Polaroid and Corporate Bankruptcy

Good morning.  Thank you for being here.  I'm very pleased to join with Senator Durbin and Senators Leahy and Kennedy in introducing the Employee Abuse Prevention Act of 2002—a bill we regard as an important next step in putting a stop to the pattern of corporate abuses that have had such a devastating impact on working families, retirees, and the U.S. economy.

On Tuesday, the Financial Times published an analysis of the profits amassed by top officers and directors of the 25 largest companies to declare bankruptcy during the past 18 months.  According to the report, "in just three years, they grossed about $3.3 billion before their companies went bust, having wiped out hundreds of billions of dollars of shareholder value and nearly 100,000 jobs."

And so, as Global Crossing was losing $9.2 billion and eliminating over 5,000 jobs, its chairman, Gary Winnick, grossed $512 million.  While Enron lost $18.8 billion and eliminated 5,500 jobs, its CEO, Kenneth Lay, and the chairman of its energy services subsidiary, Lou Pai, made gross profits of $247 million and $270 million, respectively.

The sources of these windfalls included such now-familiar devices as retention bonuses, severance payments, forgiven loans, and dividends on holdings of company stock.

In my own corner of the world, Polaroid executives cancelled their retirees' health and life insurance coverage and terminated workers on long-term disability, all while awarding themselves more than $5 million in various bonuses and "incentive" payments prior to the bankruptcy filing and another $6 million in retention bonuses afterwards.  Officers and directors received severance packages; employee severance was terminated.  Officers and directors were able to redeem their company stock while employees, forced to put 8 percent of their salaries into the stock option plan, were prohibited from withdrawing the funds and watched their holdings evaporate.  No sooner was the sale of the company completed last night than the new CEO terminated the retiree pension plan.

And what was Congress doing while all this was going on?  Well, we did pass a significant bill to reform corporate accounting practices, which will undoubtedly help curb some of these abuses.  And Senator Sarbanes and the other authors of that legislation deserve the thanks of the American people.

But those reforms were only a first step.  That bill will do nothing for the workers and retirees who have been left holding the bag for past abuses.  And it will do little to prevent the bankruptcy system from again being abused by corporate insiders at the expense of creditors.

Last week, before adjourning for the summer, the House was poised to give final approval to something called the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2001."  You might suppose that a bill with a title like that would do something to address these flagrant corporate abuses.  But you'd be wrong.

In fact, that bill has nothing to do with corporate bankruptcies.  It was written by the credit card industry to make it tougher for ordinary Americans of modest means to declare bankruptcy and regain their financial independence.  It penalizes the very working families that have been victimized by corporate misconduct, while expressly preserving loopholes and exemptions that allow corporate insiders to shelter their ill-gotten gains when they declare bankruptcy.

As the New York Times commented, "It was probably expecting too much to think that Congress's stand-up attitude to big business would last until the weekend."

For five years corporate lobbyists have been spending tens of millions of dollars to get Congress to pass that unfair and one-sided bankruptcy bill.  For five years we have listened to wildly exaggerated claims about irresponsible behavior by individuals "gaming the bankruptcy system."  For five years we have heard pious rhetoric about "accountability" and "personal responsibility" from the very people who send out five billion unsolicited credit card offers every year, hoping to tempt college students and people already overwhelmed with debt to take on greater and greater amounts of easy credit.

And for five years Congress has done nothing at all to address the egregious abuses by corporate insiders that have brought such misery to average Americans who are barely making ends meet.

What happens to people like that, when they lose their livelihood, their savings, and their health care coverage?  Lots of them wind up unable to pay their debts and forced into bankruptcy.  So in fact, we have corporate bankruptcies causing personal bankruptcies.  And the only response from Congress has been to push an industry-sponsored bill that would make it harder for these people to get a fresh start.

So today Senator Durbin and I are offering our colleagues another approach.  By introducing real bankruptcy reform, we hope to hold corporate officeholders to the same standard of responsibility and accountability they have been preaching to people of more modest means.

The Employee Abuse Prevention Act (S. 2798 / H.R. 5221) consists of two titles.  Title I empowers bankruptcy judges and trustees to scrutinize and set aside transactions that strip companies of their assets and plunge them into bankruptcy.  By recapturing those assets for the bankruptcy estate, the courts can then apportion them fairly among employees, retirees, and other creditors with a valid claim.

The bill does this in a number of ways.  First, it enhances the ability of the courts to invalidate "fraudulent transfers" by corporate insiders, lengthening the "reachback" period under current law from one year preceding the bankruptcy filing to four years.  Second, it empowers the courts to review and set aside "excess benefit transfers" made to top management and other insiders while the company was insolvent,  or as a result of which the company became insolvent.  Third, it affirms the authority of the courts to look through the formalities of sales, leases, or other transactions that move assets "off book," and to invalidate transfers that are really disguised loans designed to drain assets from the business.  Fourth, it restores to bankruptcy trustees the full authority to challenge and set aside pre-bankruptcy transactions that take assets out of the company.  And fifth, it enables courts to recover excessive retention bonuses, severance packages and similar payments to corporate insiders and so-called "turnaround consultants."

Title II of the bill provides a number of remedies to help ensure that once the plundered assets have been recaptured for the estate, employees and retirees have the opportunity to assert their claims to a fair share of the proceeds.

Again, the bill does this in a number of different way.  First, it creates a new claim in bankruptcy for company stock held in employee pension plans for the benefit of employees who were not free to choose other investment options.  Second, it increases from $4,650 to $13,500 the cap on priority claims that are payable out of the estate for unpaid wages, salaries, or commissions and contributions to employee benefit plans.  Third, it subordinates the claims of secured creditors to those of beneficiaries of employee pension plans if the company has violated its fiduciary obligations under the Employee Retirement Income Security Act (ERISA).  Fourth, it requires the court to order reinstatement of benefits modified within 6 months of a bankruptcy filing if it finds that the modifications were made in contemplation of bankruptcy and were not essential to the continuation of the business.  And finally, it enhances the opportunity for employees, retirees, and small trade creditors to be heard in bankruptcy proceedings by restricting the ability of companies to file in distant jurisdictions with few genuine links to the affected communities.

Upon enactment of the Act, most of these provisions will be immediately applicable to pending bankruptcy proceedings.  This is very important, since without these changes to the bankruptcy laws, the courts can do little to protect affected employees, retirees, and their families.  The judge in the recent Polaroid proceedings said as much in his ruling.  He said, and I quote,

 it's up to Congress to do something to protect those individuals who put their life into a company and retire expecting to receive retiree benefits, medical benefits, and have them terminated.  This is not the only large case where that has happened.  I see it very frequently and I have commented from the bench on several occasions that it's unacceptable.  Unfortunately, there's nothing I can do about it.

That is the challenge to which our bill responds.  Taken as a whole, it will help undo the damage done to employees, retirees, and other creditors in pending bankruptcy cases.  And just as importantly, it will encouraging managers and lenders who underwrite their activities to ensure that meaningful safeguards are in place to prevent similar abuses in the future.

Additional Information: Bill Description Section-by-Section Summary Letters of support: Consumer Federation of America  Consumers Union

View details of Rep. Delahunt's efforts on behalf of Polaroid workers & retirees.