On May 20, 2010, the Senate passed the Restoring American Financial Stability Act of 2010 (Senate Bill) 59-39. The House passed its version of the Senate Bill in December 2009 - Wall Street Reform and Consumer Protection Act of 2009 (House Bill). The focus of the Senate and House Bills is to prevent the failure of too big to fail institutions and avoid taxpayer bailouts.
Under current law, failing depository banks are subject to receivership rather than Chapter 11. Receivership provisions extend to operating banks themselves, not their holding companies. This is why Lehman Brothers Holdings, Inc., a failing investment bank parent company, filed for Chapter 11 protection.
The proposed legislation affects bondholders and other creditors of the failing institutions, with the FDIC taking on financial institution receiverships with little court oversight. Under the Senate Bill and House Bill, the Secretary of the Treasury has authority to place a financial company into receivership even if there is a Chapter 11 pending. The House Bill says the Secretary of the Treasury initiates liquidation proceedings and appoints the FDIC as the receiver. The Senate Bill says the Secretary of the Treasury obtains either the financial company's consent or the approval of the United States District Court for the District of Columbia.
The financial reform legislation affects not only banks and bank holding companies, but also insurance companies and other non-bank financial companies requiring "stricter prudential regulation." This means investors may unknowingly be, creditors of a financial company. Chapter 11 and the current law on FDIC receiverships for failed banks allow similarly situated creditors to receive the same treatment. The new legislation giving the FDIC, as receiver, the right to treat similar claims differently if the treatment furthers financial stability or the US economy, allows the FDIC to make additional payments to some equal priority creditors but not others if the additional payments would minimize losses to the receiver from the orderly liquidation of the covered financial company.
Also in the new legislation, the FDIC can sell assets of a covered financial company "without obtaining any approval, assignment, or consent". There is no requirement to implement a sale process that would maximize the value of the assets. The FDIC will be free to act, without the risk of being second-guessed in a court even if it discriminates among similarly-situated creditors.
If you have any questions with regard to bankrutpcy, please contact our office at 1-800-303-2964. Rinne Legal is located at 1990 North California Blvd., Walnut Creek, California 94596, with additional offices in Fairfield, Oakland, and Sacramento. Rinne Legal offers free initial consultations.
