On October 20, 2021, Democratic senators Elizabeth Warren (D-Mass.), Tammy Baldwin (D-Wisc.), Sherrod Brown (D-Ohio), and Jeff Merkley (D-Oregon), and Independent senator Bernard Sanders (I-Vermont), introduced to the United States Senate proposed legislation S. 3022, the Stop Wall Street Looting Act of 2021 (the "SWSLA"),1 as a reworked version of legislation previously proposed in 2019.
In what appears to be an attempt at wholesale reform of the private equity industry and bankruptcy practice, the SWSLA proposes to:
- require "controlling private funds" and certain other insiders to be "jointly and severally liable for all liabilities of each target firm [and its affiliates]," including any debt, legal judgments, WARN act violations, and pension-related obligations;
- carve out transfers made in connection with "change in control transactions"2 from the safe harbor protections of Section 546(e) of the Bankruptcy Code, and impose a statutory presumption that both a constructive and actual fraudulent transfer under Section 548 of the Bankruptcy Code has occurred with respect to various "change in control transactions" undertaken in the eight years prior to a bankruptcy filing;
- address so-called "sham" independent directors by vesting an unsecured creditors committee, as opposed to a debtor in possession, with certain chapter 5 causes of action and claims against company insiders; and
- increase protections for employees in bankruptcy cases by increasing wage claim amounts and priority status, limiting payments to executives, and directing bankruptcy courts to favor employee-friendly bids for a debtor's assets.3
The notion that core legal concepts of corporate separation and limited liability are considered "looting" suggests that clinical analysis may not be the order of the day'with at least a few unintentional echoes of Atlas Shrugged. And, despite its breadth, the SWSLA seems almost singularly focused on the interests of very specific creditor constituencies, as opposed to representing a measured approach to legislative reform. In many respects, the SWSLA seems almost to have been drafted as a "wish list" from a highly litigious plaintiff rather than reflecting a holistic analysis of key bankruptcy principles. Regardless, the SWSLA presents perhaps the most substantial proposed re-write of core bankruptcy concepts since the Bankruptcy Code's enactment. And, viewed together with the Nondebtor Release Prohibition Act of 2021,4 practitioners should be mindful of the extent to which 'bankruptcy reform' may become the latest soundbite in...
