Resolution Authority: The New Court

Under the Dodd bill, petitions to invoke the resolution authority are to be presented to a new Liquidation Authority Panel. Under section 202 of the bill, the Panel is to be comprised of three Delaware bankruptcy judges, selected by the Chief Judge. Presently there are seven bankruptcy judges in Delaware, including the Chief.

This seems like too small of a pool to select the judges from, and Wilmington seems like an unlikely place to hold the kind of secret hearings contemplated in this legislation. Moreover, most of the key governmental, legal, and financial actors in these matters are based in New York.

Solution:  Create a nationwide court, based in New York, utilizing the best bankruptcy judges from around the country. Having a bigger pool also provides a source for alternate members if a particular member is unavailable when the Panel is called. The Panel can share infrastructure with the SDNY bankruptcy court. Since the Panel’s role is essentially administrative, you might even consider having a non-judge on the Panel (e.g., a legal or finance academic). Finally, perhaps there should be annual education requirements for panel members so they stay up to date with the latest developments.

Comments

[Adam Levitin]

Stephen, I agree with you about having a nationwide pool, but there's no reason to base it in SDNY. DC is the logical place. The key governmental actors are going to be based in DC, not NY (Treasury and the Fed Board have no NY presence), and the firm in question could be based anywhere. There's only minimal infrastructure needed, and the presence of some bankruptcy judges in DC isn't going to attract anyone's notice (not that it really would in Wilmington: meet after 5:30 downtown and there's no one around...)

I think the question of Panel composition is interesting--there's really no great reason to make it a panel of bankruptcy judges; the Panel's sole duty is to determine whether a firm is in financial default or danger of such default (basically meaning insolvency). Bankruptcy judges have to determine issues of solvency from time to time. But I'm not sure they have any special expertise in the matter.

Also notice what escapes up-front judicial review under the Dodd bill: whether the firm's default would have a systemic impact. That's the critical determination, and it is left in the hands of the agencies. The question of imminent (or actual) default is likely going to be pretty clear. The real question is whether a special resolution system should be invoked or not, and there's no review of that determination before a firm is liquidated. I think there's probably an implied right of appeal after the fact, but that's a Pyrrhic victory.

Mandatory education requirements, though? Is that academic rent-seeking?

[Mbjoseph]

Actually there are 6 sitting Bankruptcy Judges in Delaware (and a visiting Judge) and while it is a distinct honor to recognize the expertise and tireless efforts of our Bench, I agree it is better to consider creating a national liquidation panel.
Michael B. Joseph