A
bill introduced by Representative Baldwin (D-Wisconsin) on September 9, 2002,
would make the Chapter 12 “family farmer” provisions a permanent
form of bankruptcy relief and would extend the chapter’s coverage to include
“family fishermen.”
The provisions of this stand-alone bill are almost identical to the
Chapter 12 provisions of the pending Bankruptcy Abuse Prevention and Consumer
Protection Act of 2002, and the bill could provide a vehicle to enact the
Chapter 12 amendments if the comprehensive reform bill remains deadlocked. Without new legislation, Chapter 12 is
scheduled to sunset on December 31, 2002.

Like
the provisions of the Bankruptcy Abuse Prevention bill, this bill would expand
eligibility for Chapter 12 in several ways. The family farmer eligibility debt limit would increase from
$1,500,000 to $3,237,000, subject to future automatic cost of living increases
under section 104 of the Code. In
addition, the bill would reduce the percentage of liabilities that must arise
from the farming operation from 80 percent to 50 percent and would relax the
farm income requirement so that a debtor would be eligible for Chapter 12 if
more than 50 percent of the debtor’s gross income was derived from a
farming operation in either the taxable year before filing, or both the second
and third tax years prior to filing.

The new “family
fisherman” definition would apply to a debtor engaged in a commercial
fishing operation and includes requirements analogous to those in the current
family farmer definition.
Interestingly, the new family fisherman definition does not include the
relaxed standards that the bill would add to the family farmer definition. Thus, for instance, the debt
eligibility limit for family fisherman would be $1,500,000, and would not be
subject to automatic cost of living adjustments.

The
bill would make two other significant changes to Chapter 12. First, if the debtor’s disposable
income exceeded the projected disposable income upon which the plan was based,
the modification of the plan would be prospective only. The debtor could not be required to
make monthly payments that exceed current disposable income in order to make up
for the excess disposable income earned prior to plan modification. In addition, the debtor could not be
forced to increase plan payments in the final year of the plan if the
modification would leave the debtor with insufficient funds to carry on the
farming operation after the plan is completed.

The
second change would allow the debtor to treat governmental claims that arise
from the disposition of farm assets as unsecured non-priority claims. This provision would address the
problem created when the farmer recognizes a taxable gain when a
fully-encumbered, appreciated asset is abandoned, sold or foreclosed upon. The priority status of the resulting
tax liability could doom the reorganization effort if the debtor cannot pay the
liability in full within the plan period.
The amendment also appears to make such tax debts dischargeable because
the section 523(a)(1) “tax” exception to discharge refers to the
tax claims that have priority under section 507(a)(8). The provision is not limited to tax
claims and may have broader application.
However, this treatment of the claim occurs only if the debtor actually
receives a discharge.

The
amendments proposed by this bill would become effective immediately, but would
not apply to cases filed before the bill becomes effective.

Prof. G. Ray Warner, ABI Resident Scholar, Professor of Law
at the University of Missouri-Kansas City.

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Monday, September 9, 2002 - 12:00

H.R. 2820 ANALYSIS BY ABI RESIDENT SCHOLAR

Submitted by webadmin on Tue, 2002-07-30 00:00

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.

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Tuesday, July 30, 2002 - 12:00

H.R. 5525 ANALYSIS BY ABI RESIDENT SCHOLAR

Submitted by webadmin on Tue, 2002-01-01 00:00

H.R. 5525 Would Increase Wage Priority And Recover Excessive Insider Compensation (Written by Prof. G. Ray Warner)

H.R. 5525 Would Increase Wage Priority And Recover
Excessive Insider Compensation

By: Prof. G. Ray Warner

Robert M. Zinman American Bankruptcy Institute Scholar in Residence

On October 2, 2002, Representative Gekas
(R-PA) introduced H.R. 5525, the “Corporate Abuse Prevention and Employee
Protection Act of 2002.”
Like several pending bills introduced in both houses of Congress by both
Republicans and Democrats, the Gekas bill would increase the wage priority,
enhance the trustee’s powers to recover excessive pre-petition
compensation paid to insiders, and protect retiree benefits. Unlike some of the competing bills,
this bill would not apply to pending cases. The bill was referred to the Committee on the Judiciary.

Increased Wage Priority

The bill would increase the section 507(a)(3) wage priority
and the section 507(a)(4) employee benefits priority from $4,650 to $10,000,
and would extend the time period during which wages could qualify for priority
from 90 days to 180 days. This
amendment would apply to cases filed on or after the date of enactment. Since few employees will continue
working without pay for an extended period, the principal effect of extending
the time period to 180 days is that a greater portion of unpaid vacation,
severance, and sick leave pay will be entitled to priority. In contrast, the recently introduced
substitute for the Durbin-Delahunt bill, S. 2798, would increase the priority
to $13,500 and would include all severance pay, not just the portion that
accrued during the 180-day period.

Retiree Health Benefits

Current section 1114 prevents a Chapter 11 debtor from
unilaterally modifying certain retiree benefits, such as retiree health
insurance, during the case unless an authorized retiree representative is
appointed and agrees to the modification, or the court authorizes the
modification as necessary to the reorganization. The bill would amend section
1114 to prevent debtors from evading its requirements by terminating retiree
benefit plans on the eve of bankruptcy. The bill would require retroactive
reinstatement of retiree benefits that were modified within 180 days before
filing if the debtor was insolvent on the date of the modification, unless the
court finds that the balance of the equities clearly favors the modification. This amendment would apply to cases
filed on or after the date of enactment.

Enhanced Avoidance of Fraudulent Transfers and Excessive Compensation

The bill would also enhance the recovery of avoidable transfers and
excessive pre-petition insider compensation. Two changes would make it easier
for the estate to avoid pre-petition transfers. First, the one-year reach-back
period for fraudulent transfers under section 548 would be extended to two
years. Thus, the estate could avoid both actual fraudulent transfers and
constructive fraudulent transfers (transfers for less than reasonably
equivalent value when the debtor is insolvent) if they occurred within two
years before bankruptcy. This change would have relatively little impact in
most cases since most such transfers already could be avoided under section
544(b) using very similar state fraudulent transfer laws. The provision would
enhance the estate’s recovery in those cases where the state law was less
expansive than section 548.

The bill would also expand section 548 to allow the recovery
of excessive insider compensation during the two years prior to
bankruptcy. In order to be
avoidable, the transfer or obligation would have to satisfy four conditions:
(1) the transfer or obligation must arise under an “employment
contract;” (2) it must be to or for the benefit of an insider, including
officers and directors of the debtor; (3) the debtor must have received less
than a reasonably equivalent value in exchange for the transfer or obligation;
and (4) the transfer or obligation must be outside of the ordinary course of
business. Since the current
provisions of section 548 could reach many of the transfers and obligations
addressed by the amendment, the change will have limited effect. The principal differences between the
amendment and current law are that the amendment would extend the reach-back
period from one year to two years and would allow recovery in cases where the
debtor was not insolvent but the transfer or obligation was outside the
ordinary course of business.
However, since the section 548(a)(1)(B)(ii) constructive fraud provision
already includes prospective insolvency (unreasonably small capital and
expectation of incurring debts beyond ability to repay) as an alternative to
insolvency, there will likely be few cases where the estate will need to rely
upon the new “non-ordinary course” alternative to insolvency.

The amendment expanding the section 548 reach-back period to
two years has a delayed effective date and will apply to cases filed one year
or more after the date of enactment. The remaining changes to section 548 apply to cases
filed on or after the date of enactment.

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