Bankruptcy is a federal court procedure conducted under the Code. The goal of bankruptcy is to give individuals and businesses a “fresh start” by eliminating or restructuring debts they cannot repay and help creditors receive some payment in an equitable manner. The filing of a bankruptcy petition operates as an “automatic stay” that stops most lawsuits, foreclosures, and most other collection activities against the debtor. Under the Code, secured creditors—those with liens or other secured claims against the debtor’s property—are more likely to get some debt repaid than unsecured creditors. Creditors typically receive payment of their debts before shareholders receive any return of their equity in the failed company. Business debtors that are eligible for protection under the Code may qualify for liquidation, governed primarily by Chapter 7 of the Code, or reorganization, governed by Chapter 11. Proceedings under both Chapters 7 and 11 can be voluntary (initiated by the debtor) or involuntary (generally initiated by at least three creditors). A liquidation proceeding—under Chapter 7—is a court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors in accordance with the Code’s priority scheme. A reorganization proceeding—under Chapter 11—allows debtors that are commercial enterprises to continue to operate some or all of the debtor’s operations as a way to satisfy creditor claims. The debtor typically remains in control of its assets under a Chapter 11 proceeding, and is called a debtor-in-possession (DIP). However, if the court determines that there is cause or it is in the best interest of creditors, the court can direct the U.S. Trustee to appoint a Chapter 11 trustee to take over the affairs of the debtor. A debtor (or other interested party) may file a reorganization plan, which ultimately may be confirmed by the court. The plan includes details on the operations of the reorganization, including disposition or retention of property, mergers, and issuance of securities. The plan also divides creditors into classes and directs how the creditor classes will be paid. The debtor can terminate burdensome contracts and leases, recover assets, and rescale its operations to return to profitability. To continue operations, a debtor may obtain additional financing, which could be paid before other debts.under Chapter 11 or transfer to a Chapter 7 liquidation, which may provide a greater return to creditors. A debtor also may file a plan of liquidation The U.S. bankruptcy system involves multiple federal entities. While bankruptcy courts are located in 90 federal judicial districts, the Southern District of New York (which includes Manhattan) and the District of Delaware adjudicate a majority of larger corporate or business bankruptcy cases, many of which constitute “megacases.” The Judicial Conference of the United States recommends national policies and legislation for all aspects of federal judicial administration. AOUSC serves as the central administrative support entity for the Judicial Conference and the federal courts, including bankruptcy courts. For example, AOUSC provides administrative, legal, financial, management, and information technology support functions for the federal courts. The Federal Judicial Center, an education and research agency for the federal courts, assists bankruptcy courts with education relating to case administration and management, while the majority of Federal Judicial Center research helps inform policy decisions of the Judicial Conference of the United States. In addition, the Trustee Program at Justice and the Bankruptcy Administrator Program oversee bankruptcy trustees and the administration of bankruptcy estates, respectively. It is important to note that certain financial institutions may not file as debtors under the Code and other entities face special restrictions in using the Code: Insured depository institutions: Under the Federal Deposit Insurance Act, FDIC serves as the conservator or receiver for the insured depository institutions placed into conservatorship or receivership under applicable law. Insurance companies: Insurers generally are subject to oversight by state insurance commissioners, who have the authority to place them into conservatorship, rehabilitation, or receivership. Broker-dealers: Broker-dealers can be liquidated under the Securities Investor Protection Act (SIPA) or under a special provision of Chapter 7 of the Code. However, broker-dealers may not file for reorganization under Chapter 11. Commodity brokers: Commodity brokers, also known as futures commission merchants, are restricted to using only a special provision of Chapter 7 for bankruptcy relief. Bank Holding Company Act of 1956, 12 U.S.C. § 1841 et seq. nonbank financial companies supervised by the Federal Reserve; any company that is predominantly engaged in activities that the Federal Reserve has determined to be financial in nature or incidental thereto for purposes of section 4(k) of the Bank Holding Company Act (including broker-dealers that are registered with SEC and are members of SIPC); or any subsidiary of a company described in the bullets above that is predominantly engaged in activities that the Federal Reserve has determined to be financial in nature or incidental thereto for purposes of section 4(k) of the Bank Holding Company Act (except for insured depository institutions and insurance companies). In addition to the evaluation of whether the financial company fits within one of the categories described above, federal regulators recommending whether the Secretary of the Treasury should appoint FDIC as receiver must include: an evaluation of whether the financial company is in default or in danger of default; a description of the effect that the default of the financial company would have on the financial stability in the United States; a description of the effect that the default of the financial company would have on economic conditions or financial stability for low- income, minority, or underserved communities; a recommendation on the nature and extent of actions to be taken under Title II of the Dodd-Frank Act regarding the financial company; an evaluation of the likelihood of a private-sector alternative to prevent the default of the financial company; an evaluation of why a case under the Code is not appropriate for the an evaluation of the effects on creditors, counterparties, and shareholders of the financial company and other market participants. Upon recommendation, the Secretary of the Treasury, must invoke OLA if the Secretary, in consultation with the President, determines that: the financial company is in default or in danger of default; the failure of the financial company and its resolution under otherwise applicable federal or state law would have serious adverse effects on the financial stability of the United States; no viable private-sector alternative is available to prevent the default; the effect on the claims or interests of creditors, counterparties, and shareholders of the financial company and other market participants of proceedings under Title II of the Dodd-Frank Act is appropriate, given the impact that any action under Title II would have on the financial stability of the United States; an orderly liquidation would avoid or mitigate such adverse effects; and the company meets the definition of financial company as described above. By a two-thirds vote, the Federal Reserve and FDIC (or relevant regulator) must agree to make the recommendation to the Secretary of the Treasury to place the financial company into receivership. The Secretary consults with the President and then makes a determination to place the company in receivership, and notifies the company’s board of directors (or equivalent). If the company consents or acquiesces to the recommendation, FDIC becomes receiver. If the company does not consent, the Secretary through Justice must petition the D.C. District Court for an order authorizing the appointment of FDIC as receiver. The D.C. District Court has 24 hours to determine whether the Secretary’s determination was arbitrary and capricious, in which case FDIC would not become receiver. If the D.C. District Court failed to act within 24 hours, then FDIC would become receiver. The financial company can appeal the D.C. District Court’s determination, but the receivership would not be stayed (or postponed) if it did so. If the D.C. District Court did not uphold the Secretary’s determination, the Secretary could amend and refile or appeal within 30 days. Upon appointment as receiver, FDIC becomes successor to and legal custodian of the financial company, including assets and operations. Under authority provided by Title II of the Dodd-Frank Act, when FDIC is appointed receiver of the financial company it may take over and manage the assets of the company. FDIC must liquidate and wind up the affairs of the financial company, and may sell or transfer the assets to a bridge financial company, which is a temporary company used to maintain the failed company’s operations. A bridge financial company may purchase assets, assume liabilities, and undertake other functions of the financial company. FDIC also has authority to determine the validity of creditor claims against the company and pay creditor claims. The Dodd-Frank Act generally requires that all creditors of a financial company with similar priority be treated similarly; however, in certain circumstances FDIC may treat similarly situated creditors differently. In some cases, FDIC may repudiate contracts to which a financial company is a party or may enforce certain contracts that otherwise could have been terminated because of the financial company’s insolvency. Among its provisions, Title I of the Dodd-Frank Act requires certain financial companies to provide regulators with periodic reports on their plans for rapid and orderly resolution in the event of “material financial distress or failure” under the Code. The resolution plan must include the following: information on the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company; full descriptions of the ownership structure, assets, liabilities, and contractual obligations of the company; identification of the cross-guarantees tied to different securities, identification of major counterparties, and a process for determining to whom the collateral of the company is pledged; and any other information that the Federal Reserve and FDIC jointly require by rule or order. The Federal Reserve and FDIC must review the information in these resolution plans.