Restructuring

Section 209 of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requires the Federal Deposit Insurance Corporation (the “FDIC”) to prescribe rules or regulations to implement the Orderly Liquidation Authority (“OLA”) created by Dodd-Frank and, “to the extent possible,” to “harmonize applicable rules and regulations promulgated under this section with the insolvency laws that would otherwise apply to a covered financial company.”  See Dodd-Frank § 209.
In this third article in a series that addresses the FDIC’s second Notice of Proposed Rulemaking (“NPR”) with respect to the OLA, we consider one way in which the FDIC has sought to fulfill this mandate: by identifying some potentially inconsistent provisions of the OLA and the Bankruptcy Code and promulgating rules to resolve these inconsistencies.  Specifically, we consider how the NPR identifies and attempts to harmonize the preferential transfer and fraudulent transfer provisions of the OLA and the Bankruptcy Code, thereby mitigating potential confusion and uncertainty surrounding the inconsistent language used in each statute.  We also discuss the ways in which the NPR fails to address all inconsistencies.
Like a trustee in bankruptcy, the FDIC succeeds to certain rights, title, powers, and privileges of a “covered financial company” when the FDIC is appointed as a receiver for the covered financial company under the OLA.  In addition, like a trustee in bankruptcy, the FDIC as the receiver for a covered financial company has the ability to avoid preferential or fraudulent transfers.  The avoidance powers under the OLA are similar in many respects to those of a trustee under the Bankruptcy Code.
The NPR attempts to resolve two potential inconsistencies that exist between the language of the OLA and the Bankruptcy Code with respect to preferential and fraudulent transfers.  First, the applicable standard for determining when a potentially preferential or fraudulent transfer occurs is unclear under the OLA.  Section 210(a)(11)(H)(i)(II) of Dodd-Frank provides that “a transfer is made when such transfer is so perfected that a bona fide purchaser from the covered financial company against whom applicable law permits such transfer to be perfected cannot acquire an interest in the property transferred that is superior to the interest in such property of the transferee” (the “BFP” standard).  The language of the OLA seems to imply that the BFP standard applies to all fraudulent transfers and preferential transfers. 
Under sections 547(e) and 548(d) of the Bankruptcy Code, however, while the BFP standard is used for determining when a transfer occurs with respect to fraudulent transfers, this standard only applies to preferential transfers when such transfer is of real property other than fixtures.  In other words, the BFP standard is not applicable to preferential transfers of personal property or fixtures.  Section 547(e) provides that in the case of preferential transfers of personal property or fixtures, a transfer occurs when the transferee’s interest is perfected such that a hypothetical creditor under a contract could not obtain a judicial lien that is superior to the interest of the transferee under applicable non-insolvency law, otherwise known as the “hypothetical lien creditor” standard. 
To harmonize these conflicting provisions, the NPR provides that the preferential and fraudulent transfer provisions in the OLA should be applied in a manner consistent with the Bankruptcy Code.  See Treatment of Fraudulent and Preferential Transfers, 76 Fed. Reg. 16,324, 16,330 (Mar. 23, 2011) (to be codified at 12 C.F.R. pt. 380).  Under the NPR, the BFP standard applies when the FDIC determines whether it can avoid a fraudulent transfer or a preferential transfer of real property other than fixtures, but the hypothetical lien creditor standard applies when the FDIC determines whether it can avoid a preferential transfer of personal property or fixtures. 
The second potential inconsistency between the OLA and the Bankruptcy Code that the NPR addresses relates to the 30-day grace period for perfection of security interests set forth in section 547(e)(2) of the Bankruptcy Code.  Section 547(e)(2) provides that a security interest perfected under applicable non-insolvency law within 30 days of a transfer relates back to the date of transfer or the day before the commencement of the bankruptcy case if commencement occurs first.  This provision is meant to provide creditors a grace period similar to that typically provided under state law for the perfection of a security interest.  A security interest perfected within the 30-day period would not be considered a transfer made “on account of an antecedent debt” and, therefore, would not be avoidable as a preferential transfer.
Section 210(a)(11)(H) of Dodd-Frank does not include this grace period.  Thus, to harmonize the OLA with the Bankruptcy Code, section 380.9(c) of the NPR clarifies that the avoidance provisions in section 210(a)(11)(B) will apply the 30-day grace period as provided in section 547(e)(2) of the Bankruptcy Code, including any exceptions or qualifications contained in the Bankruptcy Code.  
Several inconsistencies between the OLA and the Bankruptcy Code remain, however.  First, although section 210(a)(11)(A) of the OLA is similar to section 548 of the Bankruptcy Code in that it allows the FDIC to avoid fraudulent transfers made within 2 years before the FDIC’s appointment as receiver, the OLA does not contain a provision similar to section 544(b) of the Bankruptcy Code that allows a bankruptcy trustee to avoid fraudulent transfers that would be avoidable by a creditor under non-bankruptcy law.  This difference is important because many states’ fraudulent transfer laws are substantively similar to the fraudulent transfer provisions of the Bankruptcy Code but allow transactions to be avoided that occurred as many as 6 years prior to the avoidance lawsuit.  Thus, the FDIC may not be able to avoid certain fraudulent transfers that would have been avoidable by a bankruptcy trustee.
Second, the OLA does not provide the FDIC with certain tools that the Bankruptcy Code provides a bankruptcy trustee in the avoidance action context.  Section 502(d) of the Bankruptcy Code disallows claims of an avoidance defendant until the transfer subject to avoidance is paid or returned, but Dodd-Frank lacks a similar provision.  Additionally, Dodd-Frank has no provision similar to section 545 of the Bankruptcy Code that allows a bankruptcy trustee to avoid certain statutory liens.  To the extent that Dodd-Frank does permit the FDIC to avoid a lien, it does not preserve the avoided lien for the benefit of the FDIC as receiver like section 551 of the Bankruptcy Code does for a bankruptcy trustee.
Lastly, Dodd-Frank does not provide certain rights and protections to avoidance defendants that are provided under the Bankruptcy Code.  The following are some Bankruptcy Code protections and rights that have no similar provision under Dodd-Frank:

• Section 502(h) of the Bankruptcy Code allows claims to avoidance action defendants for avoided transfers;
• Sections 546(a) and 550(f) of the Bankruptcy Code limit the time that a bankruptcy trustee can wait before filing a lawsuit to avoid a transfer or recover transferred property;
• Section 550(c) of the Bankruptcy Code shields non-insider transferees from repayment of preferential transfers that were made more than 90 days before the commencement of the bankruptcy case and for the benefit of an insider;
• Section 550(d) of the Bankruptcy Code makes clear that a bankruptcy trustee is only entitled to a single satisfaction; and
• Section 550(e) of the Bankruptcy Code grants a lien to a good faith transferee for improvements to the transferred property made by the transferee.

It is unclear whether Congress intended these discrepancies or whether they were oversights.  Regardless, interested parties should monitor the rulemaking and/or statutory amendment process to watch for any changes meant to address these discrepancies.