Sen. Elizabeth Warren (D-Mass.) has proposed a new measure that would empower creditors in chapter 11 cases to pursue allegations of self-dealing by private-equity owners, rights that currently lie with corporate directors selected by those investment firms, WSJ Pro Bankruptcy reported. The senator introduced a revised version of her Stop Wall Street Looting Act yesterday, modifying a two-year-old proposal to rein in the private-equity industry and including fresh provisions targeting perceived abuses of the chapter 11 system by investment firms. In the bill’s new form, creditors’ committees in bankruptcy cases would have the exclusive right to pursue company insiders who have stripped assets, siphoned value or otherwise elevated their interests over those of lenders, suppliers and employees. As the Bankruptcy Code currently stands, corporate boards themselves have those rights, often delegated to an independent director of their choosing. These independent directors can carry significant weight with bankruptcy courts, which tend to defer to their findings that a particular transaction was fair or not. But some researchers allege that independent directors have an inherent conflict of interest, as they are typically appointed by the shareholders responsible for the potential misconduct at issue. Creditors pay the price for this structural bias, according to legal researchers who examined 770 large chapter 11 filings between 2004 and 2019 and found that independent directors sometimes stifled investigations, rejected potential legal claims and rushed negotiations with private-equity firms. Under Sen. Warren’s bill, independent directors “won’t be able to just tidy-up claims against insiders,” said an author of that study, Jared Ellias, a professor at the University of California Hastings College of Law. The new legislation would also give creditors the right to compel directors and officers of a bankrupt business to sit for an examination, subject to a judge’s approval, for potential conflicts of interest. Sen. Warren also proposed other changes to chapter 11, such as lengthening the statute of limitations to eight years from two years on unwinding transactions that defraud creditors. Read more.
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