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Copyright (c) 2010 Washington & Lee University School of Law
Washington & Lee Law Review

ARTICLE: Why Banks Are Not Allowed in Bankruptcy

Summer, 2010

Washington & Lee Law Review

67 Wash & Lee L. Rev. 985


Richard M. Hynes * and Steven D. Walt **


I. Introduction

Most nations resolve failed banks with the same procedures they apply to other insolvent firms. 1 American law is different. American banks and thrifts do not receive bankruptcy protection. 2 Instead, regulators seize insolvent or unsound banks or thrifts and give the Federal Deposit Insurance Corporation (FDIC) the authority to resolve them. Almost always the FDIC chooses to resolve seized institutions through a receivership. 3 Very different rules govern the bankruptcy and bank receivership processes. These rules appear in different titles of the United States Code and have important substantive differences. The most important difference between the two procedures is the concentration of control over the disposition of the failed firm's assets. The traditional bankruptcy reorganization divides control among the various claimants and appoints a judge to supervise the process. The overwhelming majority of reorganizations are resolved consensually with the approval of each class of creditors and shareholders. 4 Even when a debtor tries to "cram down" a plan over the objections of dissenting creditors, the debtor must win approval of at least some creditors, and the other creditors can ask the judge to reject the plan because it fails to comply with tests of horizontal and vertical equity or it is not in the best interests of the creditors. 5

Debtors sometimes bypass the traditional reorganization with a relatively quick sale of many of the failed firm's assets or at least the assets necessary for some of the business to continue operating. Although this ...
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