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Political leaders write taxpayer bailouts, bureaucratic powers into bankruptcy law

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is a small business bankruptcy?”


The craziness in Washington, D.C. is heating up, as one party has foisted onto the floor of the House of Representatives a bill that will be considered under rules suspension. That means the bill will not be amended and will be subject to limited debate.

Bailout money Charlotte Mecklenburg Bankruptcy Attorney North Carolina Chapter 13 LawyerIt is not what you might imagine, however, and far from the advertised “gridlock” that is supposed to have been ensuing in the nation’s capital. The Financial Institution Bankruptcy Act actually enjoys broad, bipartisan support and is co-sponsored by powerful members of both predominant political parties, including Reps. Spencer Bachus (R., Ala.), John Conyers (D., Mich.), and Bob Goodlatte (R., Va.).

Many critics of the 2010 Dodd-Frank Act complained that it enshrined in law the kind of taxpayer bailouts of large companies and financial institutions that were employed on an emergency basis during the Great Recession. The new Act creates a new section of the bankruptcy code, which vests in the bankruptcy courts the authority to oversee bankruptcies involving large financial firms. This authority would appear to supplant the “orderly liquidation authority” created by the Dodd-Frank Act, which critics said enabled bureaucrats to pick and choose among creditors.

The new Act, however, does not eliminate or sap power from the “orderly liquidation authority.”

The Dodd-Frank Act—like the General Motors and large financial firm bailouts—was largely criticized in business and financial sectors because it vested discretionary authority in regulators to discriminate among creditors of bankrupt or quasi-bankrupt companies. Discriminating between creditors defied “every American concept of the rule of law and” was criticized by leading bankruptcy scholars across the United States, according to Forbes Magazine.

In essence, vesting the authority in regulators to decide who gets paid and how much when a large company goes bankrupt renders the bankruptcy code and existing law irrelevant. Instead of creditors and lienholders being able to look to the law to determine the order of priority—or who gets paid, how much, and in what order—such decisions would be made by regulators on an ad-hoc basis.

The new Act also grants to the Federal Reserve’s Board of Governors the authority to trigger a bankruptcy filing if the Board thinks a financial institution’s countenanced failure might have “serious adverse effects on financial stability in the United States.” A company foisted involuntarily into bankruptcy could contest the Board’s decision in private in court.

The new Act also sets into law an agreement reached earlier this year between the largest financial institutions and the Federal Reserve. Under that agreement, the banks agreed not to exercise all of their contractual rights with each other. If one large financial institution is teetering on the brink of collapse, for instance, its erstwhile competitors may not call the obligations the teetering giant owes due, even though the competitors may have legal or contractual rights to do so. This, it is proposed, will give the teetering giant time to stay afloat while credit obligations and business organizations are reshuffled in order to return to profitability.

The Wall Street Journal found it “puzzling” that Republicans appear to be rushing the bill through “in the waning days of a lame duck session” with a soon-to-vanish Democrat-controlled Senate. The Journal recommended a wholesale rewrite of Dodd-Frank that prohibits any future taxpayer bailouts and said Republicans should not offer the bill until their return to power in January.

If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.








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