Recently the state of Oklahoma joined two other states, South Carolina and Michigan, and other plaintiffs in challenging the constitutionality of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”), Pub. L. No. 111-203 (July 21, 2010). The challenge brings to light provisions of the legislation that not only will have a great impact on financial companies, but also creditors.
The amended complaint filed in district court in the District of Columbia specifically targets the Orderly Liquidation Authority (“OLA”) contained in the Act. The OLA gives the Treasury Secretary the power to liquidate financial companies if the Federal Deposit Insurance Corporation (“FDIC”) and Federal Reserve Board agree. The Secretary also has the authority to merge a company with another, sell assets of the company, transfer assets to another company set up by the FDIC, and repudiate contracts it views as burdensome. The complaint asserts that the standards by which the Secretary may liquidate a company offer no meaningful direction or limitations emphasizing phrases such as “in danger of default” and “no viable private sector alternative is available”.
As to the treatment of creditors in this process, the plaintiffs specifically challenge the authority given to the FDIC to treat similarly situated creditors differently, arguing that it is an improper exercise of Congress’s power under the Bankruptcy Clause. The complaint argues that the Act gives the FDIC unfettered authority to “take any action” to treat similarly situated creditors differently if they deem it necessary to maximize the value of assets and minimize loss realized upon sale of assets of the financial company.
Provisions for court review do not give the states, who’s pension funds are invested in financial companies, much comfort. If a target company does not acquiesce to the Secretary’s demands to liquidate, the Secretary can file a petition with the District Court to force liquidation. The Act requires the court to conduct a hearing and issue a decision within 24 hours of receipt of the petition. The hearing by the court must be conducted in private, without any public disclosure in advance of the decision, i.e., no notice to creditors. If no decision to overturn the Secretary’s decision is made within this time frame, the petition is granted by operation of law.
A reviewing court can only review the Secretary’s findings that the target is a financial company and that it is in default or danger of default and then, only under an arbitrary and capricious standard. Further, the target company cannot receive a stay of the liquidation while it appeals a decision of the District Court which the States argue could make any appeal moot. Even worse, a company could agree to liquidation, leaving its creditors to find out what the government has determined they shall recover. Interestingly, the same argument used to justify the Act is the same argument used by the States now – protecting the people’s investments.