Legislative Highlights January 2025

Legislation Reintroduced Taking Aim at Nonconsensual, Nondebtor Releases in Bankruptcy

Sens. Elizabeth Warren (D-Mass.), Dick Durbin (D-Ill.) and Richard Blumenthal (D-Conn.) on Dec. 5 reintroduced S. 5415, the “Nondebtor Release Prohibition Act,” to explicitly prohibit the use of nonconsensual, nondebtor releases in bankruptcy. “Billionaires and corporations should not be able to use our bankruptcy system to escape accountability for serious allegations, including medical malpractice, sexual abuse, or national public health crises like the opioid epidemic,” Sen. Warren said in a press release.1 “Our bankruptcy system is meant to grant struggling individuals and companies a fresh start, and this bill will protect our bankruptcy system and victims from abuse.”

In June 2024, the U.S. Supreme Court ruled in Harrington v. Purdue Pharma that the use of nondebtor releases without the consent of claimants is illegal under bankruptcy law. S. 5415 would codify that decision and goes further by:

• defining what constitutes consent by claimants to prevent companies from using deceptive or extortionary tactics to extract consent;
• forcing the dismissal of any chapter 11 bankruptcy where a company has split their assets and liabilities into separate companies, known as the Texas Two-Step, in the 10 years leading up to the bankruptcy filing; and
• severely restricting bankruptcy courts’ ability to slow or limit lawsuits against a nondebtor, even if that litigation impairs a corporate debtor’s ability to reorganize.

Rep. Jerry Nadler (D-N.Y.) introduced H.R. 9223 with the same title in the House of Representatives on July 30, with co-sponsors that included Reps. Steve Cohen (D-Tenn.), Mark DeSaulnier (D-Calif.), Eleanor Holmes Norton (D-D.C.), Henry “Hank” Johnson (D-Ga.), Katie Porter (D-Calif.) and Rashida Tlaib (D-Mich.). In the previous 117th Congress, Sen. Warren, Rep. Nadler and other Democratic lawmakers introduced similar legislation in the wake of such high-profile cases as Purdue Pharma LP, Boy Scouts of America and USA Gymnastics.

Although time has run out on the 118th Congress, the prospects are favorable for the bill to be reintroduced in the 119th, but consideration would be challenging, as there currently are no Republican co-sponsors.

Bipartisan Bill Targets Bankruptcy Protections for Workers and Retirees

Sens. Dick Durbin (D-Ill.) and Josh Hawley (R-Mo.) on Dec. 5 introduced S. 5443, the “Protecting Employees and Retirees in Business Bankruptcies Act.”2 The bipartisan legislation aims to “correct abuses of the bankruptcy process that deprive employees and retirees of their hard-earned wages, benefits, and retirement savings.”

According to the bill’s sponsors, laws have not adapted to give employees and retirees a fair shake in the bankruptcy process. The Protecting Employees and Retirees in Business Bankruptcies Act would modify chapter 11 procedures by expanding available claims for employees and retirees and granting them improved priority, while placing restrictions on excessive compensation for executives.

“Employees should not have to panic that they will lose their hard-earned wages, benefits, and retirement savings when their company files for bankruptcy,” Sen. Durbin said in a statement. “The Protecting Employees and Retirees in Business Bankruptcies Act would ensure that all employees, not just those at the top, receive the benefits they were promised.”

“When companies go bankrupt, workers — and not predatory creditors — should be taken care of first,” according to Sen. Hawley. “This legislation would prioritize workers’ claims to wages, benefits, and retirement funds in bankruptcy proceedings, protecting compensation earned through years of hard work.”

The bill proposes doubling the maximum value of employee wage claims that would receive priority payment to $20,000 from $10,000 per employee. It also provides for an additional priority claim for each employee benefit plan of up to $20,000 per worker. These claims would no longer have to be earned within 180 days of bankruptcy filing to get priority. It also allows additional priority claims for workers’ severance pay.

If passed, the legislation would allow retirees to claim any shortfalls related to the termination of their pension plans. It also has provisions that would make it more challenging for a bankrupt company to reject collective bargaining agreements with unions. The bill also stipulates that in a chapter 11 sale, the court should give “substantial weight” to any offers that would preserve employees’ jobs and assume or match the retirement and health benefits they had been receiving.

While time has run out on this bill for consideration in the 118th Congress, prospects are favorable for the bill to be reintroduced in the 119th and be considered, as it has bipartisan support.

Supreme Court Hears Argument on Allowing a Trustee to Sue the IRS for Fraudulent Transfers

ABI Editor-at-Large Bill Rochelle’s take of the oral argument before the U.S. Supreme Court in United States v. Miller had him wagering that the justices will hold that § 106(a) does not permit a bankruptcy trustee to sue the federal government for receipt of a fraudulent transfer under § 544(b)(1), when no actual creditor could sue the government outside of bankruptcy.

“The comments and questions from the justices are not an infallible indication of how the Court will rule, but a majority (if not all) of the justices seem to be aligned with the idea that the ‘actual creditor’ requirement in Section 544(b)(1) brings sovereign immunity back into play as a defense for the Internal Revenue Service, even though Section 106(a) waives sovereign immunity,” Rochelle wrote in his column on Dec. 5.3

In mid-2023, the Tenth Circuit in U.S. v. Miller4 sided with the Ninth and Fourth Circuits in holding that the waiver of immunity in § 106(a) allows claims against the government under state law for recovery of fraudulent transfers.5 There is a circuit split because the Seventh Circuit had held to the contrary in 2014 in In re Equip. Acquisition Res. Inc.,6 reasoning that § 106(a) did not modify the actual creditor requirement in § 544(b).

Based on the circuit split, the government filed a petition for certiorari in Miller. The Supreme Court granted the petition on June 24, near the end of the last term. Oral argument took place on Dec. 2.