Bankruptcy Reform Bill

Bankruptcy Reform Bill

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While there are a number of bankruptcy-related bills floating around on Capitol Hill, most activity appears to be stalled. The only bill to pass both houses was H.R. 5167/S. 2864, which would extend chapter 12 retroactively from Jan. 1, 2004, and prospectively until June 30, 2005. In addition, activity (or inactivity) focused on three areas: (1) the omnibus bankruptcy reform bill, (2) pension reform, and (3) asbestos reform.


While the House passed H.R. 975 in March 2003, the omnibus bankruptcy reform bill in March 2003, the bill remains stalled in the Senate. The two houses of Congress remain divided over an amendment that would prevent anti-abortion protesters from using bankruptcy to discharge civil fines and judgments arising from their protest activities. While Congress will return after the November recess, Senate Majority Leader Frist has said that the focus of that session will be on spending bills and bills that have passed both houses. In addition, a number of attempts have been made to split off pieces of the larger bankruptcy bill, but they have resisted by the bills sponsors.

Bankruptcy Judgeships

Included in the Bankruptcy Reform Bill was language authorizing additional bankruptcy judgeships. The Senate approved a bill to create federal judgeships (including bankruptcy judges) in May 2003 (S.878), and the House Judiciary Committee has approved the Senate Bill, but not before stripping out the additional bankruptcy judgeships.

Derivative Netting

Also included in the Bankruptcy Reform Bill was a series of provisions that would have permitted "netting" of derivative contracts. These provisions would create an exception from the automatic stay and a defense to preference avoidance for payments that close out derivative transactions. The netting provisions are similar to provisions that already exist for so-called "swap" and "repo" transactions. Recently, this language was added to legislation proposed in response to the 9/11 CommissionÕs recommendations. While the future of that legislation is uncertain, this appears poised to move forward notwithstanding the deadlock on the Bankruptcy Reform Bill


While it is unlikely that anything will happen this session, pensions have been receiving a lot of attention. This is largely due to the decisions by USAirways and United, as well as Fruehauf and Kaiser Aluminum, to seek distress terminations of their pension plans. Given the instability of the airline industry after 9/11, there is significant concern that the PBGC may not have sufficient resources to cover its full exposure.

Hearings were held in September. Under discussion is legislation under which the formula by which firms calculate the insurance fund would be changed. In addition, legislation has been proposed that would require companies to disclose to their employees the extent to which their pension plans were funded or underfunded.


Significant efforts were made over the summer to reach an agreement on legislation that would create a federal trust fund to pay asbestos claims. The trust would be capitalized with contributions from liability insurers and from firms that are likely to be subject to asbestos lawsuits in the future. Issues under negotiation included the size of the fund ($140-145 billion), the size of insurance company contributions and the extent to which claimants would retain recourse to the court system.


Finally, in July the House Subcommittee on Commercial and Administrative Law held a hearing on whether competition by courts for big cases had "corrupted" the bankruptcy system. Testimony by Prof. Lynn LoPucki, among others, suggested that competition by jurisdictions such as the Southern District of New York and Delaware, particularly with regard to the payment of attorneys fees, has led to higher costs and greater refiling rates in those jurisdictions.

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Monday, November 1, 2004