S. 2820 Would Increase Wage Priority and Recover Unjust Compensation
S. 2820 Would Increase Wage Priority and Recover Unjust Compensation
A
bill introduced by Senator Carnahan (D-Missouri) and co-sponsored by Senators
Kennedy (D-Massachusetts) and Leahy (D-Vermont) on July 30, 2002, would
increase the dollar amounts for the section 507(a)(3 & 4) wage and employee
benefits priorities to $13,500 from the current cost of living adjusted amount
of $4,650. This is the same change
proposed by the pending Employee Abuse Prevention Act of 2002 (S. 2798 and H.R.
5221) that was introduced by Senator Durbin and Rep. Delahunt. The current limit has come under attack
recently in such high profile cases as Enron and Worldcom. In Enron, the bankruptcy court approved
priority wage payments that exceeded the current $4,650 limit and a similar
motion is pending in the Worldcom case.
In addition to increasing the wage
and employee benefits priority, the bill would also amend the section 547
preference provision to permit recovery of transfers of
"compensation" made within 90 days before bankruptcy to present or
former employees, officers, or directors.
In order to be recoverable, such compensation must be shown to be either
"out of the ordinary course of business" or "unjust enrichment." Although this provision would be added
to the preference section, it would not technically be a preference since the
section would permit recovery of compensation even if the debtor was solvent
and even if there was no pre-existing debt owed to the employee, officer, or
director. Although the
Durbin-Delahunt bill also would allow recovery of excessive compensation, its
provisions are substantially different from the provisions of S. 2820.
Since the term
"compensation" limits the class of transfers that can be recovered
under S. 2820 and since that term is not defined, it is not clear whether this
provision would apply to transactions such as sweetheart loans to executives
and the forgiveness of such loans that have recently drawn scrutiny.
Similarly, it is unclear how the
avoidance standards would apply. The
non-ordinary course test, if applied strictly, might result in the avoidance of
payments made to rank and file employees, such as the non-ordinary course
payment of all earned but unpaid wages on the eve of bankruptcy. It might also result in the avoidance
of completely proper compensation arrangements merely because the debtor's
financial condition required it to resort to unusual compensation schemes as
its condition worsened.
It is unclear whether the
alternative "unjust enrichment" standard is meant to incorporate the
common law contract doctrine of unjust enrichment or to provide wide discretion
to bankruptcy judges to avoid compensation deemed excessive. If it merely allows recovery of
compensation in cases where the compensation was excessive, it adds little to
the section 548 power to avoid constructively fraudulent transfers where the
debtor received less that a reasonably equivalent value. Unlike section 548, the amendment would
allow recovery even if the debtor was solvent and might allow recovery where
excessive compensation was paid pursuant to a contract entered into before the
one-year look-back period under section 548.
The
bill has been referred to the Committee on the Judiciary.
Prof. G. Ray Warner, ABI Resident Scholar, Professor of Law
at the University of Missouri-Kansas City.