The FDIC Board Proposed a Rule (Tinyurl.com/2bbd3r6) Clarifying How the Agency Would Treat Certain Creditor Claims under the New Orderly Liquidation Authority Established under the Dodd-Frank Wall Street Reform and Consumer Protection Act

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The FDIC board proposed a rule (tinyurl.com/2bbd3r6) clarifying how the agency would treat certain creditor claims under the new orderly liquidation authority established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal advances the principle that all creditors must expect to absorb losses in any liquidation.

Title II of Dodd-Frank provides a mechanism for the appointment of the FDIC as receiver for a financial company where the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the country's financial stability

The Notice of Proposed Rulemaking (NPR) requests comments on a proposed regulation on specific issues related to creditor claims and on broader questions to inform future rulemaking addressing other orderly liquidation issues under Dodd-Frank. The comment period closed on Nov. 18. Comments on the additional questions for future rulemaking are due Jan. 18, 2011.

The proposal addresses the availability of additional payments to creditors under the authority of Dodd-Frank. The proposed rule would bar any additional payments to holders of long-term senior debt, subordinated debt, or equity interests that would result in those creditors recovering more than other creditors entitled to the same priority of payments under the law. Additional payments to holders of long-term senior debt, subordinated debt, or equity interests do not meet the statutory test that the payments must maximize the value of the assets or recoveries, minimize losses or be essential to implementation of the receivership or any bridge financial company. The proposal would also clarify that all creditors must expect to absorb losses in any liquidation.

The proposal provides that secured creditors will only be protected to the extent of the fair value of their collateral. …