April 12 — The House of Representatives April 12 passed a bill by voice vote that would amend Chapter 11 of the Bankruptcy Code to address large failing financial institutions.

The bill, which would establish a new bankruptcy process for certain financial institutions with assets of $50 billion or more, was brought to the floor under suspension of the rules, which requires a two-thirds vote for passage and allows no floor amendments.

The Financial Institution Bankruptcy Act (FIBA) of 2016 (H.R. 2947), was introduced July 7, 2015 by Rep. David A. Trott (R-Mich.) and co-sponsored by Reps. John Conyers Jr. (D-Mich.), Tom Marino (R-Pa.), and Dennis A. Ross (R-Fla.). The House Judiciary Committee favorably reported the bill Feb. 11, by a vote of 25-0 .

A ‘Necessary Reform.’

House Judiciary Chairman Bob Goodlatte (R-Va.) called the bill a “necessary reform” that is based on “long standing bankruptcy principles.”

“FIBA is a strongly bipartisan bill that establishes a transparent, predictable process, overseen by an experienced bankruptcy judge, to handle the failure of financial institutions,” according to a House Judiciary Committee joint press release issued after the vote on behalf of Goodlatte, Marino, and Trott. “Furthermore, FIBA will ensure shareholders and creditors of a financial institution, not taxpayers, bear the risk and the losses associated with the failure of a financial institution. This legislation will not create a single new regulation and is an important step towards safeguarding against a future systemic economic collapse,” they said.

“The potential failure of a financial institution is a burden that cannot be placed on the American people,” according to Goodlatte, Marino, and Trott’s statement. “Mismanagement on Wall Street should not be paid for by Main Street,” they said.

On the House floor, Rep. Henry C. “Hank” Johnson, Jr. (D-Ga.) expressed concern that the bill lacked a funding mechanism for the federal government to provide liquidity. Liquidity is essential to resolve these situations, according to bankruptcy experts, he said.

Johnson also cautioned against combining H.R. 2947 with legislation that would strike Title II of the Dodd-Frank Act. “Title II is a valuable backstop to the bankruptcy process if this bill should become law,” Johnson said. Title II of the Dodd-Frank Act provides a non-bankruptcy resolution process for large, “systemically important financial institutions.”

The bill will now go to the Senate for consideration.

Creates New Subchapter V

According to House Report 114-477 on H.R. 2947, the bill adopts the proposed method of creating a new subchapter V within Chapter 11 of the Bankruptcy Code to allow the “single point of entry” approach to be used in the bankruptcy process. Specifically, Sections 1181–1192 would be added at the end of Chapter 11 of Title 11 of the U.S. Code.

The “single point of entry” approach is currently used by the Federal Deposit Insurance Corporation under Title II of the Dodd-Frank Act. 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,” the report states.

H.R. 2947 would allow 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, according to the House report. The debt, any remaining assets, and equity of the holding company would remain in the bankruptcy process and absorb the losses of the financial institution. This process will allow existing creditors of the debtor to price their dealings and investment with the debtor prior to any bankruptcy proceeding, according to the House report.

The subchapter V “single point of entry” approach will allow the financial institution’s operating subsidiaries to remain outside the bankruptcy process. This is helpful for multi-national firms that might need to comply with multiple, and potentially conflicting, insolvency jurisdictions, according to the House report.

Accounting for ‘Systemic Risk.’

Taking into account the potential of systemic risk in a subchapter V case, H.R. 2947 gives key financial regulators standing in subchapter V cases to give the presiding bankruptcy judge the benefit of their views when considering pending motions, the House report states. The legislation also allows the presiding bankruptcy judge to consider the impact of a decision on financial stability in the U.S. before issuing a final judgment on any motion.

The bill overrides the exemptions for derivatives and structured transactions in the Bankruptcy Code by imposing a temporary two-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, according to the House report. This would “endanger the successful transfer and continued operation of the bridge company and potentially threaten other entities within the broader financial system,” the report states.

Speed Is Important

H.R. 2947 acknowledges the “speed by which a financial institution must be resolved in order to mitigate financial contagion,” the report states. As a result, the legislation includes specific timeframes for the commencement of a case and court approval of the transfer of assets to the bridge company.

Finally, the bill recognizes that overseeing a subchapter V case requires a presiding bankruptcy judge to have a certain level of expertise and experience with financial industry cases or large corporate transactions. The bill provides for the advance designation of bankruptcy judges who can be available to hear these cases.