The Protecting Employees and Retirees in Business Bankruptcies Act of 2013: Proposed Changes: Part I

Earlier this year, Rep. John Conyers (D-Mich.) and 12 House Democrats proposed revisions to the Bankruptcy Code that would restrict executive compensation in business bankruptcies while purporting to preserve jobs and protect retirement benefits. The congressional sponsors of H.R. 100, the Protecting Employees and Retirees in Business Bankruptcies Act of 2013 (PERBBA),[1] have stated that “[a]s the use of bankruptcy has expanded, job preservation and retirement security are placed at greater risk,” and that the laws protecting recoveries for employees and retirees have failed to keep pace with the increased use of the bankruptcy process while certain aspects of executive and management compensation have been escaping the bankruptcy process without sufficient scrutiny. (PERBBA also proposes sweeping changes to §§ 1113 and 1114 of the Bankruptcy Code, which are not discussed in this article.)

Restricting or Recovering Executive Compensation

PERBBA seeks to restrict executive compensation by prohibiting certain transfers and enabling a debtor’s estate to recover executive compensation in certain circumstances.[2] First, PERBBA would require bankruptcy courts, as a confirmation requirement, to make a finding of reasonableness with respect to payments or distributions to be made to insiders, senior executive officers and any of the 20 most highly compensated employees or consultants.[3] This finding would be made within the context that the payments that were being made pursuant to a program that was generally applicable to all employees of the debtor.[4] In addition, PERBBA would add transfers and certain payments to senior executives or any of the 20 highly compensated employees or consultants to the list of those transfers or payments subject to the restrictions set forth in § 503(c)(1).[5] The bill would also require that any such transfers or payments be:

supported by “clear and convincing evidence”; and
made only to the extent that is “reasonable compared to individuals holding comparable positions at comparable companies in the same industry and not disproportionate in light of economic concessions by the debtor’s nonmanagement workforce during the case.”[6]

Further, PERBBA would prohibit the assumption under § 365 of certain deferred compensation arrangements if a defined benefit plan was terminated either after the filing of a petition for relief or within 180 days prior thereto; and certain plans, funds, programs or contracts to provide retiree benefits for insiders, senior executive officers, or any of the 20 next most compensated employees if the debtor obtained relief under § 1114 or 1113 to impose reductions in retiree benefits or health benefits of employees, respectively.[7]

PERBBA also proposes to add provisions permitting the recovery of executive compensation in certain circumstances.[8] First, PERBBA proposes to add § 563 to the Bankruptcy Code, which would enable a debtor’s estate to make a claim for the return of compensation paid in an amount that is equal to the percentage reduction in benefits (if a debtor obtains relief under § 1113 or 1114), or otherwise terminates or reduces benefits within the 180-day period prior to commencing a case under the Bankruptcy Code.[9] The estate could then recover the claim from compensation paid, directly or indirectly, to any officer of the debtor serving as a member of the board within the year before the date of the filing of the commencement of the case; or any individual serving as chair or lead director of the board of directors at the time of granting relief under § 1113 or 1114 or the reduction in benefits within the 180-day period.[10] Similarly, PERBBA would also permit an estate to avoid and recover certain compensation that was paid pre-petition as a preference under § 547.[11]

Claim Enhancement and Protection; Job Preservation

In addition to placing restrictions on executive compensation, the bill’s sponsors seek to enhance and protect the rights of employees and retirees. PERBBA would increase claim amounts and the recoveries thereon by increasing current caps on certain claims, creating new claims and granting certain claims administrative-expense claim status. Key elements of these changes to the Bankruptcy Code include:

the revision of §§ 507(a)(4) and 507(a)(5) to increase the maximum amount of employees’ claims for unpaid compensation and contributions to employee benefit plans and remove the 180-day time limitation imposed on the calculation of these claims;[12]
the addition of § 101(5)(C), which would permit claims to be filed on account of a right or interest in equity securities of the debtor held in a defined contribution plan if the debtor has committed fraud with respect to such plan or has proximately caused a loss of value to the plan;[13]
the addition of § 502(m), which would allow claims filed under § 101(5)(C), with the amount of such claim being measured by the market value of the stock at the time of contribution to or purchase by the plan and the value as of the commencement of the bankruptcy case;[14] and
the addition of § 502(l), which would allow claims asserted by an active or retired participant — or a labor organization representing the participant — in a defined benefit plan terminated under § 4041 or 4042 of the Employee Retirement Income Security Act (ERISA) for any shortfalls in pension benefits, notwithstanding any potential claims asserted or collected upon by the Pension Benefit Guaranty Corp. with respect to such termination.[15]

PERBBA also proposes to grant certain existing claims administrative-expense status and provide sources for the payment of post-petition claims arising from post-petition services rendered by employees. The proposed legislation would first provide administrative-claim status to claims for severance pay to the extent that such pay arose under a plan that was generally applicable to a debtor’s employees, or under a collective-bargaining agreement, as a result of a termination or layoff of an employee on or after the filing of a petition for relief.[16] PERBBA would also provide that wages and benefits awarded as a result of a violation of state or federal labor laws, including the Worker Adjustment and Retraining Notification (WARN) Act, attributable to any time occurring after the petition date would be treated as administrative-expense claims, unless the court determines that such treatment would substantially increase the probability of layoff or termination of current employees or of nonpayment of domestic-support obligations.[17]

In addition to elevating certain claims to administrative-expense claims, PERBBA would also revise § 506(c), providing that notwithstanding any waiver by the trustee of the right to surcharge under § 506(c), if employees have not received wages, accrued vacation, severance or other benefits for services rendered on or after the petition date, then such amounts shall be deemed “necessary costs and expenses of preserving, or disposing of, property securing an allowed secured claim” and shall be recovered from such property.[18]

In addition to increasing and enhancing claims, PERBBA seeks to inject job preservation into the reorganization process. First, the bill proposes to add a new § 1100, which would provide that a chapter 11 debtor would have to have as its principal purpose “the reorganization of its business to preserve going concern value to the maximum extent possible through the productive use of its assets and the preservation of jobs that will sustain productive economic activity.”[19] In addition, PERBBA would amend § 363 of the Bankruptcy Code such that in the context of an asset sale, a bankruptcy court would be required to consider “the extent to which a bidder has offered to maintain existing jobs, preserve terms and conditions of employment, and assume or match pension and retiree health benefit obligations” when considering whether to approve a sale and whether an offer constitutes the highest and best offer for the property being sold.[20] Similarly, PERBBA further injects the goal of job preservation into the confirmation process by amending § 1129(a) and (c) of the Bankruptcy Code so as to require a debtor to demonstrate that the reorganization preserves jobs, and a court to consider job preservation when considering more than one plan.[21]

Conclusion

While PERBBA, in its current form, faces long odds for passage according to Capitol Hill observers,[22] its provisions could resurface — in whole or in part — in future proposed legislation. The bill’s sponsors are attempting to ensure that a debtor’s employees do not end up bearing all of the cost of a business bankruptcy while executives and management personnel pass through the process relatively unscathed. As the 2014 mid-term elections loom closer on the horizon, bankruptcy professionals will be well served to keep a watchful eye on legislative developments and proposals emerging from Capitol Hill.

[1] Available at www.gpo.gov/fdsys/pkg/BILLS-113hr100ih/pdf/BILLS-113hr100ih.pdf.

[2] PERBBA, §§ 301-305.

[3] Id. at § 301.

[4] Id.

[5] Id. at § 302.

[6] Id.

[7] Id. at § 303.

[8] Id. at § 304.

[9] Id.

[10] Id.

[11] Id.

[12] PERBBA, § 101.