Senate Bill Would Heighten Worker, Retiree Protections In Corporate Bankruptcies, Limit Management Bonuses

By Peter D. DeChiara

pdechiara@cwsny.com

Posted July 2014

It will never become law so long as Republicans control the House of Representatives.  But the bankruptcy reform bill introduced on July 10 by Senator Richard Durbin (D. Illinois) provides a comprehensive roadmap of Bankruptcy Code amendments that the bill rightly asserts are “urgently needed” to better protect the interests of workers and retirees in corporate bankruptcies, and to lessen the ability of corporate management to use bankruptcy as an opportunity for self-enrichment.  See S. 2589, entitled the Protecting Employees and Retirees in Bankruptcy Act.  A companion bill on the House side was introduced in 2013 by House Judiciary Committee member John Conyers (D.) of Michigan.

The Senate bill, co-sponsored by Sens. Harkin (D. Iowa), Whitehouse (D. Rhode Island), Brown (D. Ohio) and Franken (D. Minnesota), would, among other things, make it much more difficult for corporate debtors to reject their collective bargaining agreements and to avoid paying health and other benefits to retirees.

For example, Sections 1113 and 1114 of the Bankruptcy Code now say that a debtor can only propose modifications to a collective bargaining agreement or to retiree benefits that are “necessary” to the debtor’s reorganization.  Many courts, however, following the lead of the Second Circuit in Truck Drivers Local 807 v. Carey Transportation, 816 F.2d 82 (2d Cir. 1987), have interpreted this language to mean that the employer’s proposed cuts need not be limited to the minimal essential for its reorganization.  The Durbin bill would overrule the Second Circuit’s approach and adopt the more stringent standard set forth by the Third Circuit in Wheeling-Pittsburgh Steel Corp. v. United Steelworkers, 791, F.2d 1074 (3d Cir. 1986), by expressly limiting bankrupt employers to proposing only those changes to labor contracts and retiree benefits that provide “the minimum savings essential to permit the debtor to exit bankruptcy.”

The bill would also overrule the Second Circuit’s decision in In re Northwest Airlines Corp., 483 F.3d 160 (2d Cir. 2007), holding that employees under the Railway Labor Act may not strike even after their employer rejects their collective bargaining agreement.  The bill provides that a union can engage in “economic self-help” after a court grants an employer’s request to reject the labor contract.

The bill would also resolve the controversy over whether a corporate debtor must satisfy the requirements of Section 1114 of the Code to cut retiree health benefits even if those benefits would be terminable-at-will outside of bankruptcy.  In Visteon Corp., 612 F.2d 210, 218-37 (3d Cir. 2010), the Third Circuit parted company with the Second Circuit and many other courts on this issue, correctly holding that the protections of Section 1114 apply to all retiree benefits, including those that could have been terminated at will under state law.  The Durbin bill would effectively codify Visteon, by clarifying that Section 1114 shields retiree benefit payments “without regard to whether the debtor asserts the right to unilaterally modify” them.

In addition, the bill would make it much harder for corporate debtors to give bonuses or other financial rewards to top management.  Since the 2005 bankruptcy amendments, Section 503(c) of the Bankruptcy Code has effectively prohibited debtors from giving bonuses to directors, officers and other “insiders” if those bonuses are aimed at keeping the insiders from leaving the company.  Corporate debtors have often successfully skirted this prohibition by styling the extra pay not as a retention bonus but an “incentive” bonus aimed at boosting the individual’s work performance.  The bill would nail this loophole closed, by extending the prohibition on bonuses to “performance or incentive compensation, or a bonus of any kind.”  It would also expand the scope of the prohibition beyond “insiders” to include senior executives, as well as the twenty next most highly paid managers or consultants.

Going beyond such needed fixes, the reform bill would impose certain innovative measures to ensure equity in Chapter 11 between rank-and-file workers and upper management.  For instance, the bill provides that if a debtor under Sections 1113 or 1114 cuts worker pay or retiree benefits by a certain percentage, an action may be brought against the debtor’s officers to claw back their pay by the same percentage.

The bill proposes numerous other changes, including giving priority status to an increased portion of a claim for unpaid wages or benefit fund contributions; recognizing administrative pay status for certain backpay claims under the National Labor Relations Act or the WARN Act; and requiring a bankruptcy court, when considering a sale of the debtor’s business to competing bidders, to weigh the extent to which each bidder would preserve the jobs of the debtor’s employees.

If even some of these changes were to ever become law, bankruptcy court would be a less threatening, and more equitable, arena for workers and retirees.