Corporate Financial Scandals Inspire New Proposal in Congress
he "Employee Abuse Prevention Act of 2002" is a controversial package of reforms
of the Code designed to "protect employees and retirees from corporate practices that
adversely impact earnings and retirement savings when businesses file for bankruptcy." The
bill (S. 2798/H.R. 5221) was introduced on Aug. 1 in the Senate by
Sen. Dick Durbin (D-Ill.) and in the House by Rep. William Delahunt
(D-Mass.). The bill's authors aim to empower courts and trustees to challenge certain
transactions that strip assets from the company and to recapture them for the benefit
of the company and creditors.
"From Enron to Polaroid, the recent wave of bankruptcies have left tens of thousands
of employees without jobs, retirees without pensions or health insurancewhile corporate
assets are diverted to executive bonuses and off-book transactions," Delahunt said. The
bill would make more than a dozen changes in the Code. Among other provisions, it
would enhance the ability of the courts to invalidate "fraudulent transfers" by corporate
insiders, lengthen the "reachback" period under current law from one to four years,
empower the courts to review and set aside "excess benefit transfers" made to top
management while the company was insolvent, affirm the authority of the court to look
through the formalities of sales, leases and other transactions that move assets
"off-book" and to invalidate them where appropriate, restore to the trustee the right
to challenge and set aside transactions that take assets out of the company, and enable
courts to recover "excessive" retention bonuses, severance packages and other payments to
top executives, including turnaround consultants.
Other changes include an increase in the priority wage claim from $4,650 to
$13,500, subordination of secured claims to those of beneficiaries of employee
pension plans where there has been a violation of ERISA, a reinstatement of employee
benefits modified within six months of the bankruptcy where it is found that the changes
were made in contemplation of bankruptcy, and a restriction on the debtor's choice of
venue to those with a genuine link to the affected community. Significantly, these
provisions would be retroactive and would thus apply to pending cases.
Lenders, particularly secured creditors, will oppose the new bill, as will many of
those who now handle turnaround cases. The change in the venue rules will be very
controversial with defenders of the current rules, which permit most large cases to be
filed in either Delaware or New York, regardless of contacts with other locations.
No hearings have been scheduled yet on the bill. However, the bill is co-sponsored
in the Senate by the Chairman of the Judiciary Committee, Patrick Leahy (D-Vt.).
One plan may be to try to attach some or all of the provisions to the pending bills
on retirement and pension reform. Congress is scheduled to adjourn in October of this
A complete analysis by ABI Resident Scholar G. Ray Warner of the
Durbin-Delahunt legislation can be found on the ABI World home page