Corporate Financial Scandals Inspire New Proposal in Congress

The "Employee Abuse Prevention Act of 2002" is a controversial package of reforms of the Code designed to "protect employees and retirees from corporate practices that adversely impact earnings and retirement savings when businesses file for bankruptcy." The bill (S. 2798/H.R. 5221) was introduced on Aug. 1 in the Senate by Sen. Dick Durbin (D-Ill.) and in the House by Rep. William Delahunt (D-Mass.). The bill's authors aim to empower courts and trustees to challenge certain transactions that strip assets from the company and to recapture them for the benefit of the company and creditors.

"From Enron to Polaroid, the recent wave of bankruptcies have left tens of thousands of employees without jobs, retirees without pensions or health insurance—while corporate assets are diverted to executive bonuses and off-book transactions," Delahunt said. The bill would make more than a dozen changes in the Code. Among other provisions, it would enhance the ability of the courts to invalidate "fraudulent transfers" by corporate insiders, lengthen the "reachback" period under current law from one to four years, empower the courts to review and set aside "excess benefit transfers" made to top management while the company was insolvent, affirm the authority of the court to look through the formalities of sales, leases and other transactions that move assets "off-book" and to invalidate them where appropriate, restore to the trustee the right to challenge and set aside transactions that take assets out of the company, and enable courts to recover "excessive" retention bonuses, severance packages and other payments to top executives, including turnaround consultants.

Other changes include an increase in the priority wage claim from $4,650 to $13,500, subordination of secured claims to those of beneficiaries of employee pension plans where there has been a violation of ERISA, a reinstatement of employee benefits modified within six months of the bankruptcy where it is found that the changes were made in contemplation of bankruptcy, and a restriction on the debtor's choice of venue to those with a genuine link to the affected community. Significantly, these provisions would be retroactive and would thus apply to pending cases.

Lenders, particularly secured creditors, will oppose the new bill, as will many of those who now handle turnaround cases. The change in the venue rules will be very controversial with defenders of the current rules, which permit most large cases to be filed in either Delaware or New York, regardless of contacts with other locations.

No hearings have been scheduled yet on the bill. However, the bill is co-sponsored in the Senate by the Chairman of the Judiciary Committee, Patrick Leahy (D-Vt.). One plan may be to try to attach some or all of the provisions to the pending bills on retirement and pension reform. Congress is scheduled to adjourn in October of this election year.

A complete analysis by ABI Resident Scholar G. Ray Warner of the Durbin-Delahunt legislation can be found on the ABI World home page (www.abiworld.org).