Relevant Documents:Bill TextPress Release
On Wednesday, Oct. 20, Democratic senators and representatives introduced the Stop Wall Street Looting Act of 2021, which joins a
group of bills that could have major implications for the high-yield debt industry and chapter 11 bankruptcy cases in particular. The bill is co-sponsored by Sens. Elizabeth Warren, D-Mass., Tammy Baldwin, D-Wisc. and Chair of the Senate Banking Committee Sherrod Brown, D-Ohio, along with Reps. Mark Pocan, D-Wisc., and Pramila Jayapal, D-Wash.
According to a press release and
summary issued by Warren, the bill would generally make “controlling” equity sponsors “jointly and severally liable for all debt incurred by a target firm and its affiliates, including for legal judgments, liabilities in connection with violations of the Worker Adjustment and Retraining Notification (WARN) Act, and pension-related obligations.” The bill would also void indemnification provisions requiring companies to reimburse equity sponsors for liability to third parties, prohibit companies from making capital distributions or laying off workers for two years after a leveraged buyout, and provide employees and creditors with a right to sue to enforce these provisions.
With respect to chapter 11, the bill would also dramatically upend the
current fraudulent transfer regime related to corporate takeovers and LBOs by eliminating the section 546(e) “safe harbor” for a newly created class of “change in control” transactions. In addition, for such transactions, the bill would create a presumption of insolvency if certain factors apply, and the federal look-back period would be extended from to eight years from two.
Additionally, the bill would end the widespread practice of chapter 11 debtors using what the bill calls “sham”
independent directors to investigate and settle claims related to potentially actionable prepetition transactions. Under the proposal, the summary says, “[l]itigation claims brought against company insiders must be brought by a trustee representing the creditor committee rather than the debtor-in-possession.”
The bill also includes numerous new protections for employees and consumers in chapter 11 cases, including an increase in priority wage claims to $20,000 from $10,000, a surcharge requirement that would force secured creditors to cover unpaid postpetition wages, and protections for gift card holders. The bill would also direct bankruptcy courts to favor section 363 sales that preserve jobs.
Finally, the bill would limit executive compensation and bonuses in chapter 11 cases. Under the proposal, bankruptcy courts would be barred from confirming a plan “if an insider, senior executive, highly compensated employee, or consultant of the company will receive payments that are not generally applicable to the company’s employees when the company exits bankruptcy or that the court determines are excessive or disproportionate compared to payments to the company’s non-management workforce.”
Warren introduced a
similar bill in the 116th Congress that, among other things, lacked the new bill’s provisions relating to “sham” directors and committee control over claims related to prepetition transactions. That bill did not progress out of the Senate Finance Committee.