Reconciling the Dormant Conflict: Crafting a Banking Exception to the Fraudulent Conveyance Provision of the Bankruptcy Code for Bank Holding Company Asset Transfers

Banking law and bankruptcy law clash. This is most evident when a bank holding company (parent company) becomes insolvent after it has made an asset transfer to its financially troubled bank subsidiary. The Bankruptcy Code (Code) governs the insolvency proceedings of the bank holding company. Predictably, the parent company\u27s trustee, appointed for the protection of all the creditors of the bankrupt entity, uses the fraudulent conveyance provision of the Code to have any asset transfers that were made to the bank subsidiary returned to the debtor\u27s estate. The good faith exception to that provision will protect the asset transfer only if the parent company made the transfer for “good and fair consideration.” The banking laws govern the regulation of the entire banking industry, including the insolvency of a financial institution. The banking laws, arguably, provide preferential treatment for the Federal Deposit Insurance Fund as a failed financial institution\u27s potentially largest unsecured creditor. Banking law allows the parent company to make an asset transfer to avoid the threat of mandated restrictions. It also gives an unfulfilled payment a priority status in bankruptcy. The rules do not state, however, under what circumstances an unfunded capital obligation ought to be allowed. The legality of the asset transfer when a parent company seeks bankruptcy protection is a crucial question for the banking industry. Part II of the article identifies the statutory basis for the dormant conflict between Titles 11 and 12. Specifically, this section lists the broad array of somewhat identical discretionary powers that both the bankruptcy court and the banking regulatory agencies have as trustee and receiver for insolvent corporations and financial institutions, respectively. Part II concludes with an analysis of the cases in which these discretionary powers of the trustee and the receiver have come into conflict. Part III discusses the bankruptcy of the Bank of New England Corporation (BNEC). The factual history of this case provides an example of the types of legal issues that an insolvent holding company faces under the banking laws when it files for protection under the Bankruptcy Code. The section ends by specifying post-BNE legislative reforms designed to address issues raised during the liquidation of that failed enterprise. Part IV identifies the statutory rights that creditors have under the fraudulent conveyance law, including the good faith exception. Finally, Part V proposes an amendment to the current regulatory scheme that would require asset transfers from an insolvent holding company. It posits that the policies supporting the good faith exception are not compromised by the concomitant goal of protecting the Federal Deposit Insurance Fund. The banking enterprise exception establishes a procedure for regulatory assets transfers that is reviewable by the bankruptcy court, and operates as a credit against cross-guarantee liability. The proposed change will more closely merge the policies and purposes of the two schemes that converge when a bank holding company becomes insolvent