On September 15, 2010, the House Subcommittee on Commercial and Administrative Law voted 8-4 to report H.R. 4677 to the full House Judiciary Committee. Called the “Protecting Employees and Retirees in Business Bankruptcies Act of 2010,” H.R. 4677 contains several substantial changes to federal law aimed at preserving workers’ wages and benefits during a Chapter 11 bankruptcy proceeding. The subcommittee members voted along party lines, indicating that the bill will have a difficult fight in the full committee – its fate may ultimately depend on the result of the recent election.

Rep. John Conyers (D-Mich.) and Sen. Dick Durbin (D-Ill.) introduced the bill and its Senate companion, S. 3033 on February 24, 2010. The 33 page bill contains several provisions that give preference to employees and restrict increases in executive compensation following a bankruptcy. The sponsors of the bill say the changes will “level the playing field” between employees and management when businesses file for Chapter 11 protection. Its critics, including Rep. Trent Franks (R-Ariz.) say the changes would force businesses that could otherwise be reorganized into liquidation.

Proposed changes in the bill include:

  • Giving priority to employee wage and benefit claims in bankruptcy, and doubling the cap on wage claims to $20,000.
  • Extending priority to claims for severance pay owed to employees other than executives and consultants, as well as claims under the Worker Adjustment and Retraining Notification (“WARN”) Act.
  • Allowing claims for stock value losses in defined contribution plans if the loss was caused by fraud or a breach of a duty owed to the employee.
  • An expanded set of requirements that a debtor-in-possession or bankruptcy trustee must meet before rejecting a collective bargaining agreement. Under these changes, any proposed reduction in employee compensation must be “not more than the minimum savings essential to permit the debtor to exit bankruptcy” and must be part of a plan that includes savings in management personnel costs. The court will allow rejection of the collective bargaining agreement only if the trustee’s proposal will not “cause a material diminution of the purchasing power of the employees covered by the agreement,” among other requirements. Implementation of an executive or insider bonus plan during the bankruptcy or the 180 day lead up to filing is presumed to be overly burdensome to the employees of the company, and will prevent rejection of the collective bargaining agreement. Similar provisions are included for trustee-proposed modification of retired employees’ insurance benefits. Labor organizations enforcing this clause will be entitled to attorney’s fees.
  • Significant limitations on executive bonuses before, during, and after bankruptcy proceedings. The bill also prohibits creation of a deferred compensation plan for executives and insiders if a defined benefit plan for employees has been terminated during the bankruptcy or the 180 day lead up to filing.
  • A provision allowing the trustee to avoid preferential transfers made to insiders in the year before the business files for bankruptcy.
  • Arbitration proceedings under a collective bargaining agreement that were started prior to the bankruptcy filing are exempted from the automatic stay. Actions for the enforcement of an award or settlement from an arbitration proceeding are also allowed.