Thank you to David Morse of Otterbourg P.C. for supplying the below information on the “Stop Wall Street Looting Act of 2021”. SFNet’s advocacy team is working with our Federal resources to monitor and advise as this develops.

Certainly, many people have heard about the “Stop Wall Street Looting Act of 2021”, the dramatically titled shot at the private equity business publicized by Massachusetts Senator Elizabeth Warren, introduced in the House and the Senate on October 20, 2021.  Given so many other major (and controversial) legislative initiatives, the bill does not seem to be gaining much traction—for now.  At the same time, while the secured lending industry makes a lot of loans to businesses owned by private equity firms, the headlines around the proposed legislation do not suggest any direct impact on secured lenders. The bill certainly addresses matters relating to the private equity industry, with sections titled “Closing the Carried Interest Loophole”, “Restrictions on Securitizing Risky Corporate Debt” and other provocative terms, like “Anti-Looting” and includes sections providing for limitations on post-acquisition dividends and distributions as part of a reworking of basic principles of corporate law.

But it also includes some significant changes to the Bankruptcy Code that would more directly affect the larger world beyond private equity.  It provides that transfers made in connection with “change in control transactions” would not be entitled to the benefit of the safe harbor from fraudulent transfers under Section 546(e).  It creates a statutory presumption that a constructive and actual fraudulent transfer has occurred in connection with various “change in control transactions” that occur within eight years of a bankruptcy. 

Then there is Title III of the bill called:  “Protecting Workers When Companies Go Bankrupt.”   Besides increasing priority claim amounts for unpaid wages, severance and employee benefit plan contributions from $10,000 to $20,000 (and eliminating the 180-day prepetition cutoff date), this section proposes some significant changes to the Bankruptcy Code beyond the context of just a private equity transaction.  A battle that secured lenders regularly confront is the concept of a “surcharge” on their collateral thanks to Section 506(c) of the Bankruptcy Code.  The SWSLA says that wages, accrued vacation, severance and other compensation on or after the commencement of the case will be a surcharge on the collateral. Then, just as secured lenders have been wrestling with the treatment of supplier claims as administrative expense claims as a result of Section 503(b)(9), the SWSLA would add a Section 503(b)(10) to make severance pay and contributions to employee welfare benefit plans (and damages from WARN Act violations) an administrative expense claim.  Perhaps less surprising, the bill also includes limitations on the payment of bonus and retention payments to higher-paid employees of companies that file for bankruptcy.

While not likely to go anywhere in the short term, notwithstanding its title referring to Wall Street, the bill certainly introduces some ideas that would impact the ability of secured lenders to provide financing to businesses, even those on Main Street.