Category Archives: Bankruptcy & Financial Distress

OCC’s Recovery Planning Proposal

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On December 17th, the Office of Comptroller of the Currency (OCC) proposed recovery planning standards for banks with assets of $50 billion or more. [1] The proposal was released exactly one year after the FDIC released guidance for covered insured depository institutions (CIDI) that significantly raised the resolution planning bar for many of these same banks. [2]

Most institutions will find that they will be able to leverage their existing risk management, business continuity planning, capital and liquidity planning, stress testing, and resolution plans in order to build their recovery plan. Many of the proposed standards’ requirements can be met by modifying existing bodies of work.

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Recovery Planning for Large National Banks

This post is based on a Sullivan & Cromwell LLP publication by C. Andrew GerlachRebecca J. Simmons, Mark J. Welshimer and Connie Y. Lam. Mr. Gerlach, Ms. Simmons, and Mr. Welshimer are partners in the Financial Services Group; and Ms. Lam is a firm associate.

On December 16, 2015, the Office of the Comptroller of the Currency (the “OCC”) solicited public comment, through a Notice of Proposed Rulemaking (the “NPR”), [1] on proposed guidelines to establish standards for recovery planning by certain large insured national banks, insured Federal savings associations and insured Federal branches of foreign banks (the “Guidelines”).
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Comment Letter of 18 Law Professors on the Trust Indenture Act

Adam J. Levitin is Professor of Law at Georgetown University Law Center, specializing in bankruptcy, commercial law, and financial regulation. This post contains the text of a letter spearheaded by Prof. Levitin, and co-signed by 18 professors of bankruptcy and corporate finance law, regarding a proposed omnibus appropriations rider that would amend the Trust Indenture Act of 1939. The complete letter is available here.

We are legal scholars of corporate finance. We write because we are concerned by a proposed omnibus appropriations rider that would amend the Trust Indenture Act of 1939 without any legislative hearings or opportunity for public comment on the proposed amendment.

As you may know, the Trust Indenture Act is one of the pillars of American securities regulation. Congress passed the Trust Indenture Act in the wake of the Great Depression to protect bondholders in restructurings. Among other things, the Trust Indenture Act provides that no bondholder’s right to payment or to institute suit for nonpayment may be impaired or affected without that individual bondholder’s consent. These provisions are intended to protect bond investors by requiring any restructuring of bonds to occur subject to the transparency of a court supervised bankruptcy process, absent bondholder consent to a debt restructuring.

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Bankruptcy Versus Bailout of Socially Important Non-Financial Institutions

Shlomit Azgad-Tromer is a visiting scholar at Berkeley Law School. This post is based on the article Too Important to Fail: Bankruptcy Versus Bailout of Socially Important Non-Financial Institutions.

Systemically important financial institutions are broadly considered to pose a risk to the entire economy upon failure. Thus governments act upon their failure, providing them with an implied insurance policy for ongoing liquidity. Yet governments frequently provide de facto liquidity insurance for non-financial institutions as well. For example, recently in the U.K., 35 hospital trusts were sharing £536 million in non-repayable bailouts in order to keep services running smoothly during 2013-2014. A decade earlier, a federal bankruptcy judge approved California’s multibillion-dollar bailout of Pacific Gas & Electric Corporation. In an effort to stabilize and sustain air transportation after 9/11, the U.S. Congress passed the Air Transportation Safety and System Stabilization Act, which provided the airline industry with financial aid valued at as much as $10 billion. In all of these cases, taxpayer money was used to rescue non-financial institutions.

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Quadrant v. Vertin: Determining Rights of Creditors

Steven Epstein is a partner and Co-Head of the Mergers & Acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Epstein, J. Christian Nahr, Brad Eric Scheler, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Quadrant Structured Products Company, Ltd. v. Vertin (Oct. 20, 2015), the Delaware Court of Chancery, in a post-trial decision, rejected Quadrant’s challenges to transactions by Athilon Capital Corp., with Athilon’s sole stockholder (private equity firm Merced), after Athilon had returned to solvency following a long period of insolvency. Merced held all of Athilon’s equity and all of its junior notes; and both Quadrant and Merced held the company’s publicly traded senior notes. Quadrant challenged Athilon’s (i) repurchases of senior notes held by Merced (the “Note Repurchases”) and (ii) purchases of certain relatively illiquid securities owned by Merced (the “Securities Purchases”). A majority of the Athilon board that approved the challenged transactions was viewed by the court as non-independent (with two directors affiliated with Merced; the Athilon CEO; and two independent directors). Vice Chancellor Laster, applying New York law, rejected (i) Quadrant’s claims that the Note Repurchases (a) were prohibited by the indenture and (b) were fraudulent conveyances; and (ii) Quadrant’s derivative claim that the Note Repurchases and the Securities Purchases constituted a breach of the directors’ fiduciary duties.

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Broker-dealers: Lock in your Liquidity

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Adam Gilbert, Grace Vogel, Armen Meyer, and Peter Melz.

The credit crisis of 2008 highlighted the criticality of effective liquidity management and demonstrated the difficulties broker-dealers face without adequate funding sources. In response, the Financial Industry Regulatory Authority (“FINRA”) has been taking steps to impose new requirements that will impact many broker-dealers, especially those that hold inventory positions or that clear and carry customer transactions.

Following up on guidance issued in November of 2010, FINRA last month issued new liquidity risk management guidance after a year-long liquidity review of 43 member firms under a stressed environment.

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UK Regulatory Proposals and Resolvability

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Thomas DoneganReena Agrawal SahniJoel MossAzad AliTimothy J. Byrne, and Sylvia Favretto.

The Bank of England, the UK authority with powers to “resolve” failing banks, is consulting on how it might exercise its power of direction to remove impediments to resolvability. The Bank may require measures to be taken by a UK bank, building society or large investment firm to address a perceived obstacle to credible resolution. Concurrently, the Prudential Regulation Authority is proposing to impose a rule that would require a stay on termination or close-out of derivatives and certain other financial contracts to be contractually agreed by UK banks, building societies and investment firms with their non-EEA counterparties. This post discusses the proposed approaches by the UK regulators to ensuring that impediments to resolvability are removed, as well as certain cross-border implications.

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England and Germany Limit Bank Resolution Obligations

Solomon J. Noh and Fredric Sosnick are partners in the Financial Restructuring & Insolvency Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication.

In two recent decisions, European national courts have taken a narrow view of their obligations under the Bank Recovery and Resolution Directive (BRRD)—the new European framework for dealing with distressed banks. The message from both the English and the German courts was that resolution authorities must adhere strictly to the terms of the BRRD; otherwise, measures that they take in relation to distressed banks may not be given effect in other Member States.

Goldman Sachs International v Novo Banco SA

In August 2014, the Bank of Portugal announced the resolution of Banco Espírito Santo (BES), what at the time was Portugal’s second largest bank. That announcement followed the July disclosure of massive losses at BES, which compounded a picture of serious irregularities within the bank that had been developing for several months. As part of the resolution, BES’s healthy assets and most of its liabilities were transferred to a new bridge bank, Novo Banco (the so-called “good bank”), which received €4.9 billion of rescue funds—while troubled assets and “Excluded Liabilities,” categories specifically identified in the BRRD, remained at BES (the “bad bank”). Amongst those liabilities initially deemed to have transferred to Novo Banco in August was a USD $835 million loan made to BES via a Goldman Sachs-formed vehicle, Oak Finance.

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Illegality and Hardball in Government’s Nationalization of AIG

Lawrence A. Cunningham is Henry St. George Tucker III Research Professor of Law at George Washington University Law School. This post builds on Professor Cunningham’s recent article published in The National Interest, available here. Professor Cunningham is co-author with Hank Greenberg, former chairman and CEO of American International Group (AIG), of The AIG Story.

Suppose your bank offers to lend you money to buy a home, and even if you repaid the loan, the bank would retain ownership of your home as well. Would you sign up? Would you expect a business organization to accept equivalent loan-plus-forfeiture terms? I don’t think so but that is what the U.S. government’s “bailout” of American International Group (AIG) involved and one reason a federal judge has declared it an illegal exaction in violation of the Constitution of the United States.

In the fall of 2008, Treasury Secretary Henry Paulson and New York Federal Reserve President Timothy Geithner demanded the permanent surrender of nearly an 80% stake in AIG as “security” for a usurious loan. They then fired AIG’s CEO, replaced its board members, took control of all the company’s affairs, and divested nearly half the company’s worldwide assets in a series of fire sales—all while using subterfuge and deception to avoid a shareholder vote the officials agreed was required and promised would be held.

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Delaware Court of Chancery Revisits Creditor Derivative Standing

Paul K. Rowe and Emil A. Kleinhaus are partners at Wachtell, Lipton, Rosen and Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rowe, Mr. Kleinhaus, William Savitt, and Alexander B. Lees. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a significant decision, the Delaware Court of Chancery has rejected several proposed limitations on the ability of creditors to maintain derivative suits following a corporation’s insolvency. In doing so, however, the Court reaffirmed the deference owed to a board’s decisions, regardless of the company’s financial condition, and the high hurdles faced by creditors in seeking to prove a breach of fiduciary duty. Quadrant Structured Prods. Co. v. Vertin, C.A. No. 6990-VCL (May 4, 2015).

Quadrant, a creditor of Athilon Capital, brought a derivative action claiming that when Athilon was insolvent, its directors violated their fiduciary duties, including by authorizing repayments of debt owed to Athilon’s equity owner. The defendants moved for summary judgment on the basis that Quadrant lacked standing to sue under the Delaware Supreme Court’s decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (see memo of May 24, 2007), which permits creditors to sue directors for breach of fiduciary duty only on a derivative basis, and only once the corporation is insolvent.

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