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Reprinted from the June 2006 ABI Journal June 1, 2006

Web posted and Copyright © June 1, 2006, American Bankruptcy Institute.

Is the FAIR Act Fair to Companies Trying to Reorganize?

Ann vom Eigen
Deputy Executive Director
and General Counsel

avomeigen@abiworld.org

en. Evan Bayh (D-Ind.) and Rep. John Conyers (D-Mich.), ranking member of the House Judiciary Committee, introduced legislation this spring to "limit executive compensation agreements and require corporations to provide a more accurate picture of their holdings." These identical bills, S. 2556 and H.R. 5113, entitled the "Fairness and Accountability in Reorganizations Act of 2006" (FAIR Act), have the stated goal of ensuring that workers are treated more fairly during bankruptcy reorganizations. However, it is questionable whether they would, if enacted in their present form, have that practical effect.

The FAIR Act has two primary provisions. It extends the requirements imposed on retention payments by the Bankruptcy Abuse Prevention and Consumer Protection Act to include a requirement of an evidentiary finding that an executive has another job offer, and that their services are essential to the survival of the business for eligibility for bonuses and other incentives. The legislation also limits the amount of these payments to 10 times the amount paid to non-management employees during the calendar year, or no more then 25 percent of any similar executive benefit in the preceding calendar year. With respect to foreign affiliates, the bill requires the bankruptcy court to take into account "the ongoing impact on the debtor of the debtor's relationship with all subsidiaries and affiliates, regardless of whether any such subsidiary or affiliate is a debtor entity" in determining whether or not a company can modify its existing collective bargaining agreement and retiree health benefits."

Both provisions place new burdens on the bankruptcy judge. With respect to bonus compensation, the bankruptcy judge would have to make evidentiary findings that the executive has another offer and that his services are essential to the business, and determine that the payment is "reasonable." These provisions may appear "fair" to those who believe that executive compensation in general is no longer related to worker's pay, and that executives should be subject to the same sacrifices that workers are forced to make in the reorganization process. However, as Robin Jeweler of the Congressional Research Service has pointed out, opponents may contend that "lengthy compensation proceedings will substantially increase the costs of bankruptcy administration...and may diminish managerial zeal for reducing non-management employee benefits in the course of reorganization."

The practical effects of the proposed legislation on the bankruptcy process are also questionable. According to ABI's Immediate Past-President John Penn of Haynes and Boone LLP (Fort Worth, Texas), "FAIR seems to be 'feel good' legislation in that it might make someone feel good to propose it, but it probably would not have a material effect on KERPs." (See analysis in the Affairs of State column, above.)

The requirement in the proposed legislation to take foreign affiliates into account before modifying collective bargaining agreements and retiree health benefits feeds workers' concerns that foreign entities compete for American jobs. As a practical matter, the language currently in the bill appears unworkable for a number of legal and functional reasons relating to corporate law and the realities of the insolvency situation. Thus, the "fairness" of this aspect of the proposal cannot even be measured at this point in the legislative process.

Sen. Bayh and Rep. Conyers are now focused on reaching out to colleagues to build support for their proposal. The Senate bill has seven co-sponsors, all Democrats, while the House bill has 26 co-sponsors, all Democrats. Given the short timeframe remaining in the session and the partisan orientation of this legislation, the probability of enactment in this Congress now appears slim.



 

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