Resolution Authority: Missing an Umpire

The current draft of the Dodd bill does not provide for a anyone comparable to the bankruptcy judge in a chapter 11 case. Instead, the proposed legislation allows parties to seek review of the receiver’s decision to allow or disallow a claim in the district court “for the district within which the principal place of business of the covered financial company is located (and such court shall have jurisdiction to hear such claim).”

First note that this means that case will start in Delaware with the Panel, but will likely end up in the Southern District of New York for claims resolution. Moreover, the court seems to be limited to hearing claims disputes – whereas it arguably might be better to have a general “referee” for all disputes. But most importantly, I doubt that the district court in the SDNY is the right place to resolve these matters. The SDNY district court is widely perceived to be slow in acting on bankruptcy appeals, and is often weighed down with a lengthy docket of criminal cases that understandably has priority on the judges’ time. Bankruptcy judges – particularly those that routinely handle large chapter 11 cases – are more accustomed to acting with the kind of speed that is required for these matters. Otherwise the FDIC will face the prospect of some district judge ruling against its treatment of a claim years after everyone thought the case was fully administered.

Solution: When picking the members of the Panel (see my last post), pick a fourth judge who will act as trial judge to resolve these issues.