Under the new insolvency regime created by Title II of the Dodd-Frank Act, the Federal Deposit Insurance Corp. may be appointed as receiver of any failing financial company that the secretary of the Treasury Department (in consultation with the president) determines poses a significant risk to financial stability in the United States.

Title II requires the FDIC, as receiver, to liquidate the failing financial company in a manner that imposes all losses on the company's creditors and shareholders.

A systemic-risk determination under Title II will have a direct impact on the senior executives and directors of the company and could affect unrelated financial companies.

This means senior executives and directors of financial companies have compelling reasons to foster an environment to prevent receivership under Title II.

Upon its appointment as receiver, the FDIC must remove all management personnel and board members who are responsible for the failed condition of the financial company.

Further, the FDIC may recover from any current or former senior executive or director who is determined to be "substantially responsible for the failed condition" of the financial company any and all compensation received during the two-year period preceding the receiver's appointment.

Some senior executives and directors, including the chairman of the board, the CEO and the CFO, are presumed to be substantially responsible for the company's failed condition and, to avoid disgorgement of compensation, must prove that they performed their duties with the requisite degree of skill and care.

Senior executives and directors who engaged in grossly negligent or tortious conduct may be held personally liable for monetary damages caused by their bad behavior, and, in particularly egregious circumstances, the FDIC may seek to ban a senior executive or director from any further participation in the conduct or affairs of any financial company for a period of not less than two years.

The impact of the orderly liquidation process is not limited to the failing financial company, but may extend to healthy, unrelated financial companies.

If the proceeds from the disposition of the failing financial company's assets are insufficient to cover the costs of receivership, the remaining obligations incurred by the FDIC may be the responsibility of the financial sector, through assessments.

Assessments may be imposed on any financial company with total consolidated assets equal to or greater than $50 billion and any nonbank financial company supervised by the Board of Governors of the Federal Reserve System.

Considering these consequences, senior executives and directors of financial companies must know and use the mechanisms available to defend against the appointment of a receiver.

Although judicial review of the decision to appoint a receiver is available, the expedited review process (the district court has 24 hours to hold a hearing and issue a determination) and the highly deferential "arbitrary and capricious" standard of review make it unlikely that the decision will be overturned by the courts.

Thus, if a financial company is to avoid orderly liquidation, it must position itself so that its failure will not pose systemic risk to financial stability in the United States.

The overriding considerations in making a determination of systemic risk are whether the financial company is in default or in danger of default, whether such default poses systemic risk to financial stability in the United States, and whether that risk might be alleviated by filing a case under the Bankruptcy Code.

These factors underscore that the orderly liquidation process is not intended to supplant the Bankruptcy Code, but should only be used when the Bankruptcy Code is deemed insufficient to assuage the risk posed by the failing financial company.

If a financial company is able to convince the FDIC and the Fed that a resolution of the company under the Bankruptcy Code will not pose significant risk to financial stability in the United States, it likely will not be required to undergo the orderly liquidation process of Title II.

In this respect the resolution plan that financial companies are required to draft and submit to the regulators under Section 165(d) of the act may play a role in the determination of systemic risk.

Section 165(d) requires certain financial institutions to produce a resolution plan detailing, among other things, how the company would be reorganized or liquidated under the Bankruptcy Code without posing systemic risk.

For the plan to be accepted, the regulators must determine that it adequately demonstrates that the firm could be resolved under the Bankruptcy Code in a way that would not pose systemic risk to the financial system.

If the resolution plan is accepted and the regulators are convinced that the firm may be reorganized or liquidated under the Bankruptcy Code without posing systemic risk, they are unlikely to recommend the appointment of a receiver under Title II if and when the financial company begins to fail.

Instead, the financial company likely will be permitted to proceed as a debtor-in-possession in a case under the Bankruptcy Code.

Though they may find it burdensome, financial companies should develop a well-reasoned resolution plan and remedy any deficiencies that the regulators identify.

In the event that the financial company should fail, an up-to-date, accepted resolution plan may be the company's best defense against the appointment of a receiver and other consequences attendant to the orderly liquidation process.

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