Stop Looting The Bankruptcy Code: Stop Wall Street Looting Act Proposes Substantial Changes To The Bankruptcy Code And Key Principles Of Corporate Law

• Published date: 24 November 2021
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Ropes & Gray LLP
• Author: Mr Gregg M. Galardi, Ryan Preston Dahl and Mark Maciuch

On October 20, 2021, Democratic senators Elizabeth Warren (D-Mass.), Tammy Baldwin (D-Wisc.), Sherrod Brown (D-Ohio), and Jeff Merkley (D-Oregon), and Independent senator Bernard Sanders (I-Vermont), introduced to the United States Senate proposed legislation S. 3022, the Stop Wall Street Looting Act of 2021 (the "SWSLA"),¹ as a reworked version of legislation previously proposed in 2019.

In what appears to be an attempt at wholesale reform of the private equity industry and bankruptcy practice, the SWSLA proposes to:

• require "controlling private funds" and certain other insiders to be "jointly and severally liable for all liabilities of each target firm [and its affiliates]," including any debt, legal judgments, WARN act violations, and pension-related obligations;
• carve out transfers made in connection with "change in control transactions"² from the safe harbor protections of Section 546(e) of the Bankruptcy Code, and impose a statutory presumption that both a constructive and actual fraudulent transfer under Section 548 of the Bankruptcy Code has occurred with respect to various "change in control transactions" undertaken in the eight years prior to a bankruptcy filing;
• address so-called "sham" independent directors by vesting an unsecured creditors committee, as opposed to a debtor in possession, with certain chapter 5 causes of action and claims against company insiders; and
• increase protections for employees in bankruptcy cases by increasing wage claim amounts and priority status, limiting payments to executives, and directing bankruptcy courts to favor employee-friendly bids for a debtor's assets.³

The notion that core legal concepts of corporate separation and limited liability are considered "looting" suggests that clinical analysis may not be the order of the day'with at least a few unintentional echoes of Atlas Shrugged. And, despite its breadth, the SWSLA seems almost singularly focused on the interests of very specific creditor constituencies, as opposed to representing a measured approach to legislative reform. In many respects, the SWSLA seems almost to have been drafted as a "wish list" from a highly litigious plaintiff rather than reflecting a holistic analysis of key bankruptcy principles. Regardless, the SWSLA presents perhaps the most substantial proposed re-write of core bankruptcy concepts since the Bankruptcy Code's enactment. And, viewed together with the Nondebtor Release Prohibition Act of 2021,⁴ practitioners should be mindful of the extent to which 'bankruptcy reform' may become the latest soundbite in...