Chapter 11 of the Bankruptcy Code primarily is designed 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, which benefit from
the ability to remain in business. Employees, suppliers,
customers, and others can also benefit if the debtor remains
in business.
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 of the debtors 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 run in substantially the same manner under
new, third party ownership. In a liquidation, the
[[Page H8180]]
debtor's assets are sold in piecemeal fashion or simply
handed over to secured 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 (Resolving Globally Active,
Systemically Important, Financial Institutions, December
2012), ``[t]he U.S. would prefer that large financial
organizations be resolvable through ordinary bankruptcy.''
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.'' Smaller financial companies are also eligible to
restructure their operations under the Bankruptcy Code in the
event of material financial distress or failure.
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 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 goal of reducing systemic
risk within the financial sector. 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.
One of the concepts discussed in the Federal Reserve and
GAO reports is the resolution of a financial institution
through a ``single point of entry.'' This resolution approach
relies on placing a parent holding company into receivership
while maintaining the operations and solvency of its
operating subsidiaries. The ``single point of entry''
approach is also the FDIC's 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. Under this
approach, the FDIC would be appointed 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.
Some commentators have suggested that the single point of
entry approach should also be made available in the
Bankruptcy Code. There are two principal proposals to amend
the Bankruptcy Code to facilitate use of this approach. The
first proposal is referred to as ``chapter 14'' and would
introduce an entirely new chapter to the Bankruptcy Code. On
December 19, 2013, Senators Cornyn and Toomey introduced
legislation that would, among other things, create a chapter
14 of the Bankruptcy Code. The second proposal is referred
to as ``Subchapter V'' and would create an entirely new
subchapter within chapter 11.
As explained in additional detail below, both the chapter
14 and subchapter V proposals are designed to address the
unique issues presented by a financial institution's
bankruptcy. chapter 14 and 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 these approaches argue
that a transparent judicial process that allows for the
reorganization, rather than liquidation, of a large financial
institution is a preferable resolution strategy.
The Committee has 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 conducted a hearing
entitled ``The Bankruptcy Code and Financial Institution
Insolvencies.'' 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 the Subcommittee
on Regulatory Reform, Commercial and Antitrust Law conducted
a hearing entitled ``Exploring Chapter 11 Reform: Corporate
and Financial Institution Insolvencies; Treatment of
Derivatives.'' During this hearing, there was 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. In
addition, as detailed below, on July 15, 2014, the
Subcommittee on Regulatory Reform, Commercial and Antitrust
Law conducted a hearing on a discussion draft of the
Financial Institution Bankruptcy Act.
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. A 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.
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. There are several provisions contained in
H.R. ___, the ``Financial Institution Bankruptcy Act of
2014'' (referred to herein as ``Subchapter V'') to allow the
``single point of entry'' approach to be utilized in the
bankruptcy process. Subchapter V 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. The debt and equity held at
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.
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.
To account for the potential of a financial firm's
insolvency to impact the general financial markets,
Subchapter V allows 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
initiating a Subchapter V case is ``necessary to prevent
serious adverse effects on financial stability in the United
States.'' 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.
Subchapter V also includes provisions designed to deal with
the types of transactions 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.
Subchapter V overrides the exemption for derivative and
similarly-structured transactions contained in the Bankruptcy
Code for two days to allow for the effective transfer of the
financial institution's operations to a bridge company.
Without overriding the existing exemptions, counterparties to
derivatives and similarly-structured transactions could
terminate their relationships with the 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.
The draft 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, Subchapter V
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.
II. The Hearing on a Discussion Draft of the Financial Institution
Bankruptcy Act and Ensuing Legislative Refinement Process
On July 15, 2014, the Subcommittee on Regulatory Reform,
Commercial and Antitrust Law 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; Stephen E. Hessler, Esq.,
Partner, Kirkland & Ellis, LLP; Professor Thomas H. Jackson,
Simon Business School, University of Rochester; and,
Professor Stephen J. Lubben, Seton Hall Law School. All four
witnesses, including the Minority witness, testified that
they believed the Financial Institution Bankruptcy Act,
subject to certain technical modifications, should be enacted
into law.
Following the hearing, the Committee received comments on
the Financial Institution Bankruptcy Act from, among others,
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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 the revisions to the
discussion draft that was the subject of the July 15
Subcommittee hearing.
Mr. BACHUS. Again, I thank the chairmen, the ranking members, and
their staff for putting this together.
The resolution process for financial institutions is one of the
pieces of unfinished business from the 2008 financial crisis, and we
will finish some of that business hopefully before the year is out. The
American people are hungry for us to do some good things in a spirit of
bipartisanship, and they are getting that today.
Mr. CONYERS. Mr. Speaker, I yield back the balance of my time.
Mr. GOODLATTE. Mr. Speaker, I urge my colleagues to support this
important legislation, and I yield back the balance of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Virginia (Mr. Goodlatte) that the House suspend the
rules and pass the bill, H.R. 5421, as amended.
The question was taken; and (two-thirds being in the affirmative) the
rules were suspended and the bill, as amended, was passed.
A motion to reconsider was laid on the table.
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