In its continued effort to implement certain provisions of its authority to resolve “covered financial companies” under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), on March 20, 2012, the Board of Directors of the Federal Depository Insurance Corporation (the “FDIC”) approved proposed rules relating to Enforcement of Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered Financial Company (the “Proposed Rules”). For a detailed discussion of Title II, see the White & Case Client Alert titled Orderly Liquidation Authority, dated July 2010.
The Proposed Rules are intended to implement section 210(c) of the Dodd-Frank Act, codified at 12 U.S.C. §5390(c)(16), which permits the FDIC as receiver of a covered financial company to enforce contracts of subsidiaries or affiliates of the covered financial company despite contract clauses that purport to terminate, accelerate or provide for other remedies based on the insolvency, financial condition or receivership of the covered financial company. The FDIC’s enforcement authority is not without conditions, however. In order to enforce these contracts, the FDIC must first either (i) transfer supporting obligations of the covered financial company that back the obligations of the subsidiary or affiliate under the contract (along with all assets and liabilities that relate to those supporting obligations) to a bridge financial company or qualified third-party transferee by the statutory one-business-day deadline; or (ii) provide adequate protection to such contract counterparties. From a creditor perspective, it is important to note that this authority is in stark contrast to the Bankruptcy Code, which does not permit a bankruptcy trustee to enforce contracts between non-debtors. According to the FDIC, its ability to enforce subsidiary and affiliate contracts will provide it substantial flexibility by allowing it to only place certain entities of a corporate family into receivership where the FDIC believes it would maximize the value of the receivership.
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