New Limits on Exercise of Close-out Rights in Swaps, Repos, and Other Qualified Financial Contracts
By Igor Kleyman and Lauren Gilbert, Cleary Gottlieb Steen & Hamilton LLP
On September 1, the Board of Governors of the Federal Reserve System adopted a final rule intended to facilitate the orderly resolution of certain global systemically important banking organizations (“covered entities”). The rule requires covered entities to ensure that certain of their swaps, repos, and other “qualified financial contracts” (1) are subject to existing stays on and overrides of counterparty default rights under U.S. special resolution regimes (e.g., the Dodd-Frank Act), and (2) limit a counterparty’s exercise of cross-default rights in the event that the covered entity’s affiliate enters bankruptcy proceedings. Most counterparties to covered entities will need to amend their covered qualified financial contracts to comply with the rule. The rule permits market participants to comply by adhering to the ISDA Resolution Stay Protocols or other industry-wide protocols that meet certain conditions.
Business Law Section Letter Regarding CFTC’s Project KISS Initiative
By Michelle Chun, Christian Coyne, Brandon M. Hammer, and Lauren Gilbert, Cleary Gottlieb Steen & Hamilton LLP
On September 29, the Part 190 Subcommittee of the Business Law Section of the ABA (Subcommittee) submitted a letter in connection with the CFTC’s Project KISS initiative requesting that the CFTC consider adopting a new set of Part 190 Rules in the form of model rules the Subcommittee had prepared. The Part 190 Rules apply to the liquidation of a U.S.-based futures commission merchant (FCM) or derivatives-clearing organization. The Subcommittee believes there is a need to update Part 190 in a comprehensive manner, as the markets—and how they are regulated—have changed dramatically since the Part 190 Rules were adopted in 1983, and a number of lessons have been learned following the insolvencies of large FCMs in recent years.
Ninth Circuit Affirms Adherence to “Dominion Test” to Determine Initial Transferees in Fraudulent Transfers
By Michael Enright, Robinson & Cole LLP
The U.S. Court of Appeals for the Ninth Circuit recently reiterated its adherence to the “dominion test” to identify the initial transferees of a fraudulent transfer and distinguish them from subsequent transferees. The distinction is important, because subsequent transferees have defenses to fraudulent transfer actions that initial transferees do not. Matter of Walldesign, Inc., No. 15-56220 (9th Cir. October 2, 2017) held that the bankruptcy estate of a corporation could recover payments made by the corporation at the direction of its sole shareholder, director, and president to his personal creditors because they were initial transferees from the corporation, and not subsequent transferees from him personally. Subsequent transferees could have defended on the basis that they received the payments in good faith and in exchange for value. Any creditor who receives payment of a debt from someone other than its contract counterparty effectively is on notice of an irregularity bearing further scrutiny and inquiry about the proper source of payment.
“Formula” Method Applied in Chapter 13s May Not Apply in Chapter 11s Where Loan Market Exists—Allowing Secured Creditors Another Tool for Favorable Interest Rates
By Michael Enright, Robinson & Cole LLP
The “formula” method used by the U.S. Supreme Court in Till v. SCS Credit Corp., a Chapter 13 case, should not be applied in a Chapter 11 case unless no efficient market exists for loans of the type proposed in the plan. In its October 20, 2017 decision in the appeal from the Momentive Chapter 11 plan confirmation order (In re MPM Silicones, L.L.C., 2d Cir. Case No. 15-1682, Oct. 20, 2017), the Court followed the 6th Circuit’s lead, and instructed that if there is evidence of such a market, which is often the case for loans of this type, the bankruptcy court should first consider the “market rate” approach before relying on the formula approach. The Court concluded that the Chapter 11 setting is different because loans of this type typically are not available to Chapter 13 debtors. The Court also rejected the claims of objecting secured creditors that they were entitled to “make whole” premiums on their loans, relying on its prior decision in AMR. Secured creditors who face cram-down now will have another tool available to seek better interest rates for their post-confirmation claims.