[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
 PROTECTING EMPLOYEES AND RETIREES IN BUSINESS BANKRUPTCIES ACT OF 2007 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 3652

                               __________

                              JUNE 5, 2008

                               __________

                           Serial No. 110-181

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel
























                            C O N T E N T S

                              ----------                              

                              JUNE 5, 2008

                                                                   Page

                            TEXT OF THE BILL

H.R. 3652, the ``Protecting Employees and Retirees in Business 
  Bankruptcies Act of 2007''.....................................     2

                           OPENING STATEMENTS

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................    10
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Chairman, Committee on the 
  Judiciary, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................    17

                               WITNESSES

Babette Ceccotti, Esquire, Cohen, Weiss and Simon LLP, New York, 
  NY, on behalf of the AFL-CIO
  Oral Testimony.................................................    20
  Prepared Statement.............................................    22
Marcus C. Migliore, Esquire, Air Line Pilots Association, 
  International, Washington, DC
  Oral Testimony.................................................   105
  Prepared Statement.............................................   107
Michael L. Bernstein, Esquire, Arnold & Porter LLP, Washington, 
  DC
  Oral Testimony.................................................   113
  Prepared Statement.............................................   115
Karen Friedman, Esquire, Pension Rights Center, Washington, DC
  Oral Testimony.................................................   121
  Prepared Statement.............................................   123

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and Ranking 
  Member, Subcommittee on Commercial and Administrative Law......    11
Prepared Statement of the Honorable Steve Cohen, a Representative 
  in Congress from the State of Tennessee, and Member, 
  Subcommittee on Commercial and Administrative Law..............    18
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................   140
Prepared Statement of the Honorable Betty Sutton, a 
  Representative in Congress from the State of Ohio, and Member, 
  Committee on the Judiciary.....................................   141


 PROTECTING EMPLOYEES AND RETIREES IN BUSINESS BANKRUPTCIES ACT OF 2007

                              ----------                              


                         THURSDAY, JUNE 5, 2008

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 9:35 a.m., in 
Room 2237, Rayburn House Office Building, the Honorable Linda 
T. Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Conyers, Lofgren, Watt 
and Cannon.
    Staff Present: Susan Jensen, Majority Counsel; Adam 
Russell, Majority Professional Staff Member; and Zachary 
Somers, Minority Counsel.
    Ms. Sanchez. This hearing of the Committee on the Judiciary 
Subcommittee on Commercial and Administrative Law will now come 
to order.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing at any time.
    I will now recognize myself for a short statement.
    The headlines this past week have been particularly 
disturbing regarding our Nation's auto manufacturing industry. 
GM announced that it was closing four truck and SUV plants in 
North America. Chrysler reported a 25 percent drop in sales for 
last month as compared to May 2007. Likewise, Ford reported a 
16 percent drop in sales for last month; and, in May, its F-150 
pickup truck lost its status as best-selling vehicle in the 
United States for the first time since 1991.
    The airline industry, with fuel costs almost tripling since 
2000, also is cutting costs in trying to raise revenue. In 
addition to increasing fares, some airlines are now charging 
for checked baggage and seat selection, and others are 
eliminating basic amenities.
    Yesterday, the Wall Street Journal reported that United 
Airlines was planning to ground its less fuel-efficient planes 
and possibly furlough some of its employees. And while many of 
the principal airlines are well into their bankruptcy 
reorganization process, there has been another wave of 
bankruptcy filings by airlines in recent months, including 
Aloha Airlines, ATA Airlines, Skybus Airlines, Frontier 
Airlines and Eos Airlines.
    As the economic forecast of these companies becomes bleaker 
and bleaker, we are forced to consider the need to preserve 
jobs, employment benefits and protections for retirees against 
the backdrop of how these issues would be treated under Chapter 
11 of the Bankruptcy Code. How do we protect the jobs and 
livelihood of American workers while preserving the economic 
viability of U.S. companies?
    As many of you know, last year our Subcommittee conducted 
two oversight hearings on how American workers and retirees are 
faring in Chapter 11 bankruptcy cases. Our first hearing 
revealed a series of cases where chief executive officers of 
businesses in Chapter 11 receive outrageously large salaries 
and bonuses while they simultaneously slash the wages, benefits 
and even jobs of workers who are the backbones of these 
businesses. It is clear that under these practices Chapter 11 
is becoming a place where the rich are getting richer while the 
poor are getting poorer.
    Then, in September, we heard how Chapter 11 is being used 
by some businesses to bust unions and deprive retirees of hard-
won wages and benefits, including pension and health insurance 
that long-time employees had already factored into their 
retirement plans. Sam Giordano, Executive Director of the 
nonpartisan American Bankruptcy Institute observed in case 
after case, bankruptcy courts have applied congressional intent 
favoring long-term rehabilitation to sweep aside wage and 
benefit concessions won at the bargaining table.
    Chapter 11 of the Bankruptcy Code was originally enacted to 
give all participants an equal say in how a business, 
struggling to overcome financial difficulties, should 
reorganize. Unfortunately, this laudable goal does not reflect 
reality, especially for American workers.
    I commend House Judiciary Committee Chairman John Conyers 
for his leadership in attempting to address these problems by 
his introduction of H.R. 3652, the ``Protecting Employees and 
Retirees in Business Bankruptcies Act of 2007.''
    [The text of the bill, H.R. 3652, follows:]

HR 3652 IH  ___________________________________________________
                               

 deg.

                                                                      I
110th CONGRESS
    1st Session

                                H. R. 3652

To amend title 11, United States Code, to improve protections for 
    employees and retirees in business bankruptcies.
                               __________
                    IN THE HOUSE OF REPRESENTATIVES
                           September 25, 2007
Mr. Conyers (for himself, Ms. Linda T. Sanchez of California, Mr. 
    Nadler, Mr. Cohen, Ms. Sutton, Ms. Zoe Lofgren of California, and 
    Mr. Johnson of Georgia) introduced the following bill; which was 
    referred to the Committee on the Judiciary
                               __________

                                 A BILL

To amend title 11, United States Code, to improve protections for 
    employees and retirees in business bankruptcies.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Protecting Employees and Retirees in 
Business Bankruptcies Act of 2007''.

SEC. 2. FINDINGS.

    The Congress finds the following:
            (1) Recent corporate restructurings have exacted a 
        devastating toll on workers through deep cuts in wages and 
        benefits, termination of defined benefit pension plans, and the 
        transfer of productive assets to lower wage economies outside 
        the United States. Retirees have suffered deep cutbacks in 
        benefits when companies in bankruptcy renege on their retiree 
        health obligations and terminate pension plans.
            (2) Congress enacted chapter 11 of title 11, United States 
        Code, to protect jobs and enhance enterprise value for all 
        stakeholders and not to be used as a strategic weapon to 
        eliminate good paying jobs, strip employees and their families 
        of a lifetime's worth of earned benefits and hinder their 
        ability to participate in a prosperous and sustainable economy. 
        Specific laws designed to treat workers and retirees fairly and 
        keep companies operating are instead causing the burdens of 
        bankruptcy to fall disproportionately and overwhelmingly on 
        employees and retirees, those least able to absorb the losses.
            (3) At the same time that working families and retirees are 
        forced to make substantial economic sacrifices, executive pay 
        enhancements continue to flourish in business bankruptcies, 
        despite recent congressional enactments designed to curb lavish 
        pay packages for those in charge of failing enterprises. 
        Bankruptcy should not be a haven for the excesses of executive 
        pay.
            (4) Employees and retirees, unlike other creditors, have no 
        way to diversify the risk of their employer's bankruptcy.
            (5) Comprehensive reform is essential in order to remedy 
        these fundamental inequities in the bankruptcy process and to 
        recognize the unique firm-specific investment by employees and 
        retirees in their employers' business through their labor.

SEC. 3. INCREASED WAGE PRIORITY.

    Section 507(a) of title 11, United States Code, is amended--
            (1) in paragraph (4)--
                    (A) by striking ``$10,000'' and inserting 
                ``$20,000'';
                    (B) by striking ``within 180 days''; and
                    (C) by striking ``or the date of the cessation of 
                the debtor's business, whichever occurs first,'';
            (2) in paragraph (5)(A), by striking--
                    (A) ``within 180 days''; and
                    (B) ``or the date of the cessation of the debtor's 
                business, whichever occurs first''; and
            (3) in paragraph (5), by striking subparagraph (B) and 
        inserting the following:
                    ``(B) for each such plan, to the extent of the 
                number of employees covered by each such plan, 
                multiplied by $20,000.''.

SEC. 4. PRIORITY FOR STOCK VALUE LOSSES IN DEFINED CONTRIBUTION PLANS.

    (a) Section 101(5) of title 11, United States Code, is amended--
            (1) in subparagraph (A), by striking ``or'' at the end;
            (2) in subparagraph (B), by inserting ``or'' after the 
        semicolon; and
            (3) by adding at the end the following:
                    ``(C) right or interest in equity securities of the 
                debtor, or an affiliate of the debtor, held in a 
                defined contribution plan (within the meaning of 
                section 3(34) of the Employee Retirement Income 
                Security Act of 1974 (29 U.S.C. 1002(34)) for the 
                benefit of an individual who is not an insider or 1 of 
                the 10 most highly compensated employees of the debtor 
                (if 1 or more are not insiders), if such securities 
                were attributable to--
                            ``(i) employer contributions by the debtor 
                        or an affiliate of the debtor, other than 
                        elective deferrals (within the meaning of 
                        section 402(g) of the Internal Revenue Code of 
                        1986), and any earnings thereon; or
                            ``(ii) elective deferrals and any earnings 
                        thereon.''.
    (b) Section 507(a) of title 11, United States Code, is amended--
            (1) by redesignating paragraphs (6) through (10) as 
        paragraphs (7) through (11), respectively;
            (2) by inserting after paragraph (5) the following:
            ``(6) Sixth, loss of the value of equity securities of the 
        debtor or affiliate of the debtor that are held in a defined 
        contribution plan (within the meaning of section 3(34) of the 
        Employee Retirement Income Security Act of 1974 (29 U.S.C. 
        1002(34)), without regard to when services resulting in the 
        contribution of stock to the plan were rendered, measured by 
        the market value of the stock at the time of contribution to, 
        or purchase by, the plan and the value as of the commencement 
        of the case where an employer or plan sponsor that has 
        commenced a case under this title has committed fraud with 
        respect to such plan or has otherwise breached a duty to the 
        participant that has proximately caused the loss of value.'';
            (3) in paragraph (7), as redesignated, by striking 
        ``Sixth'' and inserting ``Seventh'';
            (4) in paragraph (8), as redesignated, by striking 
        ``Seventh'' and inserting ``Eighth'';
            (5) in paragraph (9), as redesignated, by striking 
        ``Eighth'' and inserting ``Ninth'';
            (6) in paragraph (10), as redesignated, by striking 
        ``Ninth'' and inserting ``Tenth''; and
            (7) in paragraph (11), as redesignated, by striking 
        ``Tenth'' and inserting ``Eleventh''.

SEC. 5. PRIORITY FOR SEVERANCE PAY.

    Section 503(b) of title 11, United States Code, is amended--
            (1) in paragraph (8) by striking ``and'' at the end;
            (2) in paragraph (9) by striking the period and inserting 
        ``; and''; and
            (3) by adding at the end the following:
            ``(10) severance pay owed to employees of the debtor (other 
        than to an insider, other senior management, or a consultant 
        retained to provide services to the debtor), under a plan, 
        program, or policy generally applicable to employees of the 
        debtor, or owed pursuant to a collective bargaining agreement, 
        but not under an individual contract of employment, for 
        termination or layoff on or after the date of the filing of the 
        petition, which pay shall be deemed earned in full upon such 
        layoff or termination of employment.''.

SEC. 6. EXECUTIVE COMPENSATION UPON EXIT FROM BANKRUPTCY.

    Section 1129(a)(5) of title 11, United States Code, is amended--
            (1) in subparagraph (A)(ii), by striking ``and'' at the 
        end; and
            (2) in subparagraph (B), by striking the period at the end 
        and inserting the following: ``; and
                    ``(C) the compensation disclosed pursuant to 
                subparagraph (B) has been approved by, or is subject to 
                the approval of, the court, as reasonable when compared 
                to persons holding comparable positions at comparable 
                companies in the same industry and not disproportionate 
                in light of economic concessions by the debtor's 
                nonmanagement workforce during the case.''.

SEC. 7. LIMITATIONS ON EXECUTIVE COMPENSATION ENHANCEMENTS.

    Section 503(c) of title 11, United States Code, is amended--
            (1) in paragraph (1), by inserting ``or for the payment of 
        performance or incentive compensation, or a bonus of any kind, 
        or other financial returns designed to replace or enhance 
        incentive, stock, or other compensation in effect prior to the 
        date of the commencement of the case,'' after ``remain with the 
        debtor's business,''; and
            (2) by amending paragraph (3) to read as follows:
            ``(3) other transfers or obligations, to or for the benefit 
        of officers, of managers, or of consultants retained to provide 
        services to the debtor, before or after the date of filing of 
        the petition, in the absence of a finding by the court based 
        upon evidence in the record, and without deference to the 
        debtor's request for such payments, that such transfers or 
        obligations are essential to the survival of the debtor's 
        business or (in the case of a liquidation of some or all of the 
        debtor's assets) essential to the orderly liquidation and 
        maximization of value of the assets of the debtor, in either 
        case, because of the essential nature of the services provided, 
        and then only to the extent that the court finds such transfers 
        or obligations are reasonable compared to individuals holding 
        comparable positions at comparable companies in the same 
        industry and not disproportionate in light of economic 
        concessions by the debtor's nonmanagement workforce during the 
        case.''.

SEC. 8. REJECTION OF COLLECTIVE BARGAINING AGREEMENTS.

    Section 1113 of title 11, United States Code, is amended--
            (1) by striking subsections (a) through (c) and inserting 
        the following:
    ``(a) The debtor in possession, or the trustee if one has been 
appointed under this chapter, other than a trustee in a case covered by 
subchapter IV of this chapter and by title I of the Railway Labor Act, 
may reject a collective bargaining agreement only in accordance with 
the provisions of this section.
    ``(b)(1) Where a debtor in possession or trustee (hereinafter in 
this section referred to collectively as a `trustee') seeks rejection 
of a collective bargaining agreement, a motion seeking rejection shall 
not be filed unless the trustee has first met with the authorized 
representative (at reasonable times and for a reasonable period in 
light of the complexity of the case) to confer in good faith in 
attempting to reach mutually acceptable modifications of such 
agreement. Proposals by the trustee to modify the agreement shall be 
limited to modifications to the agreement that--
            ``(A) are designed to achieve a total aggregate financial 
        contribution for the affected labor group for a period not to 
        exceed 2 years after the effective date of the plan;
            ``(B) shall be no more than the minimal savings necessary 
        to permit the debtor to exit bankruptcy, such that confirmation 
        of such plan is not likely to be followed by the liquidation of 
        the debtor or any successor to the debtor; and
            ``(C) shall not overly burden the affected labor group, 
        either in the amount of the savings sought from such group or 
        the nature of the modifications, when compared to other 
        constituent groups expected to maintain ongoing relationships 
        with the debtor, including management personnel.
    ``(2) Proposals by the trustee under paragraph (1) shall be based 
upon the most complete and reliable information available. Information 
that is relevant for the negotiations shall be provided to the 
authorized representative.
    ``(c)(1) If, after a period of negotiations, the debtor and the 
authorized representative have not reached agreement over mutually 
satisfactory modifications and the parties are at an impasse, the 
debtor may file a motion seeking rejection of the collective bargaining 
agreement after notice and a hearing held pursuant to subsection (d). 
The court may grant a motion to reject a collective bargaining 
agreement only if the court finds that--
            ``(A) the debtor has, prior to such hearing, complied with 
        the requirements of subsection (b) and has conferred in good 
        faith with the authorized representative regarding such 
        proposed modifications, and the parties were at an impasse;
            ``(B) the court has considered alternative proposals by the 
        authorized representative and has determined that such 
        proposals do not meet the requirements of subparagraphs (A) and 
        (B) of subsection (b)(1);
            ``(C) further negotiations are not likely to produce a 
        mutually satisfactory agreement; and
            ``(D) the court has considered--
                    ``(i) the effect of the proposed financial relief 
                on the affected labor group;
                    ``(ii) the ability of the debtor to retain an 
                experienced and qualified workforce; and
                    ``(iii) the effect of a strike in the event of 
                rejection of the collective bargaining agreement.
    ``(2) In reaching a decision under this subsection regarding 
whether modifications proposed by the debtor and the total aggregate 
savings meet the requirements of subsection (b), the court shall take 
into account--
            ``(A) 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 domestic or 
        nondomestic, or whether any such subsidiary or affiliate is a 
        debtor entity; and
            ``(B) whether the authorized representative agreed to 
        provide financial relief to the debtor within the 24-month 
        period prior to the date of the commencement of the case, and 
        if so, shall consider the total value of such relief in 
        evaluating the debtor's proposed modifications.
    ``(3) In reaching a decision under this subsection, where a debtor 
has implemented a program of incentive pay, bonuses, or other financial 
returns for insiders or senior management personnel during the 
bankruptcy, or has implemented such a program within 180 days before 
the date of the commencement of the case, the court shall presume that 
the debtor has failed to satisfy the requirements of subsection 
(b)(1)(C).'';
            (2) in subsection (d)--
                    (A) by striking ``(d)'' and all that follows 
                through paragraph (2) and inserting the following:
    ``(d)(1) Upon the filing of a motion for rejection of a collective 
bargaining agreement, the court shall schedule a hearing to be held on 
not less than 21 days notice (unless the debtor and the authorized 
representative agree to a shorter time). Only the debtor and the 
authorized representative may appear and be heard at such hearing.''; 
and
                    (B) by redesignating paragraph (3) as paragraph 
                (2);
            (3) in subsection (f), by adding at the end the following: 
        ``Any payment required to be made under this section before the 
        date on which a plan confirmed under section 1129 is effective 
        has the status of an allowed administrative expense, as 
        provided in section 503.''; and
            (4) by adding at the end the following:
    ``(g) The rejection of a collective bargaining agreement 
constitutes a breach of such contract with the same effect as rejection 
of an executory contract pursuant to section 365(g). No claim for 
rejection damages shall be limited by section 502(b)(7). Economic self-
help by an authorized representative shall be permitted upon a court 
order granting a motion to reject a collective bargaining agreement 
under subsection (c) or court-authorized interim changes under 
subsection (e), and no provision of this title or of any other Federal 
or State law shall be construed to the contrary.
    ``(h) At any time after the date on which an order is entered 
authorizing rejection, or where an agreement providing mutually 
satisfactory modifications has been entered into between the debtor and 
the authorized representative, at any time after such agreement has 
been entered into, the authorized representative may apply to the court 
for an order seeking an increase in the level of wages or benefits, or 
relief from working conditions, based upon changed circumstances. The 
court shall grant the request so long as the increase or other relief 
is consistent with the standard set forth in subsection (b)(1)(B).
    ``(i) Upon request by the authorized representative, and where the 
court finds that the prospects for reaching a mutually satisfactory 
agreement would be aided by granting the request, the court may direct 
that a dispute under subsection (c) be heard and determined by a 
neutral panel of experienced labor arbitrators in lieu of a court 
proceeding under subsection (d). The decision of such panel shall have 
the same effect as a decision by the court. The court's decision 
directing the appointment of a neutral panel is not subject to appeal.
    ``(j) Upon request by the authorized representative, the debtor 
shall provide for the reasonable fees and costs incurred by the 
authorized representative under this section, after notice and a 
hearing.
    ``(k) If a plan to be confirmed under section 1129 provides for the 
liquidation of the debtor, whether by sale or cessation of all or part 
of the business, the trustee and the authorized representative shall 
confer regarding the effects of such liquidation on the affected labor 
group, in accordance with applicable nonbankruptcy law, and shall 
provide for the payment of all accrued obligations not assumed as part 
of a sale transaction, and for such other terms as may be agreed upon, 
in order to ensure an orderly transfer of assets or cessation of the 
business. Any such payments shall have the status of allowed 
administrative expenses under section 503.
    ``(l) A collective bargaining agreement that is assumed shall be 
assumed in accordance with section 365.''.

SEC. 9. PAYMENT OF INSURANCE BENEFITS TO RETIRED EMPLOYEES.

    Section 1114 of title 11, United States Code, is amended--
            (1) in subsection (a), by inserting ``, whether or not the 
        debtor asserts a right to unilaterally modify such payments 
        under such plan, fund, or program'' before the period at the 
        end;
            (2) in subsection (c)(1), by adding at the end the 
        following: ``Where a labor organization elects to serve as the 
        authorized representative, the debtor shall provide for the 
        reasonable fees and costs incurred by the authorized 
        representative under this section after notice and a 
        hearing.'';
            (3) in subsection (f), by striking ``(f)'' and all that 
        follows through paragraph (2) and inserting the following:
    ``(f)(1) Where a trustee seeks modification of retiree benefits, a 
motion seeking modification of such benefits shall not be filed, unless 
the trustee has first met with the authorized representative (at 
reasonable times and for a reasonable period in light of the complexity 
of the case) to confer in good faith in attempting to reach mutually 
satisfactory modifications. Proposals by the trustee to modify retiree 
benefits shall be limited to modifications in retiree benefits that--
            ``(A) are designed to achieve a total aggregate financial 
        contribution for the affected retiree group for a period not to 
        exceed 2 years after the effective date of the plan;
            ``(B) shall be no more than the minimal savings necessary 
        to permit the debtor to exit bankruptcy, such that confirmation 
        of such plan is not likely to be followed by the liquidation of 
        the debtor or any successor to the debtor; and
            ``(C) shall not overly burden the affected retirees, either 
        in the amount of the savings sought or the nature of the 
        modifications, when compared to other constituent groups 
        expected to maintain ongoing relationships with the debtor, 
        including management personnel.
    ``(2) Proposals by the trustee under paragraph (1) shall be based 
upon the most complete and reliable information available. Information 
that is relevant for the negotiations shall be provided to the 
authorized representative.'';
            (4) in subsection (g), by striking ``(g)'' and all that 
        follows through the semicolon at the end of paragraph (3) and 
        inserting the following:
    ``(g) If, after a period of negotiations, the debtor and the 
authorized representative have not reached agreement over mutually 
satisfactory modifications and the parties are at an impasse, the 
debtor may apply to the court for modifications in the payment of 
retiree benefits after notice and a hearing held pursuant to subsection 
(k). The court may grant a motion to modify the payment of retiree 
benefits only if the court finds that--
            ``(1) the debtor has, prior to the hearing, complied with 
        the requirements of subsection (f) and has conferred in good 
        faith with the authorized representative regarding such 
        proposed modifications and the parties were at an impasse;
            ``(2) the court has considered alternative proposals by the 
        authorized representative and has determined that such 
        proposals do not meet the requirements of subparagraphs (A) and 
        (B) of subsection (f)(1);
            ``(3) further negotiations are not likely to produce a 
        mutually satisfactory agreement; and
            ``(4) the court has considered--
                    ``(A) the effect of the proposed modifications on 
                the affected retirees; and
                    ``(B) where the authorized representative is a 
                labor organization, the effect of a strike in the event 
                of modification of retiree health benefits;'';
            (5) in subsection (k)--
                    (A) in paragraph (1)--
                            (i) in the first sentence, by striking 
                        ``fourteen'' and inserting ``21''; and
                            (ii) by striking the second and third 
                        sentences, and inserting the following: ``Only 
                        the debtor and the authorized representative 
                        may appear and be heard at such hearing.'';
                    (B) by striking paragraph (2); and
                    (C) by redesignating paragraph (3) as paragraph 
                (2); and
            (6) by redesignating subsections (l) and (m) as subsections 
        (n) and (o), respectively, and inserting the following:
    ``(l) In determining whether the proposed modifications comply with 
subsection (f)(1)(A), the court shall 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 domestic or nondomestic, or whether any such subsidiary or affiliate 
is a debtor entity.
    ``(m) No plan, fund, program, or contract to provide retiree 
benefits for insiders or senior management shall be assumed by the 
debtor if the debtor has obtained relief under subsection (g) or (h) 
for reductions in retiree benefits or under subsection (c) or (e) of 
section 1113 for reductions in the health benefits of active employees 
of the debtor on or after the commencement of the case or reduced or 
eliminated active or retiree benefits within 180 days prior to the date 
of the commencement of the case.''.

SEC. 10. PROTECTION OF EMPLOYEE BENEFITS IN A SALE OF ASSETS.

    Section 363 of title 11, United States Code, is amended--
            (1) in subsection (b), by adding at the end the following:
    ``(3) In approving a sale under this subsection, the court shall 
consider the extent to which a bidder has offered to maintain existing 
jobs, has preserved retiree health benefits, and has assumed the 
obligations of any defined benefit plan, in determining whether an 
offer constitutes the highest or best offer for such property.''; and
            (2) by adding at the end the following:
    ``(q) If, as a result of a sale approved under this section, 
retiree benefits, as defined under section 1114(a), are modified or 
eliminated pursuant to the provisions of subsection (e)(1) or (h) of 
section 1114 or otherwise, then, except as otherwise provided in an 
agreement with the authorized representative of such retirees, a charge 
of $20,000 per retiree shall be made against the proceeds of such sale 
(or paid by the buyer as part of the sale) for the purpose of--
            ``(1) funding 12 months of health coverage following the 
        termination or modification of such coverage through a plan, 
        fund, or program made available by the buyer, by the debtor, or 
        by a third party; or
            ``(2) providing the means by which affected retirees may 
        obtain replacement coverage on their own,
except that the selection of either paragraph (1) or (2) shall be upon 
the consent of the authorized representative, within the meaning of 
section 1114(b), if any. Any claim for modification or elimination of 
retiree benefits pursuant to section 1114(i) shall be offset by the 
amounts paid under this subsection.''.

SEC. 11. UNION PROOF OF CLAIM.

    Section 501(a) of title 11, United States Code, is amended by 
inserting ``, including a labor organization,'' after ``A creditor''.

SEC. 12. CLAIM FOR LOSS OF PENSION BENEFITS.

    Section 502 of title 11, United States Code, is amended by adding 
at the end the following:
    ``(l) The court shall allow a claim asserted by an active or 
retired participant in a defined benefit plan terminated under section 
4041 or 4042 of the Employee Retirement Income Security Act of 1974, 
for any shortfall in pension benefits accrued as of the effective date 
of the termination of such pension plan as a result of the termination 
of the plan and limitations upon the payment of benefits imposed 
pursuant to section 4022 of such Act, notwithstanding any claim 
asserted and collected by the Pension Benefit Guaranty Corporation with 
respect to such termination.''.

SEC. 13. PAYMENTS BY SECURED LENDER.

    Section 506(c) of title 11, United States Code, is amended by 
adding at the end the following: ``Where employees have not received 
wages, accrued vacation, severance, or other benefits owed pursuant to 
the terms of a collective bargaining agreement for services rendered on 
and after the date of the commencement of the case, such unpaid 
obligations shall be deemed necessary costs and expenses of preserving, 
or disposing of, property securing an allowed secured claim and shall 
be recovered even if the trustee has otherwise waived the provisions of 
this subsection under an agreement with the holder of the allowed 
secured claim or successor or predecessor in interest.''.

SEC. 14. PRESERVATION OF JOBS AND BENEFITS.

    Title 11, United States Code, is amended--
            (1) by inserting before section 1101 the following:

``SEC. 1100. STATEMENT OF PURPOSE.

    ``A debtor commencing a case under this chapter shall have as its 
purpose the reorganization of its business and, to the greatest extent 
possible, maintaining or enhancing the productive use of its assets, so 
as to preserve jobs.'';
            (2) in section 1129(a), by adding at the end the following:
            ``(17) The debtor has demonstrated that every reasonable 
        effort has been made to maintain existing jobs and mitigate 
        losses to employees and retirees.'';
            (3) in section 1129(c), by striking the last sentence and 
        inserting the following: ``If the requirements of subsections 
        (a) and (b) are met with respect to more than 1 plan, the court 
        shall, in determining which plan to confirm, consider--
            ``(1) the extent to which each plan would maintain existing 
        jobs, has preserved retiree health benefits, and has maintained 
        any existing defined benefit plans; and
            ``(2) the preferences of creditors and equity security 
        holders, and shall confirm the plan that better serves the 
        interests of employees and retirees.''; and
            (4) in the table of sections in chapter 11, by inserting 
        the following before the item relating to section 1101:

    ``1100. Statement of purpose.''.

SEC. 15. ASSUMPTION OF EXECUTIVE RETIREMENT PLANS.

    Section 365 of title 11, United States Code, is amended--
            (1) in subsection (a), by striking ``and (d)'' and 
        inserting ``(d), and (q)''; and
            (2) by adding at the end the following:
    ``(q) No deferred compensation arrangement for the benefit of 
insiders or senior management of the debtor shall be assumed if a 
defined benefit plan for employees of the debtor has been terminated 
pursuant to section 4041 or 4042 of the Employee Retirement Income 
Security Act of 1974, on or after the date of the commencement of the 
case or within 180 days prior to the date of the commencement of the 
case.''.

SEC. 16. RECOVERY OF EXECUTIVE COMPENSATION.

    Title 11, United States Code, is amended by inserting after section 
562 the following:

``Sec. 563. Recovery of executive compensation

    ``(a) If a debtor has obtained relief under subsection (c) or (e) 
of section 1113, or subsection (g) or (h) of section 1114, by which the 
debtor reduces its contractual obligations under a collective 
bargaining agreement or retiree benefits plan, the court, as part of 
the entry of such order granting relief, shall determine the percentage 
diminution, as a result of the relief granted under section 1113 or 
1114, in the value of the obligations when compared to the debtor's 
obligations under the collective bargaining agreement or with respect 
to retiree benefits, as of the date of the commencement of the case 
under this title. In making its determination, the court shall include 
reductions in benefits, if any, as a result of the termination pursuant 
to section 4041 or 4042 of the Employee Retirement Income Security Act 
of 1974, of a defined benefit plan administered by the debtor, or for 
which the debtor is a contributing employer, effective at any time on 
or after 180 days before the date of the commencement of a case under 
this title. The court shall not take into account pension benefits paid 
or payable under the provisions of title IV of such Act as a result of 
any such termination.
    ``(b) Where a defined benefit plan administered by the debtor, or 
for which the debtor is a contributing employer, has been terminated 
pursuant to section 4041 or 4042 of the Employee Retirement Income 
Security Act of 1974, effective at any time on or after 180 days before 
the date of the commencement of a case under this title, but a debtor 
has not obtained relief under subsection (c) or (e) of section 1113, or 
subsection (g) or (h) of section 1114 of this title, the court, upon 
motion of a party in interest, shall determine the percentage 
diminution in the value of benefit obligations when compared to the 
total benefit liabilities prior to such termination. The court shall 
not take into account pension benefits paid or payable under the 
provisions of title IV of the Employee Retirement Income Security Act 
of 1974 as a result of any such termination.
    ``(c) Upon the determination of the percentage diminution in value 
under subsection (a) or (b), the estate shall have a claim for the 
return of the same percentage of the compensation paid, directly or 
indirectly (including any transfer to a self-settled trust or similar 
device, or to a nonqualified deferred compensation plan under section 
409A(d)(1) of the Internal Revenue Code of 1986) to any officer of the 
debtor serving as member of the board of directors of the debtor within 
the year before the date of the commencement of the case, and any 
individual serving as chairman and any individual serving as lead 
director of the board of directors at the time of the granting of 
relief under section 1113 or 1114 of this title or, if no such relief 
has been granted, the termination of the defined benefit plan.
    ``(d) The trustee or a committee appointed pursuant to section 1102 
may commence an action to recover such claims, except that if neither 
the trustee nor such committee commences an action to recover such 
claim by the first date set for the hearing on the confirmation of plan 
under section 1129, any party in interest may apply to the court for 
authority to recover such claim for the benefit of the estate. The 
costs of recovery shall be borne by the estate.
    ``(e) The court shall not award postpetition compensation under 
section 503(c) or otherwise to any person subject to the provisions of 
subsection (c) if there is a reasonable likelihood that such 
compensation is intended to reimburse or replace compensation recovered 
by the estate under this section.''.

SEC. 17. EXCEPTION FROM AUTOMATIC STAY.

    Section 362(b) of title 11, United States Code, is amended--
            (1) in paragraph (27), by striking ``and'' at the end;
            (2) in paragraph (28), by striking the period at the end 
        and inserting ``; and'' and
            (3) by adding at the end the following:
            ``(29) of the commencement or continuation of a grievance, 
        arbitration, or similar dispute resolution proceeding 
        established by a collective bargaining agreement that was or 
        could have been commenced against the debtor before the filing 
        of a case under this title, or the payment or enforcement of an 
        award or settlement under such proceeding.''.

SEC. 18. PREFERENTIAL COMPENSATION TRANSFER.

    Section 547 of title 11, United States Code, is amended by adding 
at the end the following:
    ``(j) The trustee may avoid a transfer to or for the benefit of an 
insider (including an obligation incurred for the benefit of an insider 
under an employment contract) made in anticipation of bankruptcy, or a 
transfer made in anticipation of bankruptcy to a consultant who is 
formerly an insider and who is retained to provide services to an 
entity that becomes a debtor (including an obligation under a contract 
to provide services to such entity or to a debtor) made or incurred on 
or within 1 year before the filing of the petition. No provision of 
subsection (c) shall constitute a defense against the recovery of such 
transfer. The trustee or a committee appointed pursuant to section 1102 
may commence an action to recover such transfer, except that, if 
neither the trustee nor such committee commences an action to recover 
such transfer by the time of the commencement of a hearing on the 
confirmation of a plan under section 1129, any party in interest may 
apply to the court for authority to recover the claims for the benefit 
of the estate. The costs of recovery shall be borne by the estate.''.

SEC. 19. FINANCIAL RETURNS FOR EMPLOYEES AND RETIREES.

    Section 1129(a) of title 11, United States Code, is amended--
            (1) by adding at the end the following:
            ``(18) In a case in which the debtor initiated proceedings 
        under section 1113, the plan provides for recovery of rejection 
        damages (where the debtor obtained relief under subsection (c) 
        or (e) of section 1113 prior to confirmation of the plan) or 
        for other financial returns, as negotiated by the debtor and 
        the authorized representative (to the extent that such returns 
        are paid under, rather than outside of, a plan).''; and
            (2) by striking paragraph (13) and inserting the following:
            ``(13) With respect to retiree benefits, as that term is 
        defined in section 1114, the plan--
                    ``(A) provides for the continuation after its 
                effective date of payment of all retiree benefits at 
                the level established pursuant to subsection (e)(1)(B) 
                or (g) of section 1114 at any time prior to the date of 
                confirmation of the plan, for the duration of the 
                period for which the debtor has obligated itself to 
                provide such benefits, or, if no modifications are made 
                prior to confirmation of the plan, the continuation of 
                all such retiree benefits maintained or established in 
                whole or in part by the debtor prior to the date of the 
                filing of the petition; and
                    ``(B) provides for allowed claims for modification 
                of retiree benefits or for other financial returns, as 
                negotiated by the debtor and the authorized 
                representative, to the extent that such returns are 
                paid under, rather than outside of, a plan).''.
                                 



    Ms. Sanchez. This important bill will do much to preserve 
jobs and relevel the playing field for American workers in 
Chapter 11 business bankruptcy cases.
    Accordingly, I very much look forward to the testimony of 
the witnesses for today's hearing; and at this time I will 
recognize my colleague, Mr. Cannon, the Ranking Member of the 
Subcommittee, for his opening remarks.
    Mr. Cannon. Thank you, Madam Chair.
    I ask unanimous consent to have my written statement 
included in the record.
    Ms. Sanchez. Without objection, so ordered.
    [The prepared statement of Mr. Cannon follows:]
 Prepared Statement of the Honorable Chris Cannon, a Representative in 
 Congress from the State of Utah, and Ranking Member, Subcommittee on 
                   Commercial and Administrative Law

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Cannon. Let me just say briefly, the hearing here today 
is an important hearing. The ideas are important ideas.
    Fundamentally, the question is, can Government make the 
market work or can Government actually protect employees or, in 
America, where we typically have had a system of a free market 
and robust market and a market where wages are bid up, is it 
not the better way--as we go through the process of transition 
that you laid out, is it not a better way to deal with or to 
respond to or allow the market to respond to these problems in 
an unfettered fashion not going to get us better employment, 
higher wages and greater benefits for all concerned? So I look 
forward to hearing our witnesses today as they discuss these 
ideas and yield back the balance of my time.
    Ms. Sanchez. Thank you, Chris.
    At this time, I would like to recognize Mr. Conyers, a 
distinguished Member of our Subcommittee and the Chairman of 
the full Judiciary Committee, for his opening statement.
    Mr. Conyers. Thank you, Linda Sanchez, our Chair of number 
five. This is a measure that I brought forward for our 
examination today, and I thank you for holding the hearing.
    Now, Chapter 11, just briefly, is intended to give all 
participants an opportunity to work out economic differences. 
But we know what happens in bankruptcy. Namely, as a matter of 
fact, one of the most common threats that occur when a company 
is having hard times in their negotiating the collective 
bargaining terms for a new contract is that somewhere along the 
way, delicately or not so subtly, they are told this by 
management: ``If we don't work this out, we are going to end up 
in bankruptcy.'' He doesn't say, ``and then you know what that 
means,'' because you don't have to say that. It means that all 
contracts become undone, everything, including pensions, health 
care, everything; and the bankruptcy judge is then empowered to 
rewrite, terminate, diminish in any way he or she sees fit 
whatever the existing agreements were.
    Another thing always happens is that a lot of workers lose 
their jobs. This is why I wrote the bill. If anybody needs to 
know why this legislation has been proposed--and I want to 
thank all of my colleagues. As I recall, I think this is a 
bipartisan work effort here.
    But sometimes these disparities that we talk of don't wait 
for chapter bankruptcy to kick in. One time we had a hearing, 
this same Subcommittee. A company used Chapter 11 to extract 
drastic pay cuts and benefit reductions from workers and 
retirees or take away their jobs and benefits entirely. And it 
never fails. In these mergers and bankruptcies, guess what? The 
people that caused it get multi-million dollar, extravagant 
bonuses and stock options as if they are being congratulated 
for driving the company out of business. The automobile 
industry is replete with examples, if anybody would like to 
learn more about this.
    And so we have tried to stop executive compensation. We had 
a hearing, and both the Chairman and Ranking Member were at it. 
We had five heads of oil companies, three of whom told us their 
compensation, and they--I don't think they blushed or stammered 
or were embarrassed by it, but two of them made so much money 
they couldn't remember how much. They didn't know what to tell 
us.
    We are remedying that by referring them to--I presume they 
filed tax returns on April 15, but we would like to know for 
the record what this excessive competition that rewards the 
failures in the American industry are.
    And so I thank you, Madam Chair, for allowing me this 
opportunity.
    Ms. Sanchez. I thank the gentleman for his opening 
statement.
    Without objection, other Members' opening statements will 
be included in the record.
    [The prepared statement of Mr. Cohen follows:]
 Prepared Statement of the Honorable Steve Cohen, a Representative in 
   Congress from the State of Tennessee, and Member, Subcommittee on 
                   Commercial and Administrative Law
    Workers and retirees have been hit very hard by the growing number 
of corporate bankruptcies in recent years. Workers and retirees have 
been asked, and in many cases forced, to make substantial sacrifices in 
pay and benefits, including wholesale defaults by their bankrupt 
employers on their pension obligations. The sting of these sacrifices 
may have been slightly easier for workers and retirees to stomach were 
it not for the fact that these same bankrupt employers would pay their 
CEO's and other senior management executives almost obscene amounts of 
compensation. That is why I am an original cosponsor of H.R. 3652, 
which makes urgently needed changes to the Bankruptcy Code to ensure 
that the interests of workers and retirees are protected in corporate 
bankruptcies and to ensure that executive compensation is reasonable 
and fair.

    Ms. Sanchez. I am now pleased to introduce the witnesses on 
our panel for today's hearing.
    Our first witness is Babette Ceccotti. Ms. Ceccotti is a 
partner at Cohen, Weiss and Simon LLP in New York city, a law 
firm specializing in the representation of labor organizations, 
employee benefits plans, and individual employees. Ms. Ceccotti 
divides her time between the firm's bankruptcy practice and 
employee benefits practice. She has represented labor 
organizations in numerous bankruptcy cases in a wide range of 
industries and has served as an outside counsel to the AFL-CIO 
on bankruptcy matters since 1998.
    Ms. Ceccotti is a frequent speaker and contributor to 
programs on labor and employee benefit interests in bankruptcy 
cases, including programs sponsored by the American Bar 
Association, the AFL-CIO Lawyers Coordinating Committee, the 
American Bankruptcy Institute and the National Conference of 
Bankruptcy Judges. She has written numerous articles and has 
been a contributing editor of the Employee and Union Member 
Guide to Labor Law and a contributing author of the Employee 
Benefits law treatise Supplement.
    I want to welcome you to today's hearing.
    Our second witness is Marcus Migliore. Mr. Migliore is a 
managing attorney for the Air Line Pilots Association, 
International and joined the union in 1993. He started his 
legal career as a law clerk to Chief Judge William C. Pryor of 
the District of Columbia Court of Appeals. After his appellate 
clerkship, Mr. Migliore joined the law firm of Dickson, Shapiro 
and Warren, where he represented labor unions. Mr. Migliore has 
spent most of his career as a labor litigator representing ALPA 
and other unions in Federal court, handling cases in most of 
the United States Court of Appeals. He also represented ALPA 
and other unions in arbitration proceedings before the National 
Mediation Board and in collective bargaining associations.
    Welcome to our panel.
    Our third witness is Michael Bernstein. Mr. Bernstein is a 
partner at Arnold & Porter LLP and represents secured and 
unsecured creditors, creditors' committees, bondholders, 
investors, asset purchasers, debtors and other parties in a 
wide variety of bankruptcy and workout matters and in related 
litigations throughout the United States. He has been involved 
in large bankruptcy cases, including US Airways, TWA, Adelphia, 
Asarco, Mirant, Fannie Mae, FoxMeyer Drug, Alterra Healthcare 
Corporation, Fruit of the Loom and Continental Airlines, as 
well as many other cases throughout the United States.
    Mr. Bernstein's bankruptcy experience spans many 
industries, including telecommunications, energy, real estate, 
finance, mining, manufacturing, technology, retail, airline, 
health care and pharmaceuticals. He has co-authored two books 
and has published many articles on bankruptcy related topics. 
He is a frequent lecturer and has also testified previously 
before Congress as an independent expert on the status of 
collective bargaining agreements and retiree and pension 
benefits in bankruptcy.
    Welcome to our panel.
    Our final witness is Karen Friedman. Ms. Friedman is a 
policy director at the Pension Rights Center, the Nation's only 
consumer rights organization dedicated solely to protecting and 
promoting the pension rights of American workers, retirees and 
their families. She has more than 20 years of experience in 
retirement policy and communications and regularly represents 
the perspective of consumers in congressional hearings, 
speeches and interviews with the media.
    Ms. Friedman has written articles for The Washington Post, 
The New York Times, the Los Angeles Times and the San Francisco 
Chronicle and is featured regularly in print and electronic 
media, including appearances on different news programs. She 
also is the director of the Conversation on Coverage, a Pension 
Rights Center initiative that has brought together 45 experts 
of varying viewpoints to develop common recommendations to 
increase pension coverage, particularly for low and moderate 
wage earners.
    I want to thank all of you for your willingness to 
participate in today's hearing. Without objection, your written 
statements will be placed into the record; and we will ask that 
you limit your testimony today to 5 minutes.
    You will note that we have a lighting system which we 
sometimes remember to turn on and sometimes don't. You will get 
a green light when your time begins. After 4 minutes, you will 
see a yellow light, which will warn you you have 1 minute 
remaining in your testimony; and when your time has expired you 
will see the red light. If you are caught mid-thought or mid-
sentence when your time expires, we will of course allow you to 
finish your thought before we move on to our next witness.
    After each witness has presented her or his testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute limit.
    So, with that, I am going to invite Ms. Ceccotti to please 
proceed with her testimony.

TESTIMONY OF BABETTE CECCOTTI, ESQUIRE, COHEN, WEISS AND SIMON 
          LLP, NEW YORK, NY, ON BEHALF OF THE AFL-CIO

    Ms. Ceccotti. Thank you and good morning. Again, Madam 
Chairwoman, Chairman Conyers, Representative Cannon, on behalf 
of the AFL I would like to thank you for this opportunity to 
appear today in support of H.R. 3652.
    Congress designed the business bankruptcy system to prevent 
the liquidation of viable businesses. At the heart of the 
concerns of the system is the preservation of jobs, 
specifically jobs worth having. But workers' experience with 
the bankruptcy system is the opposite of what Congress 
intended.
    Business bankruptcy works very well for powerful, moneyed 
constituencies, but workers who cannot diversify risk or absorb 
losses the way other constituents can end up losing jobs, 
decent wages, pensions, health care and other valuable 
benefits. Business bankruptcy has become a process in which 
management lowers the living standards of its employees and 
enriches itself in the process.
    H.R. 3652 would remedy many defects in the current system 
and provide important protections for workers and retirees. I 
will briefly touch on some of these changes and refer you to my 
written statement for a more extensive description of the 
benefits of this bill.
    First, the bill would rectify serious deficiencies in the 
section 1113 process when debtors seek to modify labor 
agreements. Section 1113 was supposed to protect workers from 
paying too high a price for their employer's bankruptcy by 
requiring a debtor to use the collective bargaining process to 
negotiate modifications by placing limits on how much of a 
burden workers would bear. But debtors have been grossly 
overreaching in their concessionary demands and running 
roughshod over the collective bargaining process with heavy 
handed, expensive litigation which they used for litigation to 
try and force concessionary deals and detract from the 
bargaining process. Rather than a check on debtors' ability to 
reject a collective bargaining agreement, section 1113 has 
become a blank check for debtors.
    Recent bankruptcies in the airline and steel and auto 
industries have taken broad aim at workers' living standards 
through deep pay cuts, benefit cuts, cuts in pension and 
workforce reductions that will send thousands of jobs to lower-
cost economies. Court decisions in recent cases show that the 
court's view of section 1113 is completely dominated by the 
debtors' perspective, even though Congress designed section 
1113 to incorporate labor policies and protect workers in 
reaching decisions under section 1113.
    The bill would remedy these defects through amendments that 
would rein in overbroad, overaggressive cuts, put an end to 
contracts that last long after emergence from bankruptcy.
    The bill would require courts to consider solutions 
proposed by the union in addition to the modifications proposed 
by the debtor and would add several other protections designed 
to bolster the collective bargaining process and stop debtors 
from using the courts.
    The bill would also clarify what has been a well understood 
until very recently--what has been well understood until only 
very recently the unquestioned right of workers to strike when 
their contracts are rejected.
    The bill would also add important protections for retirees. 
Congress designated retiree health benefits for special 
treatment in bankruptcy through section 1114, which was 
intended to limit a debtor's ability to eliminate those 
obligations. But debtors had been aggressively targeting 
retiree health benefits in their bankruptcy cases, and even 
modest programs are slated for total elimination in order to 
get liability off of the company's balance sheets.
    In addition, debtors have tried to avoid the section 1113 
process altogether by claiming that nonbankruptcy law allows it 
to make unilateral changes in these benefits without involving 
retirees at all. The bill would stop this practice by requiring 
debtors that seek modifications to use the section 1114 process 
so that retirees receive the enhanced protection that the 
process would require.
    Other amendments reaffirm Congress's intent that business 
reorganizations preserve good jobs. For example, a buyer of a 
debtor's assets that retains the debtor's employees and adjusts 
the purchase price to do just that would be able to have its 
bid approved over other bidders who would not keep the workers.
    The bill would also place greater restrictions on debtors' 
ability to implement executive pay schemes in bankruptcy. 
Despite Congress' effort to crack down on these schemes, under 
new section 50(c)(3) bankruptcy continues to be a safe haven 
for executive pay, even as debtors cut pay and benefits for 
rank and file workers. Section 50(c)(3) has been thwarted 
through schemes devised through so-called incentive programs, 
devised with targets that are watered down for bankruptcy or 
other questionable milestones, practices that are criticized in 
nonbankruptcy compensation but have become successful 
strategies for avoiding the section 50(c)(3) standards. The 
bill would close the loopholes and impose consequences on 
debtors who implement executive pay enhancement schemes while 
at the same time using bankruptcy to cut pay and benefits.
    In closing, the bill would remedy many harsh, financially 
devastating defects in the current system; and we urge you to 
take prompt action on this bill. Thank you again for the 
opportunity to appear in support of this very important bill.
    Ms. Sanchez. Thank you, and we appreciate your testimony.
    [The prepared statement of Ms. Ceccotti follows:]
                 Prepared Statement of Babette Ceccotti

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Ms. Sanchez. At this time, I would invite Mr. Migliore to 
please begin his testimony.

   TESTIMONY OF MARCUS C. MIGLIORE, ESQUIRE, AIR LINE PILOTS 
           ASSOCIATION, INTERNATIONAL, WASHINGTON, DC

    Mr. Migliore. Thank you, Madam Chair.
    Good morning, Madam Chairwoman and Members of the 
Subcommittee. I am Marcus Migliore, managing attorney with the 
Air Line Pilots Association, International, a labor union 
representing 55,000 pilots who fly for 40 airlines in the 
United States and Canada.
    The proposed legislation before the Subcommittee is 
urgently needed to restore balance and fairness to the 1113 
process in bankruptcy which has been hijacked by employers who 
use the courts to assist in the rapid execution of workers' 
wages, working conditions and retirement benefits achieved over 
years of collective bargaining.
    The one-sided nature of the pressure put upon workers under 
1113 has prevented the parties from reaching superior 
negotiated solutions, contrary to the statute's intent. 
Instead, airline and other employees have been locked into 
long-term, harsh and unwarranted concessions going well beyond 
those needed for reorganization, while at the same time multi-
million dollar payouts for the debtors' corporate executives 
have been routinely approved.
    This legislation will stop these outrageous dictated 
abuses, ensure the concessions are necessary and proportionate 
to those of corporate executive and other stakeholders and 
restore balance on the issue of breach damages and the right to 
strike, thereby supporting superior negotiated solutions.
    Pilots and employees of United, US Airways, Northwest, 
Delta, Comair and Mesaba have already seen their long-term 
wages and working conditions slashed through the 1113 process. 
Just this year, ATA, Kitty Hawk Air Cargo and Aloha pilots have 
been added to the growing list of airline employees caught in 
the vise of the bankruptcy process. And given the price of jet 
fuel, as Madam Chairwoman noted, there will very likely be more 
airline bankruptcies in the coming year. The bill before you is 
therefore more relevant and important than it ever has been.
    Here are examples of why the legislation is urgently 
needed:
    Pilots at United had their defined benefit pension plan 
terminated and were locked into a 7-year concessionary 
agreement. Pilots at both United and Northwest suffered wage 
cuts of approximately 40 percent and had working conditions 
reduced or eliminated. At the same time, the CEOs of both 
carriers were rewarded with huge salary increases, bonuses and 
stock options worth many millions of dollars.
    A profitable Hawaiian Airlines used section 1113 to wrest 
employee concessions to improve its competitive position and 
profitability. This was after the pilots had previously made in 
the recent past pre-petition concessions to avoid the 1113 
filing.
    Comair used the 1113 process because the operation simply 
was not profitable enough for corporate parent Delta, which, at 
the same time, Delta was claiming to have plenty of money on 
hand to fight off US Airways and America West when they tried 
to take over the airline. The Comair bankruptcy judge in fact 
ignored evidence that the company's demands for a 22 percent 
pay cut would qualify junior pilots for Federal welfare and 
food stamp assistance. He simply dismissed it on the basis it 
wasn't relevant to the economics.
    However, the most extreme example of the one-sided nature 
of the current processes is in the Second Circuit's Northwest 
Airlines' decision. That decision allows management to reject 
with impunity binding collective bargaining and impose greatly 
reduced rates of pay and working conditions without having to 
face contractual breach damages from the employees or the 
possibilities of a responsive strike.
    The Second Circuit justified this amazingly one-sided 
result under the theory that the labor agreement is not 
actually being breached but is being abrogated with judicial 
permission in 1113, ignoring the Supreme Court's view in 
Bildisco that rejection in bankruptcy is a breach. The 
Northwest court's holding represents a radical departure from 
existing law and leaves wronged employees with no recourse for 
a bankruptcy breach claim, while they remained under the threat 
of contempt if they ceased to work under the imposed 
conditions, unlike all other creditors who with rejected 
agreements are allowed to refuse to perform under the 
circumstances.
    This decision will have lasting consequences as companies 
will file 1113 petitions in New York. Therefore, the standards 
of the Second Circuit will effectively govern most of the 1113 
practice in this country.
    Congress must overrule this decision with the proposed 
corrective legislation. The legal flaws of the Second Circuit's 
approach under the status quo provisions of the Railway Labor 
Act and the anti-strike injunction mandates of the Norris-
LaGuardia Act are spelled out in my written testimony. However, 
I wish to emphasize here the practical import of this decision.
    The willingness of the courts to enjoin a strike in 
response to management imposition of unilateral terms under 
section 1113 has taken away any incentive for airlines to 
negotiate in good faith rather than dictate terms to employees 
in bankruptcy, leaving employees powerless, chained to the 
railroad tracks as the 1113 Express bears down upon them.
    By making it clear that a rejection is a breach of contract 
and that such a rejection can trigger a lawful strike, the bill 
will end the situation where the courts unfairly single workers 
out and restore them to the position that all other providers 
of services are under in the bankruptcy laws. Balance will be 
restored, and management will be forced to act responsibly and 
fairly in bankruptcy toward its employees and negotiate 
consensual solutions only if it is faced with a real 
possibility of a responsive strike.
    In sum, Madam Chairwoman, while I also recognize that 
substantial economic sacrifices may be necessary and we have 
led the effort to save many airlines, the courts have moved the 
1113 process far from where it was intended to be in 1984. The 
bill is proper restorative legislation that is urgently needed 
to fix the misinterpretation and abuse of the 1113 process that 
has taken place over the last 7 years. This Congress must act 
to protect employees from unfair dictated sacrifices made while 
the corporate chieftains reap huge pay offs.
    Madam Chairwoman, I appreciate very much the opportunity to 
testify here today; and I will be happy to answer any questions 
you or the Subcommittee may have.
    Ms. Sanchez. Thank you very much for your testimony.
    [The prepared statement of Mr. Migliore follows:]
                Prepared Statement of Marcus C. Migliore
    Good morning Madame Chairwoman and members of the Subcommittee. I 
am Marcus Migliore, Managing Attorney with the Air Line Pilots 
Association, International (``ALPA''). ALPA represents 55,000 
professional pilots who fly for 40 airlines in the United States and 
Canada. On behalf of our members and the hundreds of thousands of other 
airline employees whose lives have been turned upside down by the 
machinations of the bankruptcy process, I want to thank you for the 
opportunity to testify today about how ALPA's experiences in the 
bankruptcy courts show why the proposed legislation before this body--
the Protecting Employees and Retirees in Business Bankruptcies Act--is 
urgently needed to restore balance and basic fairness for workers under 
the Bankruptcy Code.
    Section 1113 of the Bankruptcy Code sets forth the procedures by 
which employers can seek judicial permission to reject and thereby 
breach collectively-bargained obligations to their employees, and 
impose in their place dictated pay and working conditions. This Section 
1113 process was originally intended to prevent employers from using 
the Chapter 11 process as an ``escape hatch'' to simply wipe away with 
a bankruptcy filing the binding, long and hard-fought pay and working 
condition achievements of workers secured by their collective 
bargaining agreements.
    Prior to Section 1113's enactment in 1984, the Supreme Court ruled 
in NLRB v. Bildisco, 465 U.S 513 (1984) that an employer could walk 
away from a binding collective bargaining agreement after a bankruptcy 
filing without first making any showing of need to reject the terms of 
the agreement. In response, Congress, at the urging of ALPA and other 
unions, acted swiftly to establish procedures in the Bankruptcy Code--
the so-called 1113 process--to protect the rights of employees to 
prevent such harsh and unfair results. The 1113 process requires labor 
and management to bargain in good faith over concessions sought by the 
debtor. Under Section 1113, only after failure to reach a consensual 
agreement through such good faith bargaining and a determination by the 
court that the concessions are truly necessary to the survival of the 
employer can management impose dictated terms on its employees.
    However, instead of safeguarding employees, the 1113 process has 
been hijacked by employers and is now used as a 51-day countdown to 
threaten a court-assisted execution of the long-term wage and working 
condition achievements of airline and other employees. The one-sided 
nature of the pressure brought through the swift 1113 process by 
employers has led to cataclysmic results for airline and other 
employees. These same employers have also used the bankruptcy process 
to rubber stamp multi-million dollar payouts for the corporate 
executives who led the carriers into these financial problems and who 
decimated the employees' working conditions.
    Over the past seven years, the employee-protective purpose of 
Section 1113 has simply been gutted by bankruptcy and federal court 
judges overly sympathetic to debtor corporations. Airline managements, 
with the approval of the bankruptcy courts, have been able to easily 
achieve in case after case precisely the contract-destroying results 
that Congress originally sought to prevent in 1984. The courts have 
paid little heed to the mandates of Congress in Section 1113 to take 
into account the contract rights and personal financial security of 
employees called upon to sacrifice to help save their employers, 
essentially doing away with the required demonstration of the necessity 
of concessions limited in scope and time to those required to ensure 
the survival of the business.
    Pilots and other employees of United, US Airways, Northwest, Delta, 
Comair and Mesaba have all seen their wages and working conditions 
slashed through the 1113 process, while corporate chieftains often 
received huge bonuses, blessed by the bankruptcy courts.
    Just this year, ATA, Kitty Hawk Air Cargo, and Aloha pilots have 
been added to the growing list of airline employees caught in the vise 
of the bankruptcy process. Given the astronomical, continually rising 
price of jet fuel, and our weak economy, these airline employees almost 
certainly will not be the last to face this severe problem. There will 
very likely be more airline bankruptcies in the coming year, and the 
bill before you is therefore more relevant and important than ever.
    Some of the most extreme examples of the one-sided nature of the 
current process are found in recent court decisions such as Northwest 
Airlines v. AFA, 483 F.3d 160 (2d Cir. 2007), a decision of the Second 
Circuit which allows management to reject with impunity binding 
collective bargaining agreements and impose greatly reduced rates of 
pay and working conditions without having to face contractual breach 
damages from workers. At the same time, the court prohibited those 
employees from withdrawing their services under those agreements, as 
other parties facing such rejection are routinely allowed to do under 
bankruptcy law. The corrective legislation before this Subcommittee is 
urgently needed to restore the original intent and purpose of Section 
1113 to ensure that the impact of the bankruptcy process on honest and 
innocent workers is balanced and fair.
    Because the 1113 process has been significantly eroded and 
undermined in the courts, broad restorative legislation is necessary. 
This bill properly attempts to restore the employee-protective purpose 
of the Section 1113 process by: (1) tightening the standards governing 
what concessions management may fairly ask for in required, good-faith 
negotiations with the employees' representative prior to being able to 
seek to reject their contractual obligations to workers, so that a 
breach of a collective bargaining agreement can be permitted only when 
truly necessary, and only to provide the employer with no more than is 
truly necessary to ensure the competitive survival of the business for 
a limited period of time; (2) ensuring fair treatment and equitable 
sacrifices from both executives and workers in the bankruptcy process 
so as to prevent further outrageous abuse by corporate officers lining 
their own pockets while their employees disproportionally sacrifice to 
help save the company; and (3) making it clear that employees have the 
right to strike and seek contract damages in response to a breach of 
their collective bargaining agreements if a consensual agreement 
between the parties cannot be reached and the contract is rejected. 
These clarifications are all desperately needed to restore balance to 
the 1113 process and to help foster superior, mutually acceptable 
labor-management solutions to bankruptcy crises through collective 
bargaining.
    I will now describe in greater detail a number of examples of what 
has gone wrong from ALPA's recent experiences in the administration of 
the 1113 process in the courts, and illustrate how the bill before you 
will bring to an end the abuse of employees which has flourished in the 
current environment.
  i. the reforms to 1113 in the bill are necessary to stop bankruptcy 
    courts from allowing employers to use the bankruptcy process as 
leverage to gut labor contracts on a long-term basis without requiring 
   employers to show that such lasting concessions are necessary or 
                             proportionate.
    The courts, egged on by opportunistic employers, have progressively 
undermined the ``necessity'' standard for granting employer relief in 
Section 1113. Congress adopted this standard in 1113 to ensure that 
only those changes in working conditions that are truly ``necessary to 
permit the reorganization'' of the employer would be permitted. In 
practice, these limits have all but been ignored by both employers and 
the bankruptcy courts. The bankruptcy process has been used as leverage 
to simply jam long-term and draconian wage and benefit cuts down 
employees' throats. These scorched-earth tactics of using the short 51-
day period in the current 1113 procedures to force extraction of 
protracted, multi-year concessions that are not truly necessary or 
otherwise achievable in consensual bargaining have led to widespread 
tension and resentment among airline employees, creating lasting damage 
to labor relations in a labor-intensive industry critical to the 
national economy.
    ALPA's experience has shown that circumstances where consensual 
solutions have been reached by the parties have led to far superior 
outcomes for airlines, their employees and the flying public. Congress 
needs to take steps to restore support for consensual negotiations in 
such circumstances and to rein in employers from overreaching in 
bankruptcy.
    ALPA has even seen profitable airlines use Section 1113 as a 
bargaining lever to wrest employee concessions to either facilitate a 
sale or other transaction or just to improve the competitive position 
or profitability of the carrier. This was the case in the bankruptcy of 
Hawaiian Airlines, where pilots faced a Section 1113 motion by a 
profitable company after having made pre-petition concessions demanded 
to avoid a Chapter 11 filing. All this after management approved a 
self-tender of the airline's stock at a substantial premium to market 
value following September 11 and before the bankruptcy filing. This 
scheme by Hawaiian was an outrageous abuse of the process.
    Similarly, in the Comair bankruptcy, pilots were forced into 
Section 1113 litigation because the operation was simply deemed not 
profitable enough to its corporate parent, Delta, while at the same 
time Delta proclaimed that it had plenty of money on hand as a 
justification to creditors for fighting a hostile takeover attempt by 
America West/US Airways.
    In the case of Delta Airlines, even after many months of litigation 
before the bankruptcy court, management continued to demand extreme 
concessions. Only after the establishment of a special neutral 
mediation-arbitration tribunal, which took the matter out of the hands 
of the bankruptcy court and had the power to make a binding 
determination of the dispute if the parties did not reach agreement, 
did management finally reduce its demands and, in response to ALPA's 
demands, offer the pilots a bankruptcy claim and corporate notes in 
exchange for substantial concessions. After a consensual agreement was 
reached on this basis, the Company completed its successful 
reorganization and returned to profitability. Section 1113(i) of the 
bill attempts to build off this demonstrated success at encouraging 
consensual solutions and would allow the bankruptcy court to appoint, 
at the request of the authorized representative, an expert arbitration 
panel versed in the industry as an alternative to court proceedings in 
1113, and whose rulings would have the same effect as those of the 
bankruptcy court. This system would lead to a superior outcome for 
everyone.
    Additionally, testimony at the hearings on Comair's Section 1113 
motion established that the Company's demands for a 22% pay cut would 
qualify some full-time pilots for federal welfare assistance. In 
response to testimony from a pilot whose family would qualify for 
federal food stamps were he to work full-time under the Company's 
demands, the bankruptcy judge indicated that he would not be persuaded 
by these facts of employee hardship and suffering, because he viewed 
the issue purely in economic terms. In fact, in his decision granting 
Comair's Section 1113 motion, the judge failed to take into 
consideration the impact the Company's 1113 proposal would have on the 
pilot group and its families. A concessionary agreement was only 
reached after the airline effectively moderated its demands by offering 
the pilots meaningful ``upside'' benefits.
    In the case of Mesaba Aviation, the bankruptcy court approved as 
``necessary'' a wage cut of almost 20% that would have lasted for 6 
years, within a structure that did not envision any reversal or 
mitigation of the cuts during that lengthy period, even if they were no 
longer actually required for the survival of the business. After the 
federal district court agreed with ALPA that such overreaching amounted 
to bad-faith conduct and an abuse of the bargaining process, and 
subsequent consensual negotiations, the Company finally agreed to a 
contract that, while definitely concessionary, provided a significantly 
smaller, shorter-term pay cut that did not prevent the Company from 
successfully reorganizing under a plan that is expected to provide 
close to a 100% recovery for all creditors.
    All of these circumstances show that the 1113 process as currently 
interpreted and applied by the bankruptcy courts does not impose 
effective limits on the ``necessity'' of employer concession demands, 
is open to employer abuse and grants inappropriate leverage for 
employers to wrest long-term, unwarranted concessions from employees. 
These examples also clearly show that consensual solutions to financial 
crises are superior to the imposed alternatives. The 1113 process today 
undercuts employees and undermines consensual, legitimate solutions to 
financial crises. Necessary modifications to that process must be 
enacted to correct these imbalances and foster superior consensual 
solutions. As we will explain, the bill before you does just that.

               A. The Bill's Key Substantive 1113 Reforms

    Section 8 of the bill makes a number of necessary changes to 
Section 1113 to ensure that workers are not forced to make unnecessary, 
unfair and overly-lengthy concessions. It requires that specific 
provisions and requirements be followed in order for an employer to 
obtain relief from a collective bargaining agreement. It retains the 
general principle that labor cost relief should be limited to the 
minimum necessary and not be disproportionately burdensome. The 
information-related requirements of the current statute remain, but 
added are specific standards and time limits for concession requests in 
the 1113 process designed to foster good-faith negotiated solutions and 
counteract open-ended, long-term labor cost relief that under today's 
system can be ``locked in'' by employers for an unreasonable period 
that well outlasts any justifiable need.
    Subsection (b) of 1113 would be amended to require a clearly-
defined, reasonable and time-limited ``ask'' for concessions on the 
part of the company, which must be made to the employees' authorized 
representative over a course of good-faith bargaining that must be at 
reasonable times over a reasonable period before the debtor may apply 
to the court to reject an agreement.
    In addition to requiring good-faith bargaining as a prerequisite to 
seeking court rejection of a labor agreement, Subsection b(1) would 
require the concessions to be: (1) limited to achieve a total aggregate 
financial contribution for the affected labor group for a period of up 
to two years after the effective date of the plan; (2) be no more than 
the minimal savings necessary to permit the debtor to exit bankruptcy 
such that the confirmation of the plan or reorganization is not likely 
to be followed by the debtor's liquidation; and (3) not overly burden 
the affected labor group in either the amount of savings sought from 
each group or the nature of the modifications, when compared to other 
constituent groups expected to maintain ongoing relationships with the 
debtor, including management personnel. In addition, Subsection (b)(2) 
would require that the proposal be based on the most complete and 
reliable relevant information available, which must be shared with the 
employees' representative.
    The amendment to Section 1113(c) would tighten the standards for 
the court to approve the rejection of a collective bargaining 
agreement. As amended, Section 1113(c) provides that a debtor may file 
a motion seeking to reject a collective bargaining agreement if, after 
a period of good-faith negotiations, the debtor and the authorized 
representative have not reached agreement over mutually-satisfactory 
modifications and the parties are at an impasse.
    Section 1113(c)(1) would further provide that a court may grant a 
rejection motion only if it finds that: (1) the debtor complied with 
the substantive requirements of Subsection 1113(b) (pertaining to the 
concession proposal for modification of the agreement); (2) the debtor 
has conferred in good faith with the authorized representative 
regarding such proposal and the parties were at an impasse; (3) the 
court has considered alternative proposals by the authorized 
representative and has determined that such proposals do not meet the 
substantive requirements for relief of up to two years duration, no 
more than is necessary for the employer to avoid liquidation and not be 
unduly burdensome compared to other stakeholders and management; and 
(4) further negotiations are not likely to produce a mutually 
satisfactory agreement. In addition, the court must first consider: (1) 
the effect of the proposed financial relief on the affected labor 
group; (2) the debtor's ability to retain an experienced and qualified 
workforce; and (3) the effect of a strike in the event that the 
collective bargaining agreement is rejected.
    Amended Section 1113(c)(2) would require bankruptcy judges, in 
making their burden and proportionality analyses, to also take into 
account recent concessions made by employees within 24 months of a 
rejection petition, and to aggregate these recent concessions with any 
new ones made or demanded by the employer.

               B. The Bill's Key Procedural 1113 Reforms

    Employees are currently severely disadvantaged by the 51-day 
countdown to the rejection of collectively-bargained rights which 
begins after a debtor files an 1113 rejection motion. The bill amends 
Section 1113(d)(1) to require the court to schedule a hearing on such 
motion on not less than 21 days notice, unless the parties agree to a 
shorter period, and the amendment also deletes section 1113(d)(2), 
which now requires the court to rule on such motion within 30 days. The 
amendment also specifies that only the debtor and the authorized 
representative may appear and be heard at the rejection hearing. All of 
these improvements, taken together, will help lessen the timeline panic 
that management as well as other creditors now take advantage of in the 
current highly compressed process, and help foster reasonable 
consensual solutions instead.
    New Section 1113(h) would also ensure that workers are not locked 
into concessions that once struggling but now profitable companies no 
longer need. It allows an authorized employee representative, at any 
time after the court enters an order authorizing rejection or upon 
reaching an agreement providing mutually satisfactory contract 
modifications, to apply to the court for an order increasing wages or 
benefits or providing relief from working conditions, based on changed 
circumstances. The court must grant such request as long as the 
increase or other relief is consistent with the standard set forth in 
Section 1113(b)(1)(B), pertaining to the minimal savings necessary to 
permit the debtor to exit bankruptcy without liquidating. New Section 
1113(j) would allow for procedures for an employee representative to 
request that it be reimbursed for costs and fees associated with the 
1113 process, after notice and hearing. This provision would, in our 
view, properly help incentivize employers to bargain in good faith for 
consensual solutions and motivate debtors to move quickly to reach 
negotiated solutions.
 ii. the bill also will end the current double standard under chapter 
   11: deep sacrifice for workers, huge payouts for those at the top.
    The bill also provides urgently needed modifications to ensure that 
economic relief sought from employees not be disproportionate to the 
treatment of executives and other groups. These changes are required to 
restore basic fairness and credibility to the 1113 process. The current 
system has led to outrageous unfairness, with workers absorbing huge, 
long-term cuts in pay, work rules, and retirement benefits while 
management executives have enjoyed huge payouts which appear to be 
nothing more than rewards that are directly tied to the level of pain 
they have inflicted on the employees. For example:

          Pilots at United Airlines, who took concessions of 
        40% or more in pay, lost numerous important work rules, had 
        their defined-benefit pension plan terminated in multiple 
        rounds of Section 1113 litigation, and were locked into a 
        nearly seven-year deeply concessionary agreement, saw the 
        injustice of the United Board of Directors raising the pay of 
        Chief Executive Glenn Tilton 40% just months later. This 
        staggering increase is on top of stock grants to Mr. Tilton and 
        other United executives worth in excess of $20 million, as well 
        as stock options worth millions more, made as part of United's 
        plan of reorganization.

          Northwest Airlines' pilots were also forced to accept 
        huge wage cuts of nearly 40%, as well as accept numerous 
        rollbacks to their quality of life by losing key protective 
        working conditions. By contrast, the CEO was rewarded with $1.6 
        million in salary and bonus payments last year. The revelation 
        that he will also be rewarded with more than $26 million in 
        stock-related compensation over the next few years under a 
        court-approved management equity plan further demonstrates the 
        basic unfairness and abuse of the 1113 process.

          Pilots at Hawaiian Airlines faced demands for 
        concessions despite a plan of reorganization that paid 
        unsecured creditors in full.

          Professional advisors, banks, economic experts, 
        financial managers and executives who participate in the 
        Section 1113 process on behalf of airlines do not share in the 
        sacrifices. Instead they earn lucrative fees and even 
        ``success'' bonuses with the approval of the bankruptcy court, 
        while the workers' pay, work rules and pensions are allowed to 
        be gutted.

    The bill properly requires the bankruptcy courts to ensure that 
concessions by employees are not disproportionate in light of the state 
of compensation provided to and concessions made by other employees and 
stakeholders during bankruptcy, including management. First, the bill 
applies a desperately needed ``unfair burden'' test in Section 
1113(b)(1)(C) to determine whether the proposed modifications would 
overly burden the affected labor group compared to management or other 
stakeholders. This provision will help ensure that employees do not 
comparatively suffer while management, advisors and other are given 
large bonuses. Furthermore, Section 8(1) of the bill would amend 
Section 1113(c)(3) to require the court to presume that the debtor 
failed this undue burden test if the debtor implements a program of 
incentive pay, bonuses, or financial returns for insiders or the 
debtor's senior management during the pendency of the bankruptcy case, 
or within 6 months of the filing of the 1113 petition. ALPA believes 
that these provisions are absolutely necessary to stop any future 
court-assisted looting of employees by greedy executives and advisors 
so as to restore credibility and basic fairness--airline and other 
executives must be reined in from massively profiting as a result of 
their employees' misery in the 1113 process.
 iii. the bill will also end the blatant unfairness of airlines being 
 allowed to use 1113 to avoid binding employee obligations while being 
                   immunized from employee self-help.
    The last item I wish to highlight for the Subcommittee is what ALPA 
perceives as the most egregious of the many aspects of unfairness that 
exist in the court's administration of the current 1113 system. As I 
have explained, airlines have used the compressed timeline and largely 
unchecked judicial authority of the 1113 process as leverage to obtain 
what they could never obtain in consensual bargaining--deep, lasting 
and unfair changes to avoid the binding commitments that they made to 
their employees in collective bargaining agreements. But employers have 
not stopped there, they have gone to the bankruptcy and federal courts 
and asked them to declare that (1) an 1113 rejection is not a 
compensable breach of contract for employees, and (2) employees do not 
have the right to respond to these fundamental breaches of labor 
agreements by withholding their services, as other creditors whose 
agreements are rejected can do.
    Employers have succeeded with the courts on both counts, requiring 
broad restorative legislation. Three bankruptcy courts, two federal 
district courts, and the Second Circuit Court of Appeals have ruled 
that under Section 1113, airline employees can be forced to accept the 
utter destruction of their fundamental rates of pay and working 
conditions in binding agreements by the bankruptcy process, but may not 
strike in response. In fact, a split panel of the Second Circuit in the 
Northwest Airlines case could only justify this highly inequitable 
result with the fiction that management is not actually breaching a 
collective bargaining agreement when it obtains judicial permission to 
reject a labor contract through the Section 1113 process, a notion 
wholly at odds with settled bankruptcy doctrine, and one that would 
leave wronged employees with no recourse for a bankruptcy breach claim, 
as other creditors are allowed.
    We believe that under a proper reading of the mutual, status quo 
requirements of the Railway Labor Act, the law that governs airline 
employees, workers have a right to strike after a bankruptcy court 
grants an employer motion to reject the status quo--defining collective 
bargaining agreement under Section 1113 and imposes new inferior rates 
of pay, benefits, job security and/or working conditions. Further, 
under the Norris-LaGuardia Act, 29 U.S.C. 101 et seq. (which 
was enacted in the 1930's to generally preclude injunctions against 
strikes after egregious abuse in railroad reorganization cases), 
bankruptcy judges and U.S. District Court judges do not have 
jurisdiction to issue injunctions against lawful strike activity when 
management has acted unilaterally to destroy the contractual status quo 
and tear up a binding labor contract outside of the elaborate 
negotiations and mediation process mandated by the status quo 
provisions of Section 6 of the Railway Labor Act, 45 U.S.C. 
156.
    Additionally, from a practical perspective, the willingness of the 
courts to enjoin a strike in response to management imposition of 
unilateral terms under Section 1113 has taken away any incentive for 
airlines to negotiate in good faith rather than dictate terms in 
bankruptcy. The current situation leaves employees powerless, chained 
to the railroad tracks as the 1113 Express bears down on them. Airline 
employees are being singled out unfairly by being denied the right to 
take self-help and withhold future services after their contract is 
rejected and in the absence of a consensual agreement, which is a right 
that every other party to a rejected contract has under the current 
bankruptcy code. For example, aircraft lessors are free to stop 
performance of their agreement and take back their aircraft from the 
debtor airline upon rejection of their lease, but airline employees 
are, in the view of the Second Circuit and other courts, required to 
continue to perform under penalty of contempt and under judicially-
dictated terms even though their binding labor agreements are rejected.
    Given this blatantly unfair treatment of workers today under 1113, 
it is therefore essential that any reform legislation explicitly 
conclude that a rejection of a binding labor agreement is a compensable 
breach of contract and also preserve the right of employees to strike 
after a Section 1113 contract rejection. This bill does that. By making 
it clear that a rejection is a breach of contract and that such a 
rejection can trigger a lawful responsive strike, the bill will end the 
situation where the courts unfairly single workers out and restore 
workers to the position that all other providers of services are in 
under the bankruptcy laws--ensuring that they can attempt to collect 
damages for the employer's breach of their agreement, and be allowed to 
withhold services if their contracts with the debtor are rejected. New 
section 1113(g) would therefore restate what had been well understood 
before the Northwest case--that like rejection of other executory 
contracts in bankruptcy, the rejection of a collective bargaining 
agreement constitutes a breach of such agreement. It further provides 
that no claim for rejection damages may be limited by Section 
502(b)(7). Section 1113(g) also establishes that an authorized 
representative may engage in economic self-help if the court grants a 
motion rejecting a collective bargaining agreement or the court 
authorizes interim changes pursuant to Section 1113(e) and that no 
provision of the Bankruptcy Code or of any Federal or State law may be 
construed to the contrary.
    This provision is essential to restoring the economic balance 
contemplated in the anti-strike injunction mandates of Congress in the 
Norris-LaGuardia Act, which the Supreme Court found ``was designed 
primarily to protect working men in the exercise of organized, economic 
power, which is vital to collective bargaining.'' Brotherhood of 
Trainmen v. Chicago R & I. R.R., 353 U.S. 30, 40 (1957). Balance will 
be restored and management will be forced to act responsibly and fairly 
in bankruptcy towards its employees only if it is faced with the real 
possibility of a responsive strike.
    In sum, while ALPA recognizes that substantial economic sacrifices 
may be necessary by employees during severe economic disturbances, and 
in fact has repeatedly acted in a leadership role to help many airlines 
survive the ravages of the post 9-11 environment, management and the 
courts have moved the 1113 process far from its original intent to 
protect workers. Today, it is an extreme and one-sided process that is 
used to destroy workers' lives. ALPA believes the bill is proper 
restorative legislation that is urgently needed to fix the 
misinterpretation and abuse of the 1113 process that has taken place in 
the last seven years. All of these proposed changes to Section 1113 are 
necessary to ensure that the sacrifices extracted from employees are 
truly fair, reasonable and necessary. The Congress must act to restore 
the original intent of this legislation and protect employees from 
unfair, dictated sacrifices made while the corporate chieftans reap 
huge payoffs.
    Madame Chairwoman, I appreciate the opportunity to testify here 
today, and I would be happy to answer any questions you have.

    Ms. Sanchez. At this time, I would invite Mr. Bernstein to 
please proceed with his testimony.

          TESTIMONY OF MICHAEL L. BERNSTEIN, ESQUIRE, 
              ARNOLD & PORTER LLP, WASHINGTON, DC

    Mr. Bernstein. Good morning, Madam Chairwoman Sanchez, 
Ranking Member Cannon and Members of the Subcommittee. Thank 
you for inviting me to appear before your Subcommittee today.
    I am a partner in the law firm of Arnold & Porter LLP and 
chairman of the firm's national bankruptcy and corporate 
restructuring practice group. However, I am appearing today at 
the invitation of the Committee in my individual capacity and 
not on behalf of my law firm or any of its clients.
    Chapter 11 of the Bankruptcy Code is intended to enable 
financially troubled businesses to restructure their 
obligations and operations so that they are able to emerge as 
viable, going concerns. A debtor that achieves this objective 
benefits its creditors, its suppliers, its customers, its 
employees, its local community and other constituencies.
    H.R. 3652 would modify many provisions of the Bankruptcy 
Code. Some of these modifications are difficult to reconcile 
with the fundamental goal of Chapter 11 and would be likely to 
impair the ability of Chapter 11 debtors to reorganize.
    I want to make five points in this regard.
    First, some of the proposed modifications in this bill 
would increase the cost of Chapter 11 reorganizations, 
including by creating substantial new administrative and 
priority expenses. Debtors that would be unable to pay such 
expenses would be forced to shut down and liquidate.
    Second, the legislation would create additional hurdles for 
a business that needs to modify its labor and retiree costs in 
order to remain viable. It would do so in several ways. First, 
it would raise the already very stringent standard for 
obtaining 1113 or 1114 relief. Second, it would effectively 
preclude labor cost modifications where a debtor is paying 
incentive-based compensation to management even if such 
management compensation is at a market-competitive level. 
Third, it would slow down the court process. Fourth, it would 
allow unions to strike in retaliation for a debtor's 
implementation of court-approved modifications, even if such a 
strike would destroy the company. Finally, the bill would limit 
cost modification proposals to a 2-year period, which makes it 
much more likely that the company would have to file bankruptcy 
again 2 years down the road. It would also prohibit creditors 
and other interested parties from even participating in the 
1113 hearing. So the court would be precluded from even hearing 
their views, notwithstanding the fact that the outcome of the 
proceeding may have a profound impact on their recoveries.
    If these provisions are implemented, it is almost certain 
that some Chapter 11 debtors who truly need to modify 
burdensome and above-market labor costs would be unable to do 
so. Such companies would be unable to attract new capital and 
instead would be forced to liquidate. This would be detrimental 
to all stakeholders, including the employees who lose their 
jobs in a liquidation.
    Third, several of the proposed modifications would make it 
materially more difficult for Chapter 11 debtors to attract and 
retain management employees. Managers with the skill necessary 
to navigate a company successfully through the Chapter 11 
process are in great demand and tend to have many opportunities 
available to them. Indeed, competitors of a Chapter 11 debtor 
often see the bankruptcy filing as an opportunity to cherry-
pick the best management talent from the debtor.
    In order to retain and attract management talent, the 
debtor must be able to pay market competitive wages and 
benefits to its management employees, including in many cases 
incentive-based compensation. The 2005 amendments compounded 
this challenge by effectively precluding debtors from paying 
stay bonuses to management employees. The further restrictions 
in this proposed legislation would make it even more difficult 
for a Chapter 11 debtor to attract and retain management 
employees.
    Several provisions in the bill would directly link the 
wages and benefits paid to managerial employees with the wages 
and benefits to hourly employees. While there may be a 
superficial appeal to this linkage, it fails on take into 
account the economic reality that there are different labor 
markets for different types of employees.
    Fourth, certain of the proposed provisions would substitute 
inflexible, one-size-fits-all rules for judicial discretion 
that exists under existing law. For example, the bill would tax 
any asset sale that results in the termination of retiree 
benefits at the flat right of $25,000 per employee, regardless 
of the magnitude of the transaction or the magnitude of retiree 
benefits that are being lost and regardless of any other facts 
or circumstances. It would also limit 1113 relief in all cases 
to 2 years of cost savings, regardless of the actual cost 
savings that would be necessary to attract investment capital 
which would merge as a viable company.
    In any case, where there are competing plans of 
reorganization proposed, it would require the court 
automatically to favor the one that benefits employees, 
regardless of the merits of the plans or the impact they may 
have on any other constituency in the case.
    Because each company and each industry in each Chapter 11 
case is different, the reorganization goal of Chapter 11 is 
better served by allowing judges to make decisions in each case 
based on the evidence before them, rather than trying to create 
identical rules for every case without regard to the facts.
    Finally, the proposed provisions would create potentially 
substantial new priority claims, including a new and apparently 
unlimited priority claim for diminution in the value of debtor 
stock in the defined contribution plan. Viewed in isolation 
these new priority claims may not seem particularly 
problematic. However, in evaluating the extent to which such 
priority should be created, it is worthwhile to consider two 
factors. First, priority claims must be paid in full in order 
for a debtor to reorganize under a Chapter 11 plan. Thus, the 
creation of new priority claims will make it more difficult for 
companies to reorganize. Second, the new employee priorities 
will leave less money for the holders of other types of claims. 
Thus, while it may be appealing to say we are giving greater 
priority to employee claims, it is important to keep in mind 
that by doing so you are likely to be diminishing the recovery 
of other types of creditors such as, for example, taxing 
authorities, trade creditors, individual customers or tort 
victims injured by a debtor's products.
    In conclusion, 30 years ago when it enacted the Bankruptcy 
Code, Congress observed that the goal of Chapter 11 would 
promote reorganization because it was the best way to maximize 
value for creditors and preserve jobs. Over 30 years of Chapter 
11 history, this has proven to be true.
    If H.R. 3652 is enacted, it will make reorganization more 
difficult to achieve, particularly for companies that have 
substantial labor forces and substantial labor costs. The 
likely result will be that more companies end up in 
liquidation. This will be damaging to all stakeholders 
including employees, and it is inconsistent with the purpose of 
Chapter 11.
    Ms. Sanchez. Thank you very much.
    [The prepared statement of Mr. Bernstein follows:]
               Prepared Statement of Michael L. Bernstein
    Madam Chairman S nchez, Ranking Member Cannon, and members of the 
Subcommittee, thank you for inviting me to testify at your hearing on 
H.R. 3652, the ``Protecting Employees and Retirees in Business 
Bankruptcies Act of 2007.'' My name is Michael Bernstein. I am a 
partner in the law firm of Arnold & Porter LLP and the chair of the 
firm's national bankruptcy and corporate restructuring practice.\1\ We 
represent debtors, creditors, committees, investors and other parties 
in a wide variety of bankruptcy and corporate restructuring matters. I 
have advised and represented debtors and other parties in connection 
with matters at the intersection of bankruptcy and labor law, and I 
have lectured on this subject, as well as on numerous other bankruptcy-
related subjects. I have also written various books and articles. For 
example, I am co-author of Bankruptcy in Practice, a comprehensive 
treatise on bankruptcy law and practice published by the American 
Bankruptcy Institute.
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    \1\ The views expressed herein are solely those of the author, and 
do not necessarily represent the views of my firm or any of its 
clients.
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    Chapter 11 of the Bankruptcy Code is intended to enable a 
financially troubled business to restructure its operations and 
obligations so that it is able to remain a going concern, and to emerge 
from bankruptcy as a viable and competitive enterprise. A debtor that 
achieves this objective benefits its creditors, suppliers, customers, 
employees, local communities, and other constituencies. A successful 
reorganization ordinarily requires a debtor to achieve a competitive 
cost structure. This includes paying market-competitive wages and 
benefits to all employee groups, from hourly workers to administrative 
and clerical employees, to mid-level management and senior executives.
    H.R. 3652, the ``Protecting Employees and Retires in Business 
Bankruptcies Act of 2007,'' would modify many provisions of the 
Bankruptcy Code. Some of these modifications are difficult to reconcile 
with the fundamental goals of chapter 11, and would be likely to impair 
the ability of chapter 11 debtors to reorganize.
    First, some of these proposed modifications would increase the 
already substantial cost of chapter 11, making reorganization more 
difficult to achieve.
    Second, certain of the proposed modifications would create 
substantial additional hurdles for a business that needs to modify its 
labor and retiree cost structure in order to remain viable. If a 
chapter 11 debtor that needs to reduce above-market labor costs is 
precluded from doing so, it will likely be unable to attract new 
capital and unable to reorganize. This is detrimental to all 
constituencies, including the employees who lose their jobs in a 
liquidation.
    Third, several of the proposed modifications would make it 
materially more difficult for chapter 11 debtors to attract and retain 
management employees. Because of the substantial risks, burdens and 
uncertainties that typically come with managing a company in chapter 
11, it has historically been a challenge for debtors to retain and 
attract management talent. Numerous debtors have suffered from 
management defections, as their competitors cherry-pick the best 
management talent. The 2005 modifications to the Bankruptcy Code, as 
part of the Bankruptcy Abuse and Prevention and Consumer Protection Act 
of 2005 (BAPCPA), compounded this problem by effectively precluding 
debtors from paying ``stay bonuses'' to management employees. These 
bonuses had previously been an important means to compensate management 
employees for the risk and uncertainty of working for a debtor, and 
incentivizing such employees to remain with the debtor even though they 
may have more attractive, and more stable, opportunities elsewhere. The 
additional proposed modifications in H.R. 3652 would make it materially 
more difficult for a chapter 11 debtor to attract and retain managerial 
employees.
    Several provisions in the bill would link, in a direct way, the 
wages and benefits paid to managerial employees to the wages and 
benefits of hourly employees. While there may be a superficial appeal 
to this linkage, it fails to take into account the different labor 
markets that exist for different types of employees. Simply put, a 
debtor must pay its hourly employees the going rate in the community in 
which it operates for employees with comparable skills and expertise. 
The same is true for all other employees, up to and including the most 
senior executives. Thus, while it may sound good to say ``if labor 
suffers a ten percent pay cut, management employees must suffer the 
same pay cut,'' a more rational approach would be to say that: (i) each 
employee should be paid as close as possible to market-competitive 
wages and benefits, and (ii) the overall labor cost structure should 
not exceed what the company can afford to pay, in light of its 
financial circumstances.
    Fourth, certain of the proposed provisions would substitute 
inflexible, one-size-fits-all rules for the judicial discretion that 
exists under current law. Because each company, each industry and each 
chapter 11 case is different, the reorganization goal of chapter 11 is 
better served by allowing judges to make decisions in each case, based 
on the evidence before them, rather than trying to create identical 
rules for every case, without regard to the facts.
    Finally, some of the proposed provisions would create potentially 
substantial new priority claims. Viewed in isolation, this may not seem 
particularly problematic. However, in evaluating the extent to which 
such priorities should be created, it is worthwhile to consider two 
factors. First, priority claims must be paid in full in order for a 
debtor to reorganize under a chapter 11 plan. Thus, the creation of new 
priority claims will make it more difficult, or perhaps impossible, for 
some companies to reorganize. Second, priorities create ``creditor 
versus creditor'' issues more than ``debtor versus creditor'' issues. 
In other words, whenever you give priority to one type of claim, you 
are leaving less money for the holders of other types of claims. Thus, 
while it may be appealing to say ``we are giving a greater priority to 
employee benefits claims,'' it is important to keep in mind that, by 
doing so, you are likely to be diminishing the recovery of other types 
of creditors, such as taxing authorities, trade vendors, customers, or 
tort victims.
    I will now address some specific provisions of the proposed 
legislation, and point out some of the consequences that I believe 
would be likely to result if these provisions were enacted.

                        Sections 3-5: Priorities

    These provisions would increase the existing wage priority and 
create new types of priority claims, including a priority for 
diminution in the value of equity securities in a defined contribution 
plan,\2\ and an administrative expense priority for severance pay. Some 
of these new priority claims could be substantial, and would have to be 
paid in full in order for a debtor to confirm a plan of reorganization 
and emerge from bankruptcy. If these new priorities are established, 
there are likely to be some cases in which the debtor will not be able 
to confirm a reorganization plan because it will not be able to pay its 
priority claims in full. Instead, these debtors would be forced to 
liquidate.
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    \2\ This would turn what is now an equity interest into a claim, 
and then give that claim priority over general unsecured claims as well 
as certain other priority claims.
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    In addition, as I noted above, claim priorities pit one creditor 
group against another. The new proposed employee priorities will, 
except in those relatively rare cases in which there is enough money to 
pay all claims in full (in which case the priorities are largely 
irrelevant), diminish or eliminate entirely the recovery of other 
creditors. This creates fairness issues--for example, whether it is 
fair to increase the recovery of employees at the expense of tort 
victims injured by a debtor's products, customers who paid the debtor 
for goods or services but did not receive what they paid for, taxing 
authorities, or small businesses that sold goods to a debtor.

        Sections 6 and 7: Limitations on Executive Compensation

    These sections of the bill would make it substantially more 
difficult for a debtor to pay bonus or other incentive-based 
compensation to management employees. By doing so, it will make it more 
difficult for chapter 11 debtors to attract and retain management 
talent. The job of managing a debtor through the chapter 11 process is 
quite challenging and requires substantial skill. The people who can do 
this job well tend to be in great demand, and have many opportunities. 
In order to retain and attract management talent, a debtor must be able 
to pay market-competitive wages and benefits to its management 
employees. In many cases, this will include bonus or other incentive-
based compensation.\3\ If debtors are precluded from paying market-
competitive compensation, including incentive and bonus compensation, 
their best managers are likely to find alternative employment, thereby 
imperiling the debtor's reorganization efforts.
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    \3\ This is true not only because bonus and incentive compensation 
is a typical component of executive pay, but also because, unlike their 
competitors, debtors ordinarily cannot offer their management employees 
compensation in the form of equity (stock or options), since equity is 
most often out-of-the-money.
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    The requirement in section 6 of the bill (relating to compensation 
upon emergence) and section 7 of the bill (relating to compensation 
during the chapter 11 case) that management compensation be ``not 
disproportionate in light of economic concessions by the debtor's 
nonmanagement workforce during the case'' could be problematic, 
depending on how it is interpreted. If it is interpreted to mean that 
hourly workers should not be paid materially below market while 
management is paid materially above market, that would be reasonable 
and should not unduly interfere with the reorganization process. 
However, if this provision were interpreted to preclude a debtor that 
has obtained labor cost reductions through the Sec. 1113 or Sec. 1114 
process, or through negotiations, from paying market-competitive wages 
and benefits (including incentive compensation) to management 
employees, that would be problematic because it would essentially 
punish management for undertaking difficult but necessary cost-cutting 
measures, and would interfere with the debtor's ability to retain 
management employees.

        Section 8: Rejection of Collective Bargaining Agreements

    Section 1113 of the Bankruptcy Code deals with the modification and 
rejection of collective bargaining agreements. Unlike other contracts 
that can be rejected by a debtor if doing so is found to be a 
reasonable exercise of the debtor's business judgment, the rejection of 
a collective bargaining agreement is evaluated using a far more 
stringent standard.\4\ In order to reject a collective bargaining 
agreement under present law:
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    \4\ See Comair, Inc. v. Air Line Pilots Ass'n, Int'l (In re Delta 
Air Lines, Inc.), 359 B.R. 491, 498 (Bankr. S.D.N.Y. 2007) (``Congress 
enacted Section 1113 not to eliminate but to govern a debtor's power to 
reject executory collective bargaining agreements, and to substitute 
the elaborate set of subjective requirements in Section 1113(b) and (c) 
in place of the business judgment rule as the standard for adjudicating 
an objection to a debtor's motion to reject a collective bargaining 
agreement.'').
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    (1) The debtor in possession must make a proposal to the union to 
modify the collective bargaining agreement;
    (2) The proposal must be based on the most complete and reliable 
information available at the time of the proposal;
    (3) The proposed modifications must be necessary to permit the 
reorganization of the debtor;
    (4) The proposed modifications must assure that all creditors, the 
debtor and all of the affected parties are treated fairly and 
equitably;
    (5) The debtor must provide to the union such relevant information 
as is necessary to evaluate the proposal;
    (6) Between the time of the making of the proposal and the time of 
the hearing on approval of the rejection of the existing collective 
bargaining agreement, the debtor must meet at reasonable times with the 
union;
    (7) At the meetings the debtor must confer in good faith in 
attempting to reach mutually satisfactory modifications of the 
collective bargaining agreement;
    (8) The union must have refused to accept the proposal without good 
cause; and
    (9) The balance of the equities must clearly favor rejection of the 
collective bargaining agreement.\5\
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    \5\ The test was initially articulated by the court in In re Am. 
Provision Co., 44 B.R. 907, 908 (Bankr. D. Minn. 1984), and has 
subsequently been adopted by many other courts. See, e.g., In re Family 
Snacks, Inc., 257 B.R. 884 (B.A.P. 8th Cir. 2001).
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    The debtor must satisfy all nine of these standards in order to 
obtain relief. There are many cases in which a debtor's request for 
relief under Sec. 1113 has been denied.\6\
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    \6\ See, e.g., In re Delta Air Lines (Comair), 342 B.R. 685 (Bankr. 
S.D.N.Y. 2006) (debtor failed to confer in good faith); In re Nat'l 
Forge Co., 279 B.R. 493 (Bankr. W.D. Pa. 2002) (debtor did not meet its 
burden of proving that the proposed modifications were fair and 
equitable); In re U.S. Truck Co., 165 L.R.R.M. (BNA) 2521 (Bankr. E.D. 
Mich. 2000) (debtor failed to meet its burdens of proving the proposal 
to be necessary, fair and equitable); In re Jefley, Inc., 219 B.R. 88 
(Bankr. E.D. Pa. 1998) (court concluded ``that the proposal, as 
presented, is not `necessary' to the Debtor's reorganization; [and] 
does not treat the union workers `fairly and equitably'''); In re 
Liberty Cab & Limousine Co., 194 B.R. 770 (Bankr. E.D. Pa. 1996) 
(debtor's proposal was not fair and equitable); In re Lady H Coal Co., 
193 B.R. 233 (Bankr. S.D. W. Va. 1996) (debtor failed to treat all 
parties fairly and equitably and did not bargain in good faith); In re 
Schauer Mfg. Corp., 145 B.R. 32 (Bankr. S.D. Ohio 1992) (debtor ``has 
failed to show that the Proposal which it made to the Union makes 
`necessary modifications . . . that are necessary to permit the 
reorganization of the debtor . . . .''); In re Sun Glo Coal Co., 144 
B.R. 58 (Bankr. E.D. Ky. 1992) (``the debtors have failed to 
sufficiently quantify the results of such proposed changes to allow 
this Court to find that they are `necessary' to the reorganization of 
the debtors.'').
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    The additional requirements in the proposed bill would make it more 
difficult to modify or reject a collective bargaining agreement. For 
example, under existing law any proposed modifications must be 
``necessary to permit the reorganization of the debtor.'' In Truck 
Drivers Local 807 v. Carey Transp. Inc., 816 F.2d 82, 89-90 (2d Cir. 
1987), the court concluded that ``'necessary' should not be equated 
with `essential' or bare minimum. . . . [rather] the necessity 
requirement places on the debtor the burden of proving that its 
proposal is made in good faith, and that it contains necessary, but not 
absolutely minimal, changes that will enable the debtor to complete the 
reorganization process successfully.'' \7\ The proposed bill, among 
other things, would replace ``necessary to permit the reorganization'' 
with ``no more than the minimal savings necessary to permit the debtor 
to exit bankruptcy, such that confirmation of such plan is not likely 
to be followed by the liquidation of the debtor or any successor to the 
debtor.'' Depending on how it is interpreted, this standard might be 
nearly impossible to satisfy. It may require a debtor to leave itself, 
in creating a post-emergence cost structure, so little leeway that even 
a minor unforeseen ``bump in the road'' after emergence could cause 
another bankruptcy filing. The ``necessary'' standard under present law 
is sufficient to assure that modifications are achieved only where they 
are needed in order for the debtor to reorganize and emerge as a viable 
enterprise. A more stringent standard would be likely to impede 
successful reorganizations. The more stringent standard would also be 
likely to reduce the number of negotiated resolutions because, if the 
rejection standard is nearly impossible to satisfy, the unions will 
have great leverage and therefore less incentive to negotiate. Such a 
change in the standard could upset the delicate balance that exists 
under present law, which in the vast majority of cases has resulted in 
negotiated rather than litigated resolutions.
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    \7\ But see Wheeling-Pittsburgh Steel Corp. v. United Steelworkers 
of Am., AFL-CIO-CLC, 791 F.2d 1074, 1088 (3d Cir. 1986) (holding that 
``[t]he `necessary' standard cannot be satisfied by a mere showing that 
it would be desirable for the trustee to reject a prevailing labor 
contract so that the debtor can lower its costs'' and suggesting that 
the use of the word ``necessary'' equates to ``essential'' and that 
rejection under Sec. 1113 should be used only when necessary to prevent 
liquidation).
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    The bill would also amend Sec. 1113(d) to slow down the Sec. 1113 
process. This provision is not in any constituency's interest. 
Resolution of Sec. 1113 issues is often a prerequisite to obtaining 
commitments for new investments or exit financing and negotiating and 
implementing a plan of reorganization. As a general matter, the faster 
this can be achieved, the lower the costs of chapter 11 and the greater 
the debtor's prospects for success. Thus, slowing down the Sec. 1113 
process would be counterproductive. The bill would also prohibit 
creditors and other interested parties from participating in a 
Sec. 1113 hearing, even though their recoveries could be substantially 
affected by the outcome.
    The proposed legislation would also add a requirement that the 
debtor's proposal ``not overly burden the affected labor group, either 
in the amount of savings sought from such group or the nature of the 
modifications, when compared to other constituent groups expected to 
maintain ongoing relationships with the debtor, including management 
personnel,'' and would create a presumption that a debtor who 
implemented any incentive compensation or similar plan for management 
employees during the case or within 180 days before the filing fails to 
satisfy this requirement. Existing law already requires that a 
Sec. 1113 proposal assure that all creditors, the debtor and all of the 
affected parties are treated fairly and equitably. Seeking to create 
some sort of more precise equivalence between the treatment of hourly 
employees and other constituencies, without regard to market factors, 
would be counterproductive. The guiding principal should not be that 
every group must take the exact same pay cut or reduction in benefits, 
but instead that each employee or group of employees should be paid and 
receive benefits at, or as close as possible to, a market-competitive 
level, and the resulting overall cost structure should be manageable 
for the debtor.
    In addition to the foregoing modifications, the proposed bill would 
add six new provisions to Sec. 1113. Some of these provisions would 
likely undermine the purpose of chapter 11 or make reorganization 
significantly more costly. For example, proposed Sec. 1113(g) would 
authorize ``self help'' (presumably a strike or other job action) by 
labor representatives if the court grants a motion to reject a 
collective bargaining agreement or a motion for interim modifications 
to such an agreement.\8\ If a labor union, after the court finds that 
it unjustifiably refused to accept a fair and equitable modification 
proposal that is necessary for the debtor's reorganization, and 
therefore grants Sec. 1113 relief, is able to torpedo the 
reorganization by engaging in a retaliatory strike or other job action, 
the purpose of Sec. 1113 (and of chapter 11 more generally) will be 
undermined, and the company and its stakeholders will suffer. The union 
will also have less incentive to negotiate because it can always turn 
to the ``nuclear option'' of a strike if the debtor does not accede to 
its demands, or as retaliation for the debtor's implementing Sec. 1113 
relief. A more balanced provision would be to authorize the bankruptcy 
court to enjoin a strike or similar job action after granting Sec. 1113 
relief, but only where such an injunction is necessary in order to 
enable the debtor to reorganize and remain in business as a going 
concern.\9\
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    \8\ Similarly, proposed Sec. 1113(c)(1)(D)(iii) would require the 
court to consider the threat of a strike by a union in evaluating 
whether to grant relief to the debtor in the first place. In my 
opinion, this provision would be a mistake. A union should not, by 
threatening to strike, be able to compel a court to deny relief that is 
necessary for a successful reorganization. This would give the union 
too much leverage, to the detriment not only of the debtor, but also 
all of its creditors and other stakeholders who would benefit from a 
reorganization.
    \9\ Under existing law, courts have suggested that in cases 
governed by the National Labor Relations Act a union has the right to 
strike upon entry of a Sec. 1113 order. See Briggs Transp. Co. v. Int'l 
Bhd. Of Teamsters, 739 F.2d 341 (8th Cir. 1984) (rejecting request for 
injunctive relief in an NLRA case based on the NLGA's protection of 
right to strike); see also Northwest Airlines Corp. v. Assn. of Flight 
Attendants--CWA, AFL--CIO (In re Northwest Airlines Corp.), 349 B.R. 
338 (S.D.N.Y. 2006), aff'd, 483 F.3d 160 (2d Cir. 2007). By contrast, 
under the Railway Labor Act (which governs, inter alia, the airline 
industry), the Second Circuit has held that the right to strike does 
not exist. See In re Northwest Airlines Corp., 483 F.3d at 167-68.
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    Another newly proposed section, Sec. 1113(j), would require a 
debtor to pay the union's fees and expenses. Chapter 11 is already 
quite expensive, and this would create an additional administrative 
burden, to the detriment of creditors and other constituencies.
    Finally, the bill would preclude a debtor from making a Sec. 1113 
proposal that would achieve cost savings for more than a two-year 
period. This is a particularly short-sighted provision. A chapter 11 
debtor should restructure its costs and obligations in a manner 
calculated to make it economically viable for the foreseeable future, 
not only for two years. If a debtor were to look only two years in the 
future, the probable result would be repeat bankruptcy filings.\10\ As 
noted in the CRS Report for Congress, ``limiting the duration of 
modifications to a CBA may limit the debtor's ability to successfully 
reorganize.'' \11\
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    \10\ This would be inconsistent with Sec. 1129(a)(11), which 
requires that, in order to confirm a chapter 11 plan, a debtor must 
show that it is not likely to be followed by the subsequent need for 
further restructuring or liquidation.
    \11\ The Report further provides that: ``Modifications that can, in 
just two years, provide significant economic relief for the company's 
survival may necessarily require economic concessions that are too 
burdensome to be acceptable because of the effect on paychecks is too 
great. Conversely, modifications that last no more than two years but 
also have a smaller effect on paychecks may not provide sufficient 
economic relief to allow the debtor company to survive, effectively 
forcing the company into liquidation.'' See C. Pettit, CRS Report for 
Congress, Rejection of Collective Bargaining Agreements in Chapter 11 
Bankruptcies: Legal Analysis of Changes to 11 U.S.C. Section 1113 
Proposed in H.R. 3652--The Protecting Employees and Retirees in 
Business Bankruptcies Act of 2007, at CRS-5 (May 9, 2008).
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     Section 9: Payment of Insurance Benefits to Retired Employees

    Most of the proposed modifications to Sec. 1114 track the 
modifications to Sec. 1113. As a result, the proposed modifications to 
this section would create many of the same impediments to 
reorganization discussed previously with regard to Sec. 1113. Current 
law is sufficient to guard against any modification in retiree benefits 
other than in those cases where such modification is essential for the 
company to be able to reorganize and emerge from bankruptcy.

    Section 10: Protection of Employee Benefits in a Sale of Assets

    This section would impose a flat $20,000 per retiree charge upon 
all Sec. 363 sales that result in a cessation of retiree benefits. This 
flat charge apparently does not take into consideration the value of 
the transaction, the number of retirees, or the magnitude of lost 
benefits. Indeed, in some cases $20,000 per retiree could be greater 
than the entire value of the asset sale transaction, rendering the sale 
impossible to consummate even if it were the best transaction available 
to the bankruptcy estate and its creditors. This is an example of an 
attempt to create a one-size-fits-all rule without regard to the facts 
of a particular case.\12\
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    \12\ This provision also does not address the situation in which 
the assets sold are subject to a lien securing a debt that is greater 
than the sale proceeds, meaning that there are no unencumbered 
proceeds. The intent may be, in this situation, that the $20,000 per 
retiree would be a forced ``carve-out'' from the secured lender's lien. 
This would likely have implications for the availability and pricing of 
secured credit to companies that have retiree medical obligations.
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                 Section 13: Payments by Secured Lender

    Bankruptcy Code Sec. 506(c) currently provides that the trustee may 
surcharge a secured creditor's collateral to pay the reasonable and 
necessary costs and expenses of preserving or disposing of the 
collateral to the extent the secured creditor benefits from the 
expenditures. This surcharge right is sometimes waived by a debtor in 
exchange for the prepetition secured lender's consent to the use of 
cash collateral or providing postpetition financing.
    The proposed modifications to Sec. 506 would treat postpetition 
wages and other benefits as necessary costs and expenses, for surcharge 
purposes, regardless of any waiver of the surcharge right. The proposed 
modifications to Sec. 506 are likely to decrease the availability, and 
increase the cost, of secured credit, including postpetition financing. 
Particularly in a tight credit environment, such as we are currently 
facing, this surcharge provision could be problematic for companies 
seeking secured financing.

             Section 14: Preservation of Jobs and Benefits

    This provision would mandate that in a situation where competing 
chapter 11 plans were proposed, the court must confirm the plan that 
better serves the interests of retirees and employees. It seems 
reasonable for a court to consider the interests of retirees and 
employees in evaluating which competing plan to confirm. However, to 
consider only the interests of employees and retirees, while ignoring 
the interests of creditors and other constituencies, would be 
inconsistent with the approach historically taken in chapter 11 cases, 
which is to take into account and balance the interests of all 
stakeholders.\13\
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    \13\ As a hypothetical, if two plans were proposed, one of which 
would not require any job cuts while the second would require cutting 
five percent of the workforce, but the second plan would result in an 
80% recovery to creditors rather than a 10% recovery under the first 
plan, it would be more equitable to consider the interests of creditors 
as well as employees, rather than to consider only the interests of 
employees and ignore the interests of creditors.
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          Section 15: Assumption of Executive Retirement Plans

    Section 15 would preclude a debtor from assuming a management 
deferred compensation plan if the debtor has terminated its defined 
benefit plans during or within 180 days prior to bankruptcy. There are 
many cases in which it is necessary to terminate a defined benefit plan 
in order for a company to be able to remain a viable going concern. 
Under these circumstances, termination of the plan is consistent with 
the fiduciary duty of officers and directors. This provision would 
punish management for the proper exercise of their fiduciary duty by 
eliminating what is often an important element of management 
compensation. It would thereby make the job of attracting and retaining 
management talent to a company in or on the verge of bankruptcy 
materially more difficult. This section also seeks to create an 
equivalence between two unrelated plans--a management deferred 
compensation plan and an employee defined benefit plan. Instead of this 
artificial linkage, a company (and a court) should look at each plan in 
terms of whether it serves a legitimate business purpose, whether it 
provides benefits that are competitive in the marketplace, whether the 
debtor's obligations under the plan are affordable in light of the 
debtor's financial circumstances, and what would be the likely 
consequences of a proposed assumption, rejection or termination.

             Section 16: Recovery of Executive Compensation

    This provision would create a cause of action against certain 
officers and directors for the return of their personal compensation in 
an amount equal to the percentage reduction of collective bargaining 
obligations or retiree benefits implemented by a debtor pursuant to 
Sec. Sec. 1113 and 1114. This provision apparently seeks to create a 
disincentive for a company to seek to modify collective bargaining 
agreements or retiree benefits by threatening the personal compensation 
of some of the individuals involved in making the decision to seek such 
relief.
    As discussed above, Sec. Sec. 1113 and 1114 relief is available 
only when a clear case has been made that such relief is necessary for 
the debtor to reorganize. Where such circumstances exist, and yet the 
negotiation process has failed to generate an agreement, it is 
appropriate for a debtor to seek relief. Indeed, in such a situation, 
the debtor's failure to seek relief may well result in liquidation, and 
the resulting loss of jobs and creditor recoveries. The debtor's 
officers and directors should not be forced to operate under a threat 
that, if they do what is in their company's best interest, they will be 
sued and required to disgorge their own compensation. This would create 
an inappropriate disincentive for officers and directors. It would put 
such individuals in a ``Catch 22'' position--they either decline to 
implement labor cost reductions that are necessary for their company to 
reorganize, or they implement such reductions but thereby expose 
themselves to a lawsuit to disgorge their own compensation. As with 
several other provisions in the bill, this provision would make it more 
difficult for a troubled company (particularly one with labor cost 
issues) to retain and attract officers and directors.
                               __________
    In enacting chapter 11, Congress observed that , ``[i]t is more 
economically efficient to reorganize than liquidate, because it 
preserves jobs and assets.'' H. Rep. 95-595, 95th Cong.,1st Sess. 220 
(1977). Thirty years of chapter 11 history proves that this is true. 
Where a company is able to reorganize, creditors tend to recover more, 
customers and suppliers enjoy continued relationships, taxing 
authorities continue to receive revenues, employees retain their jobs, 
and local communities benefit. Unfortunately, chapter 11 reorganization 
is not easy. First, it is expensive. Second, it requires a talented 
management team to lead the effort. Third, it requires hard decisions, 
including sometimes painful cost cutting, to bring costs in line with 
revenues, and with the competitive marketplace. Fourth, it typically 
requires financing, which is increasingly hard to obtain. Fifth, it 
requires a balancing among competing interests which are often 
difficult to reconcile.
    In an effort to protect the interests of, and maximize value for 
union employees, H.R. 3652 is likely to impede chapter 11 
reorganizations. It will increase costs. It will make attracting and 
retaining talented management much more difficult. It will impair a 
debtor's ability to bring labor costs into line with the competitive 
marketplace, even when doing so is necessary in order for the company 
to remain viable. It will make financing less available and, where 
available, more expensive. And it will, by moving labor to the front of 
the line, diminish the recoveries of other constituencies, and thereby 
make the balancing of interests that is at the heart of the chapter 11 
process more difficult to achieve.

    Ms. Sanchez. At this time, I would invite Ms. Friedman to 
please begin her testimony.

             TESTIMONY OF KAREN FRIEDMAN, ESQUIRE, 
             PENSION RIGHTS CENTER, WASHINGTON, DC

    Ms. Friedman. Madam Chairwoman, Ranking Member Cannon and 
Members of the Subcommittee, thank you for the opportunity on 
testify today. I am Karen Friedman, the policy director of the 
Pension Rights Center; and we are the only consumer rights 
group in the country that works exclusively to promote and 
protect the pension rights of workers, retirees and their 
families.
    In today's economic environment, where companies are 
restructuring, cutting back benefits, it is more important than 
ever to provide strong safeguards for American families. I am 
going to focus my comments today on the important pension 
protections in the Protecting Employees and Retirees in 
Business Bankruptcy bill, H.R. 3652.
    The bill will provide critical retirement protections to 
employees and retirees when their companies go bankrupt. While 
companies once used bankruptcy proceedings only when they were 
truly in trouble as a tool of last resort, they now commonly 
view bankruptcy as a viable business strategy that allows them 
to unfairly eliminate long-standing pension obligations to 
their workers and retirees.
    United Airlines is a case study of how a giant corporation 
used the bankruptcy system to shed billions of dollars in 
pension obligations with devastating consequences for tens of 
thousands of American families. By going into bankruptcy, 
United was able to transfer its pension liabilities to the 
PBGC, which, as you know, is the Federal private pension 
insurance program. United then paid its creditors. It gave 
multimillion dollar pay packages to its executives, and it 
emerged profitable from bankruptcy. But who were the losers? 
The hard-working middle-class flight attendants, the mechanics, 
the ticket agents, the pilots and other airline employees whose 
pensions were reduced by $2 billion collectively.
    This corporate strategy is the subject of Fran Hawthorne's 
new book called Pension Dumping, which traces how companies 
have moved from honoring pension promises as sacrosanct to 
viewing them as a burden to eliminate.
    The PBGC was created as a backstop to protect workers' 
pensions when a company goes belly up. The agency ensures that 
those who spent a lifetime working for a company would not lose 
their retirement security. And the majority of workers and 
retirees in terminated plans will indeed get all of the 
benefits owed to them. And this is a great part of the PBGC. 
But there are limits on how much the PBGC can guarantee. The 
agency does not insure all the benefits workers are promised. 
For instance, it does not guarantee certain subsidized early 
retirement benefits or benefits improvements made within 5 
years of a plan's termination. These are benefits that were 
earned in exchange for other compensation. In addition, 
shutdown benefits are now only partially guarantied.
    H.R. 3652 recognizes that many individuals are left without 
recourse when the PBGC pays them only partial benefits. The 
bill would enable active workers and retirees whose benefits 
are not fully insured by the PBGC to file a claim in bankruptcy 
court for the full amount they earned. Under current law, 
individual workers and retirees are precluded from making such 
a claim for the difference between what the PBGC provides and 
what the plan had promised.
    This provision will make a world of difference to employees 
across the country who give up wage increases for the promise 
of a full pension. When the pension plan is terminated through 
no fault of their own, employees experience, in essence, a 
retroactive pay cut, losing benefits they earned and can never 
ever get back.
    H.R. 3652 also includes provisions to ensure that 
executives cannot enrich themselves while employees suffer 
benefit cuts in bankruptcy. The bill provides that if an 
employer terminates a plan, the executive compensation 
arrangements have to be terminated as well. The provision would 
put an end to such an unfair situation such as when Glen Tilton 
paid himself over $25 million in executive compensation after 
the company's restructuring.
    Finally, the bill provides important protections to 
employees in 401(k) plans. At a time when defined benefit plans 
are being replaced by do-it-yourself savings plans, employees 
need to know that their money is protected. H.R. 3652 provides 
individuals with a new priority claim in bankruptcy court when 
the value of their company stock in a 401(k) plummets because 
of corporate misdeeds or fraud.
    Enron is the most notorious example of such corporate 
abuse. The ending of that story is well-known. Thousands and 
thousands of workers lost their retirement money because they 
were misled by Enron executives. And who better to have a claim 
for their money? But while the Enron collapse may have occurred 
6 years ago, its lessons are still valid and similar situations 
could happen today.
    In closing, we thank the Subcommittee for holding this 
hearing on this important bill and taking steps toward 
protecting American workers and their families' retirement 
security.
    I will be happy to answer any questions.
    Ms. Sanchez. Thank you for your testimony.
    [The prepared statement of Ms. Friedman follows:]
                  Prepared Statement of Karen Friedman
    Madame Chairwoman, Members of the Subcommittee, thank you for the 
opportunity to testify today. I am Karen Friedman, Policy Director of 
the Pension Rights Center, a 32-year-old consumer rights organization 
dedicated to promoting and protecting the retirement security of 
workers, retirees, and their families.
    In today's economic environment, where increasingly companies are 
restructuring and cutting benefits, it is more important than ever to 
provide strong safeguards for American families. I will focus my 
comments today on how corporate practices are affecting employees' and 
retirees' retirement security and discuss the important pension 
protections included in the ``Protecting Employees and Retirees in 
Business Bankruptcies Act of 2007,'' (H.R. 3652).
    H.R. 3652 will provide critical retirement protections to employees 
and retirees when their companies fail or restructure under the 
bankruptcy code. While companies once used bankruptcy proceedings only 
when they were truly in trouble, as a tool of last resort, they now 
commonly view bankruptcies as a viable business strategy that allows 
them to unfairly eliminate long-standing pension obligations to their 
workers and retirees.
    United Airlines is a case study of how a giant corporation used the 
bankruptcy system to shed billions of dollars in pension obligations--
leading to devastating and irreversible losses to tens of thousands of 
American families. By going into bankruptcy, United was able to 
transfer its pension liabilities to the Pension Benefit Guaranty 
Corporation (PBGC), the federal private pension insurance program. 
United then paid off its creditors, gave multimillion-dollar pay 
packages to its executives, and emerged profitable from bankruptcy. The 
losers were the hard-working middle-class flight attendants, mechanics, 
ticket agents, pilots, and other airline employees, whose pensions were 
reduced by $2 billion.
    This corporate strategy is the subject of Fran Hawthorne's new book 
Pension Dumping, which traces how companies have moved from honoring 
pension promises as ``sacrosanct, stronger perhaps than any other 
business contract,'' to viewing them as a burden they want to 
eliminate.
    Hawthorne says that even companies that are reluctant to cut 
benefits are often forced to terminate the plan by so-called ``vulture 
investors,'' who will only provide financing to a company if the 
pension obligations disappear.
    While some of these companies emerge financially healthy--at least 
in the short-term--the workers and retirees often lose hundreds of 
thousands of dollars of the earned benefits that they were relying on 
to make it through retirement. In short, pension dumping is a short-
term strategy with devastating long-term consequences.
    The PBGC was created as a backstop to protect workers' pensions 
when companies go belly-up, in order to ensure that those who spent a 
lifetime working for a company would not lose their retirement 
security. And the majority of participants in terminated plans will, 
indeed, get all the benefits owed to them. But there are limitations 
created by Congress on how much the PBGC can guarantee. For instance, 
the PBGC pays a maximum age-65 benefit of $4,312.50 per month (or 
$51,750 annually) for plans terminated in 2008. This amount is adjusted 
for inflation every year. The agency, however, does not insure all the 
benefits on which workers' rely. The PBGC does not guarantee certain 
subsidized early retirement benefits or fully insure benefit 
improvements made within five years of a plan's termination, benefits 
that were gained in lieu of other compensation. In addition, under the 
most recent amendments to federal law, shutdown benefits, negotiated by 
unions, are now only partially guaranteed if the shutdown occurs within 
five years of the plan termination.
    H.R. 3652 recognizes that many individuals are left without 
recourse when the PBGC only pays them partial benefits. This bill would 
enable active workers and retirees whose benefits are not fully insured 
by the PBGC to file a claim against the plan sponsor in bankruptcy 
court for the full amount they earned. Under current law, individual 
workers and retirees are precluded from making such a claim for the 
difference between what the PBGC provides and what the plan had 
promised.
    This reasonable provision will make a world of difference to 
employees in hundreds of corporations and industries across the 
country, employees who meet their end of the bargain by working 
throughout their career with the promise of getting a pension based on 
all their years of work. Employees give up wage increases in exchange 
for the company contributing to the defined benefit pension plan on 
their behalf. When the pension plan is terminated--through no fault of 
their own--employees, in essence, experience a retroactive pay cut, 
losing benefits they earned and can never get back. And unlike other 
creditors who know they are taking risks in lending money to a 
corporation, workers--at least in the past--assumed their money was 
safe in the pension plan.
    H.R. 3652 also includes provisions to ensure that executives cannot 
enrich themselves while employees suffer benefit cuts. The bill fairly 
provides that if an employer terminates a plan, the executive 
compensation arrangements must be discontinued as well. This provision 
would put an end to such unfair situations as when United CEO Glen 
Tilton, after the restructuring, paid himself $4.5 million in pension 
and other benefits--an astounding $25 million worth of stock and $6 
million in stock options--not to mention his more than $3 million in 
salary and bonuses.\1\ It is unjustifiable for executives to pay 
themselves lavish compensation packages while terminating their 
employees' pension plan as well as reducing their salaries and other 
benefits.
---------------------------------------------------------------------------
    \1\ Hawthorne, Fran, Pension Dumping: the Reasons, the Wreckage, 
the Stakes for Wall Street, pp. 143-144 (2008)
---------------------------------------------------------------------------
    Finally, the bill provides important protections to employees in 
401(k) plans. At a time when defined benefit plans are being replaced 
by do-it-yourself savings plans, employees need to know that their 
money is protected. H.R. 3652 provides individuals with a new priority 
claim in bankruptcy court when the value of their company stock in a 
401 (k) plan plummets because of corporate misdeeds or fraud. Enron is 
the most notorious example of such corporate abuse. Although Enron 
executives Ken Lay and Jeffrey Skilling were well aware the company was 
tanking, they persuaded their employees to continue to invest their 
401(k) money in Enron stock--at the same time they were selling their 
own company stock. The ending of that sad story is well-known, as 
thousands of workers lost all their retirement money. But while the 
Enron collapse may have occurred six years ago, its lessons are still 
valid. Employees still are permitted to invest all their 401(k) money 
in company stock. If company executives breach their fiduciary duty by 
misleading individuals as to the value of that stock, then employees 
should have their day in court.
    The Pension Rights Center thanks the Subcommittee for holding a 
hearing on this important bill that takes some important steps towards 
protecting American workers' and their families' retirement security. 
This bill recognizes that workers have upheld their end of their 
bargain--giving their labor and loyalty to companies--and at the very 
least they should have their day in court to protect what they have 
earned.

    Ms. Sanchez. We are now going to begin our first round of 
questioning; and I believe our Chairman, who has another 
hearing, must leave, so I am going to allow him the opportunity 
to question first.
    Mr. Conyers. Is it okay with Mel Watt if I go first?
    Ms. Sanchez. Sure. I am sure Mr. Watt has no objection.
    Mr. Watt. If she lets me go second.
    Mr. Cannon. Which I have no objection.
    Ms. Sanchez. Mr. Conyers, you are recognized if you like.
    Mr. Conyers. Thanks so much.
    Look, there isn't much secret about this. I only wish we 
had more people like Mr. Bernstein who we can talk to about 
this.
    For your homework, I want you to read all of your fellow 
panelists' statements and then report back to me and Chris 
Cannon and we will give you a--it won't be part of your final 
grade, but we will test you out on this.
    Because you are not representing your company or your 
clients. This is you talking to us. And so we want to try to 
sort our way through this in a reasonable way.
    I mean, workers are getting screwed big-time, massively. We 
have got 51 sponsors of this, more than half a dozen in the 
Senate. Everybody is clamoring for this legislation to get some 
kind of reasonable control.
    So, Mr. Bernstein, in all fairness to you--because we could 
have a panel next time, if somebody wants it, on the Committee. 
We will have three witnesses against the bill and one witness 
for it and see how it comes out then. It may be different, but 
it may not be. But, look, let's get down to this thing.
    What would you want the Chairwoman, Linda Sanchez, the 
Ranking Member, Chris Cannon, Mel Watt and me to do to make 
this at least easier for you to swallow? It may be like taking 
medicine. You are going to have to take it. Do you want tap 
water or you want a Coke light? How can we make this more 
palatable to you? That is I want to do today.
    Mr. Bernstein. Congress, in enacting 1113, sought to 
encourage negotiated solutions. That was the stated objective. 
And it is in fact what has happened.
    Although we all hear about the very few cases that some of 
my other witnesses here have mentioned that result in 
litigation, there are very, very few cases that result in 
litigation compared to the enormous number that are resolved. 
So what Congress sought to do by drafting a bill that gave some 
leverage to companies in bankruptcy and considerable leverage 
to unions as well is to give each side the incentive to 
bargain. And it has worked exactly as it should.
    Now I understand that the representatives of labor unions 
would like more leverage. And they say that negotiations are 
very difficult for us and the company runs over us and makes 
the threats. And if you had a bunch of managers here of Chapter 
11 debtors, they would tell you that the union has a lot of 
leverage and the union always threatens to strike and the 
statute as it exists sets such a high standard that it is very 
difficult to satisfy. So everybody would like more leverage, 
and everybody would like a better bargaining position. But 
Congress really achieved what it sought to achieve here in 
leveling the playing field, and the best evidence of that is 
the number of negotiated solutions that have arisen.
    Now, I recognize that the cuts in pay and benefits that 
employees have been asked to take in Chapter 11 cases are 
significant and very difficult. The question in these cases is 
whether it is better to implement the necessary cuts so that 
the company can survive and emerge from bankruptcy or whether 
it is better instead to say, well, labor doesn't want to take 
cuts and the standard is so high we can't force them to so we 
will just shut down the company and all the creditors get 
nothing and all the union employees lose their jobs. And I 
think it is because survival of the company is so important 
that the unions have recognized this and in the overwhelming 
majority of cases have worked together with management to come 
up with a solution that is less than ideal but saves the 
company.
    Mr. Conyers. Well, I have more work on my hands than I 
thought originally. Let me close down by having the other three 
witnesses help us move this toward some reality here. Ms. 
Ceccotti?
    Ms. Ceccotti. Yes. Well, I would certainly agree that 
negotiated solutions are preferable. I think that that is a 
hallmark of labor negotiations generally and certainly the 
bankruptcy process.
    But I think the problem that I have with the witness' 
answer is that even though there may be negotiated solutions 
eventually, in many cases, first, debtors in Chapter 11 are 
simply using the litigation process as a lever to get there. It 
is not the situation where there are so few court cases that, 
you know, we can count them on the fingers of one hand. Debtors 
routinely start litigation processes. They spend enormous time 
and money, creditors' money I might point out, starting these 
expensive litigations over contract rejection when really what 
Congress intended in 1113 is for the parties to engage in 
negotiations over a proposed solution.
    The problem with this two-track approach, which is very 
common now, is that it is distracting, it is expensive, and the 
union very quickly gets the idea that the court process is 
going to work against it. Once that mindset sets in, it makes 
the search for genuine and fair solutions extremely difficult 
for the union and for the rank and file members to swallow. So 
I would say that we cannot simply look at the number of 
negotiated solutions versus the number of court decisions, 
because that will give you a very distorted view of how the 
process works.
    Mr. Conyers. I will ask the Chairwoman to get both the 
people to your right and left's view to my question, because I 
am out of time. But let's continue this discussion.
    I will just leave asking you, Mr. Migliore, what do you 
think of the proposed Northwest/Delta merger?
    Mr. Migliore. Well, the merger itself, you know, obviously 
has to be worked out between the pilots; and we always have 
internal issues between that.
    But in terms of the general issue of mergers, I mean, there 
is definitely increased pressures on almost all of the 
employees when you are in a scrunching situation. When two 
groups are being put together into a smaller group, there is 
going to be pressures applied. And there is no question that 
the merger situation, in addition to all of this that we are 
talking about in terms of bankruptcy, is this is going to raise 
the pressure on employees further, as a whole, looking at the 
industry as a whole, looking at it broadly.
    But I have to tell you, you know, the biggest thing that I 
see right now in the bankruptcy sphere that we are talking 
about right here is what the Second Circuit did in that case. 
Regardless of what Mr. Bernstein said, that is going to be--the 
theory of that case is going to be too powerfully attractive 
for management to resist at this point. They are going to use 
it to jam things down the employees' throats.
    They don't have a right to get damages when their contracts 
are cut in half. They don't have the right to respond to even 
say, hey, if you break my binding agreement, if you breach my 
agreement which the court says you can't breach anymore, I am 
going to strike you. They say you can't do that either.
    So if you are put in that situation as an employee and as a 
manager, what do you think the managers are going to do? They 
are going to steamroll these guys, and they are doing it, and 
they are going to do more of it.
    So I want everybody to realize, regardless of how this has 
played out before, going forward this is going to get a whole 
lot worse. Because these employers are all going to come to New 
York. Almost anybody can file an 1113 in Manhattan. They are 
all going to go there, and they are all going to take advantage 
of that case, and they are going to steamroll the employees.
    Mr. Conyers. We four are going to be following this 
carefully. And I thank you, Chairwoman Sanchez.
    Ms. Sanchez. Thank you. The gentleman yields back his time.
    I will recognize myself for 5 minutes of questions, and I 
want to start out with a little anecdote, because I think it 
sort of highlights the problem that we are talking about here 
today.
    I tend to fly quite a lot for work, for obvious reasons. 
And I was on a plane recently, and I won't say what carrier, 
but I was sitting in the front seat, and I was listening to the 
flight attendants talk with the mechanics and the folks that 
were loading things onto the plane. And I overheard a 
discussion that they were talking about, which was this bonuses 
incentive pay that they were promised if they could keep their 
record on on-time departures at a certain percentage. There was 
an incentive program that some CEO sitting at the top had 
thought would really motivate folks to get the planes cleaned 
and stocked and ready to go for their departure times, and so 
these employees had really put themselves out to make sure that 
each flight left on time as often as possible.
    And then the guy said, yeah, and when the bonuses came, 
when it came time to hand out the bonuses, the people that got 
the bonuses were the managers, not the people that are doing 
the work on the ground.
    And I think that sort of illustrates the problem that we 
are seeing here with bankruptcy. We are seeing Chapter 11 
bankruptcy and CEOs who, when there is pain, when there have to 
be cuts, it is not being shared equally in the way that when 
things that are good that are happening that are helping the 
airline are not being shared with the people who are really 
responsible for them. And it is the people who are on, you 
know, the front line doing the grunt work to make sure that 
these businesses continue to run.
    And so I am very pleased that you are all here, and I 
understand there are difference of opinions, but I think what I 
am seeing is that things are skewed in one side's favor. And I 
think what we are trying to get at is how do we balance that 
playing field.
    My first question is for Ms. Ceccotti. Section 8 of this 
bill would limit the effect of a labor group's concessions to 
no more than 2 years, and I am interested in knowing why that 
limitation is necessary.
    Ms. Ceccotti. Well, I think we heard--I think we have heard 
already about the United situation. I guess I will use that as 
an example. But it is by no means the only example.
    What happens is that in an 1113 negotiation the proposals 
that can be made by the debtor are supposed to be limited by 
economic proposals that are supposed to be clearly necessary. 
But duration, the duration of the length of time the agreement 
is going to be in effect is always something that it is part of 
these negotiations.
    And United, for example, was very successful in this effort 
and got 7-year contracts, almost unheard of. These were 
negotiations that occurred very early on in the case. No one 
obviously foresaw how the case would turn out. When United 
finally did emerge from bankruptcy, of course with its balance 
sheet much improved by the plan terminations and all, something 
like $11 billion in labor costs savings, it did very well. It 
did so well in fact that it was able to make a special dividend 
payment to shareholders of $230 million just earlier this year.
    We have already heard about the executive pay awarded to 
CEO Tilton and others. So the workers, seeing that the company 
was doing very well, asked the company to begin talks early on 
its 7-year agreement; and the company has said, no, the 
amendable date of those agreements is not for another year. 
Those workers are going to be working under cuts in pay and all 
of the onerous working conditions that they undertook to get 
the company out of bankruptcy for another year before United 
will even start to talk to them about a replacement contract, 
even though United has been able to pay shareholders extra 
money. It has prepaid part of its term loan to its exit 
lenders. It is clearly doling out money that it has reaped 
based on the successes of its very successful bankruptcy case 
to other constituencies, and workers are left to left to live 
under these harsh contracts.
    Ms. Sanchez. So, to clarify, when companies who unusually 
file bankruptcy return the profitability like the United case, 
there is no renegotiation of these concessionary agreements?
    Ms. Ceccotti. There certainly could be. And there is 
nothing, absolutely nothing preventing United or any other 
carrier or any other company that has emerged from bankruptcy 
from saying, hey, we are doing much better than we thought. We 
will--like our shareholders, we will give you an extra bonus or 
we will snap back your wages. But the whole snap-back issue 
becomes a real lightning rod in these bankruptcy negotiations 
because workers rightly believe that if the company actually 
does better than anticipated, they should share in the gains.
    In fact, the anecdote that you told goes right really to 
the heart of this issue. Because really the reason that the 
company turned around, in addition to the concessions, is the 
fact that workers were showing up and doing exactly the types 
of tasks that you witnessed. They are the vital lifeblood of 
the business' recovery.
    The limitation that is in the bill is intended to say to 
companies, look, you are going to have to be much more measured 
in what you take out of workers during this process. Because we 
have seen what happens when duration clauses and contract 
lengths are simply left open-ended. There is nothing that would 
force a company to share the gains that it has reaped from 
bankruptcy. So this is an effort to say, in that case, you are 
only going to take but so much.
    Ms. Sanchez. Thank you. My time has expired, so I will 
recognize Chris Cannon for his 5 minutes of questions.
    Mr. Cannon. One is tempted looking at the dais to yield 
back, except that I know the Chairwoman has questions that will 
go on, so I thought I would take a few minutes and get to the 
core of some of these issues.
    Let me say, first of all, bankruptcy is not a partisan 
issue. It is a philosophical issue. It is a control issue, a 
State control issue versus a market control issue, but it is 
not a partisan issue. And it is complicated. The issues that 
Ms. Friedman raised about pensions are complicated issues of 
which a small piece is before us and to solve those problems I 
think we need a broader forum.
    And I might add that it also has tended here to be a union 
versus management issue.
    Let me just say that I was a member of a union. I earned my 
way through college by being a teamster, and I believe there is 
a constitutional right to organize unions.
    The question when we deal with bankruptcy becomes much more 
difficult. It becomes how do you balance the context for 
continuing jobs against some of the other priorities. And I 
think, Mr. Bernstein, you laid out those issues very, very 
well. Thank you.
    I note that the Chairman of this panel and the Chairman of 
the full Committee and two of our panelists used the term 
``outrageous'', and I would just say that there are outrageous 
profits to be made or compensation to be made if you become a 
business leader, and therefore we hope that more people move 
into that field and bid down the cost of leadership. Because 
the amounts that are made are actually really outrageous, but 
they are outrageous in the context of a market. It is not a 
very fluid market; and, in fact, the bankruptcy itself takes 
out some of that fluidity and distorts some of the decisions 
that are made by people.
    On the other hand, we can take out some of the risk that 
goes along with that in what we do in bankruptcy or how we deal 
with bankruptcy so that there are--there is more fluidity, more 
openness to the market.
    I have followed one bankruptcy where all the creditors were 
paid off. The pensions were--it was a defined benefit or--
pardon me--it was a defined contribution pension plan, and 
therefore the employees were all thrilled at the end because 
they took pensions that were more significant than their 
defined benefits would have been.
    But after coming through a remarkably difficult, complex 
set of proceedings, with everyone paid off, the managers were 
attacked by the trustee and ended up settling for a small 
portion of the compensation that I think they earned in the 
process.
    So the uncertainty of bankruptcy clearly adds to the value 
proposition that a manager needs when he looks forward to 
making a decision that could be a career-ending decision or it 
could be a profitable phase of his life.
    With all of those things in mind, it seems to me that what 
we need to be looking for here is not sort of the extreme 
positions of this is outrageous, but rather what can we do to 
actually make some adjustments.
    So let me ask Ms. Ceccotti and Mr. Bernstein because you 
differ very clearly on section 1113, is there a way we draft 
the section in your minds that would get closer to where we 
each want to go without creating this destabilizing of what I 
think has been historically a fairly good balance?
    I might preface my question by saying I started practicing 
law about the time we did the last bankruptcy reform in 1978. I 
was actually working in a law firm and got my law degree in 
1980 and thrust into a really nasty bankruptcy. I was disgusted 
by the process. I thought there were a bunch of leeches that 
lived off the bankruptcy process. But in the last 30 years I 
have been amazed how we have taken it from an awful system that 
very few people understood to a system that has actually worked 
to preserve many companies and many, many jobs.
    In that context are there some narrow things that we can do 
with the language before us that would help us balance without 
destroying what I think we have achieved where more jobs stay 
in place as opposed to destroying more jobs, Ms. Ceccotti? Is 
there such language?
    Ms. Ceccotti. Sure. I think I understand your question.
    I think what has happened here is that the courts have 
really not--the courts really didn't take Congress' direction 
in 1984. Some courts got it. But many courts simply didn't, or 
didn't like it, and the judges found not enough guidance, 
frankly, in the language that was drafted in 1984.
    So watching that development, and I have attached actually 
to my testimony which you might find interesting an article 
that was just published in the ABI law journal that really does 
track with some degree of specificity what has happened, what 
happened very soon after the enactment of 1114 with the courts 
and what they did with the language and how it is reflected in 
the decisions today.
    So in looking in just having to accept the fact that the 
courts simply didn't know what to do with the statute, the 
notion would be here, and what the bill I think tries to do is 
to say to the courts, okay, we, Congress, will have to give you 
better guidance and that means more specific guidance on 
exactly how the two elements that I think are reflected in 1113 
and have been completely distorted beyond recognition must 
operate.
    First, you must have a good chunk of time to do the 
bargaining. So where we have perhaps more provisions or more 
words used, more language that has to be brought to bear on 
defining what that means, the intent I think is to say to the 
courts you really cannot let companies start litigation early. 
So there are certain changes that are in here now that are 
really geared toward process. They are really geared toward 
giving the parties the time to function in a serious way to 
figure out what is wrong and what would be the labor group's 
fair share.
    The second piece of this that 1113 was designed to do that 
the courts have simply been terrible at figuring out how to 
apply is what is the labor group's fair share. So here again, 
while I understand that there are more words and more 
provisions and some might consider this, the current iteration 
to be, the way the bill does it, to be less flexible, really 
the intention here is again to do the same thing, which is to 
say to the courts okay, here is what we mean when we say that 
labor's share must be proportionate.
    So I am afraid that by starting to tweak the language and 
so forth we would just be back to the situation that 
spectacularly failed with section 1113, which is absent clearer 
guidance the courts didn't know what to do and have simply let 
the debtors run away with the store.
    Mr. Cannon. Ms. Ceccotti, let me follow up with one aspect 
of what you said. You would like more time for bargaining, but 
isn't time a critical factor in many of these bankruptcies?
    Ms. Ceccotti. Well, I am very glad that you asked that 
question, actually. In fact, one of the concerns in drafting 
1113 originally was that Chapter 11 practice was--the modern 
Chapter 11 practice was much newer then. The Code had been 
revamped in 1978. There really wasn't that much time for 
companies to be operating under the new rules, and there were 
still companies who were waiting too long, getting too close to 
the brink of liquidation before filing bankruptcy cases. And 
that was one of the things that the 1978 Code tried very hard 
to correct. Obviously if a company can go into Chapter 11 
sooner, there are better chances to save the business.
    Now in 2008, particularly with the more recent round of 
cases involving entire industries, or what seem like entire 
industries, they need all of the time that they can get, 
frankly, because really bankruptcy for them can only solve but 
so much. Bankruptcy can't bring the fuel prices down or deal 
with the trade situation which caused the glut of the drop in 
steel prices and can't deal with changing demands for OEM cars.
    It can do certain things, but these problems are so 
complicated that now in 2008, as opposed to in 1984, companies 
actually do need a fair amount of time. Adelphi Corporation, 
for example, started its 1113 process virtually the day it 
filed for bankruptcy, and it took years to reach agreements 
with five unions simply because the case was that complex.
    So while I do think that the statute does deal with time 
exigencies, there is an emergency relief provision which 
provides stopgap measures so workers and the company can work 
on the bigger picture.
    I think that the time element now has vastly changed with 
the complexity of the cases that are being filed, and I want to 
note that Congress in the 2005 amendments has said to all 
stakeholders that the debtor only has 18 months to figure out 
how it wants to come out of bankruptcy, so everybody really 
does have to kind of put their shoulders to the wheel and 
figure out in a very timely way how to get to a plan that is 
going to work.
    Ms. Sanchez. The time of the gentleman has expired, but 
there is tremendous interest in receiving more information from 
the witnesses. So we are going to move to a second round of 
questions. I will recognize myself for 5 minutes.
    Mr. Migliore, I am interested in hearing from you what 
bankruptcies mean to the typical pilot, for example, in terms 
of their wage cuts and pension cuts, et cetera.
    Mr. Migliore. At least at United and Northwest, which are 
recent examples we had, both pilot groups lost about 40 percent 
of their pay.
    The United pilots lost their pensions, and so they went to 
the PBGC, and they basically will get at most a third what they 
expected to get. Mr. Tilton got his 40 percent bonus and in the 
tens of millions of dollars worth of stock options and 
benefits. The pilots are certainly looking at this and saying 
we have lost 40 percent of our pay and we have lost two-thirds 
of our retirement. The CEO gets 40 percent more pay and he gets 
some $20 million worth of a golden parachute.
    The reactions from these people is what you would expect. 
It is total outrage. And if I was in their shoes, I would be 
more outraged.
    I understand there are market forces at issue here, but why 
we are here is to try to put a brake on this so people will get 
a fair break and have an opportunity to have a living standard 
that they have built up. Pilots have built this up over 20-30 
years, and these people are seriously being knocked out of the 
middle class today.
    Ms. Sanchez. With respect to bargaining, and I have some 
familiarity with negotiating for employment contracts, and it 
has been my experience and I am interested in knowing if it is 
yours as well, that oftentimes employees will agree to no 
increases in pay so that they can retain their pensions or 
other types of benefits. So they are willing to sacrifice in 
increased wages, they are willing to sacrifice increased wages 
so that they can retain a safety net through pension benefits 
or health care benefits.
    So it seems to me, and I am interested in your comments, 
that it is almost, in a sense, sort of an illusory promise that 
if you are going to take the wage cuts or no wage increases so 
that you can have a pension that will be there when you need 
it, and then you go through something like this and see it 
completely wiped out, it is almost an illusory promise to the 
employees.
    Mr. Migliore. That is exactly what happened to the pilots 
of U.S. Airways. They had multiple 1113 rounds, as did United, 
and they made some significant wage cuts to try to save their 
pension plan, their defined benefit plan, and then they ended 
up losing it in the last round they had. I am sure that they 
felt that way. They were very angry about it because again the 
pension vehicle, the defined benefit plan, really was a primary 
vehicle for moving people into the middle class in this 
country, to have retirees not be, you know, struggling on a 
small Social Security check, and that has been removed from 
lots and lots of pilots and all sorts of other employees, too.
    You think of pilots that are highly paid, but there they 
are all not. Some fly for the feeder carriers and make $22,000 
a year. A number of them took wage cuts, too. For example, 
Comair and other feeders we have. Some of them were knocked 
back down to the level where their families would qualify for 
welfare and food stamps.
    The market is great, but we have to decide whether there is 
a role to try to tame the excesses of the market so people have 
a chance not to be destitute basically, and that is really what 
we are talking about in this legislation. The system has gotten 
so far out of whack where if management can come in and say we 
are free to cut your pay in half and we are free to your take 
your pension but you can't strike in response and you can't 
come after us after we breach your agreement, that is about the 
most one-sided thing that I have seen in the 23 years I have 
practiced labor law. That is all I can say about it.
    Ms. Sanchez. I am interested in getting your thoughts about 
the ramifications of the Second Circuit's recent ruling that 
enjoined airlines employees from striking.
    Mr. Migliore. Legally I think it is wrong, and I have 
stated in my written testimony why under section 6 of the 
Railway Labor Act we think the Second Circuit got it 100 
percent incorrect and under the Norris-LaGuardia Act.
    Putting aside the technicalities of it, the practical 
import of that decision I cannot state more clearly how much 
that is going to negatively affect going forward the ability to 
get anything done consensually in 1113. That is what 1113 was 
designed for in 1984. The Congress looked at the Bildisco 
decision and said that looks pretty one-sided and we need to 
fix it. So they put the 1113 procedures in effect. Perhaps they 
were not as specific as they could have been and should have 
been. We are trying to deal with that. But now the Second 
Circuit comes along and says going forward in 1113, employees 
won't have the right to strike. It has been unquestioned when 
someone tears up the agreement saying you have to come to work, 
you have the right to respond by saying I'm not going to work 
because you just tore up my agreement. Now the Second Circuit 
says no, you have to go to work, and when they tore up your 
agreement, you don't get any breach damages for them breaching. 
It wasn't really a breach. The court bailed you out with an 
abrogation, so we are going to let that go. The bottom line is 
management has no intent of negotiating in light of that 
decision because they can say they can't come after us. They 
can't threaten to strike or come after us to try to get 
compensation for breaching their labor agreement, so why should 
we do anything other than tell you this is what you are going 
to take and you are going to take it or we are going to--you 
know, and do the typical threat routine that they do.
    Everybody on this Committee, that decision is going to 
totally decimate any ability to negotiate anything under 1113.
    Ms. Sanchez. Mr. Bernstein, in 2005, the Bankruptcy Code 
was amended to stop CEOs and other top executives from giving 
themselves lucrative bonuses and other compensation at the same 
time that they are using the bankruptcy process to slash wages 
and benefits and jobs for rank and file workers. And from the 
testimony and some of the examples we have heard today, it 
appears some of those abuses are still continuing. I am 
interested in knowing whether you think Congress should tighten 
the law to stop those kinds of abuses from happening, or do you 
not think they are abuses?
    Mr. Bernstein. I would question the premise as to whether 
the system is rife with abuse. I think the reality is that the 
system is rife with very difficult problems to solve, and each 
side having some leverage and bargained solutions being the 
result.
    Ms. Sanchez. Do you think there is leverage in the case 
that Mr. Migliore talked about where they can basically say, 
``We don't have to honor this collective bargaining agreement; 
and, by the way, you still have to come to work and you can't 
strike and, by the way, you don't get damages for us not 
upholding our end of the collective bargaining agreement?'' Do 
you think there is leverage there?
    Mr. Bernstein. Let me provide a little background and 
context about the Northwest Airlines case which our firm 
represented the airline in because the full story hasn't come 
out.
    Northwest had negotiations like all other airlines do with 
all of its labor unions. It made a deal with all but one of its 
labor unions. They all negotiated solutions and those were 
approved. I am leaving out some of the details. It then made a 
deal with the flight attendants union as well. The members of 
the flight attendants union then rejected their own union's 
deal. So there was briefing and litigation filed with respect 
to that one union. The flight attendants also made a deal, but 
twice their own membership rejected their union's agreement. 
The union in its own brief referred to its own members as 
recalcitrant employees because they wouldn't accept the 
negotiated solution. It was clear, I think it is fair to say, 
to everybody in that case that if the flight attendants union 
had struck the airline it would have destroyed the airline. It 
is in that context that the strike was enjoined where the 
airline made a deal with all of its unions. With respect to the 
flight attendants, it met an extraordinarily high standard 
showing that the modifications that is implemented were 
essential for the airline to survive and reorganize, that it 
had made a good faith, fair and equitable proposal, and that 
the union had wrongfully refused the proposal. Those were all 
the findings that were made.
    Ms. Sanchez. Let me follow up with a question. Do you think 
there are instances in which it would be appropriate for people 
to be able to strike, or do you think--do you agree that it is 
a good thing that employees be forbidden from striking?
    Mr. Bernstein. There is a difference in the law between NLR 
cases and RLA cases. The Second Circuit case was only an RLA 
case, so it involves railways and airlines, and the law is 
different for other airlines.
    But in terms of the policy question that you asked, my 
personal view is that the bankruptcy court, the way to achieve 
balance here is that the bankruptcy court should be able to 
enjoin a strike but only in those situations where the court 
finds that the strike would be likely to destroy the 
reorganization and therefore destroy the company.
    Ms. Sanchez. Let me ask you this sort of fundamental 
question. Why shouldn't all participants in Chapter 11 cases, 
including CEOs and other managerial types, share the pain that 
the line workers have to endure over the course of a company's 
financial restructuring? And my second question is with respect 
to what we talked about earlier with respect to time deadlines 
and once a company has returned to profitability, why there is 
no sort of renegotiation of the concessions that were made to 
help the company out while it was struggling?
    Mr. Bernstein. On the first question, the sharing the pain 
issue, there are many cases where not only senior management 
but mid-level management and salaried employees have suffered 
substantial pay and benefit cuts. The way to structure 
compensation----
    Ms. Sanchez. A follow-up question, sorry. Were their 
pensions wiped out entirely? Has that happened to middle 
managers where a whole class of middle managers' pensions were 
wiped out completely in a restructuring? Are you aware of any 
cases where that has happened?
    Mr. Bernstein. I can't think of a case offhand, but there 
are many cases I know of where the middle level managers didn't 
have any pension benefits.
    Look, I understand it is appealing to say that labor took a 
20 percent pay cut and so management should take a 20 percent 
pay cut or something like that, but it ignores economic 
reality. What you have to do is pay every employee group at as 
close as possible to a market competitive level. So you should 
not pay union workers below market because otherwise they will 
leave and get jobs elsewhere. Similarly, you cannot pay middle 
level management materially below market, or they will get 
another job. And the same is true for the chief executive 
officer. If you pay him half of what the market is, and he has 
the risk of working for a Chapter 11 debtor, he will get a job 
somewhere else. So for every employee group, from the assembly 
line worker to the accountant to the clerical employee to the 
CEO, you need to pay that employee as close as the company can 
to a market-competitive wage, and then you have to look at the 
aggregate and make sure that it is not beyond the ability of 
the company to survive.
    Ms. Sanchez. I understand where you are coming from. I am 
not sure that I necessarily agree 100 percent with what you 
have just said. What about the issue of companies that return 
to profitability and employees are stuck in the same 
concessions and there is no renegotiation to try to help 
restore them a little bit to where they were since they are 
working hard to make sure that the company got back to 
profitability?
    Mr. Bernstein. So this goes to the 2-year limitation 
provision in the bill that is intended to address the issue 
that you have identified. The problem is that when a company is 
undertaking a restructuring in Chapter 11, it typically needs 
new capital, new debt financing and new investment, new equity 
financing. And in order to do that, it needs to make 
projections about its future cost structure and it can't make 
those projections over only a 2-year period. Nobody is going to 
put hundreds of millions of dollars into a company based on a 
cost structure that is only going to exist for the next 2 years 
without the slightest notion what is going to happen after the 
next 2 years. So a company in order to reorganize and attract 
new capital is going to have to make a business plan that 
includes its cost structure, one part which is the labor cost 
structure, over a much longer period of time than 2 years in 
order to be able to reorganize.
    Ms. Sanchez. Do you think 7 years is fair?
    Mr. Bernstein. Under some circumstances it may well be 
necessary to have a 7-year cost structure, including 7 year 
labor cost structure, in order to attract the new capital that 
is necessary in order to reorganize a company.
    These new outside investors who put money into Chapter 11 
have a lot of choices on what to do with their money. And 
unlike the creditors who are already stuck in the case, they 
have no obligation to this company. They have a choice whether 
they want to make an investment or not. And they are only going 
to make an investment if the company looks like it has a 
reasonable prospect of being profitable, and not only for a 2-
year period.
    Ms. Sanchez. Thank you. My time has long since expired, and 
I recognize Mr. Cannon.
    Mr. Cannon. Thank you. What Mr. Bernstein has said was 
eloquent and right to point on all factors, and direct to the 
fact that what we do here is actually complicated and we need 
to be thoughtful as we move forward.
    Let me just say as a matter of summary that what we really 
want in Congress on this Committee and what we do on this 
Committee as part of all Congress is create an environment in 
which a robust economy emerges, less regulation, less 
interference, more market control. I think we have proved that 
out over a long period of time in American history. When that 
happens, everyone in the system, and Mr. Bernstein eloquently 
pointed out, you can't pay labor, the union members, less than 
market because people will leave. What we really want is a 
robust market so people have jobs. The reason that middle 
managers tend not to get the outrageous benefits that we talked 
about earlier is because there are a lot more of those people 
and it is easier to fill those jobs. It is hard to fill the 
senior jobs. What we need to do is have a robust market and 
create a legal context in which we can have continuity of 
businesses that get in trouble, but a robust economy so that 
other companies can emerge.
    Much of the discussion we had here today is about two 
really troubled industries, the airline industry and the auto 
industry. And we have had minor discussions about some other 
companies like Enron. But basically they are troubled 
industries, and they are troubled for reasons that are way 
beyond bankruptcy, and yet we are looking at those cases as 
though they can tell us something about how the whole market 
can work, recognizing that these are huge dislocations that are 
happening in the airline industry and the automobile industry. 
We as Congress need to step back and say what do we do so we 
optimize the opportunity for entrepreneurial, innovative people 
to come in and save those industries, and what can we do in the 
environment to create more opportunity for more jobs. It seems 
to me that is where we need to go.
    I think that in this case with bankruptcy reform we need to 
be very, very thoughtful because companies plan long into the 
future, and capital has many, many choices. One of the really 
disturbing things about our oil imports and the money we are 
spending on oil coming to American is the depreciation of the 
American dollar, and in the process the benefit that countries 
that have the oil and other currencies are benefiting and 
drawing capital away from what we would be doing here.
    If we are going to retain our status as the premier economy 
in the world, we need to do it by attracting capital, and what 
we do on this panel with this bill is remarkably important in 
that regard. I yield back.
    Ms. Sanchez. I do have two last questions that I would like 
to ask, and so we will start the third round. I wanted to give 
Ms. Friedman an opportunity to answer some questions.
    It appears to me that there are circumstances when 
bankruptcy seems to be inevitable for certain companies, but if 
I am not mistaken, I also heard testimony that companies sort 
of look prospectively to the threat of bankruptcy at least to 
exact concessions from their labor force.
    Ms. Friedman, why are more and more companies seeking to 
shed their pension obligations in Chapter 13?
    Ms. Friedman. More and more companies are trying to shed 
their pension responsibilities in general.
    Before you said this seemed to be a union versus management 
issue. The Pension Rights Center hears from thousands of white-
collar employees throughout the country whose pensions are also 
being cut back. And I would like to say there is going to be a 
pension revolution, as I like to say, among green pants 
wearing, Izod-wearing, golf toting people, too, because they 
are equally angry about this.
    Mr. Cannon. Madam Chair, if the witness will yield, let me 
just point out, when I was talking about the conflict between 
union and nonunion, that was not related to pensions, which you 
are clearly right. They are way beyond that issue.
    Ms. Friedman. I think a lot of this is both through 
shareholder pressure but also creditor pressure. There has been 
pressure on companies to shed pension obligations. And in this 
book which I would highly recommend called ``Pension Dumping'' 
by Fran Hawthorne, who is a New York Times reporter, formerly a 
reporter with Institutional Investor, she points out that in 
some situations you have companies that don't want to 
necessarily terminate the plan and what they call ``vulture 
investors'' are forcing them to do so.
    Ms. Sanchez. I am going to interrupt. Can you explain that 
phenomenon about vulture investors?
    Ms. Friedman. Just in terms of creditors and probably--and 
Babette can do a better job, but creditors in bankruptcy court 
who put pressure on the judge saying we are not going to give 
financing to this company unless these billions of dollars of 
pension obligations are eliminated. The reality is both 
companies and employees used to look at pensions as being 
sacrosanct. It is not just that employers are providing these 
pensions, workers give up wages so that employers can put money 
into these defined benefit plans with the expectation of 
getting a certain benefit.
    It has only been in the last 10 years or so where we have 
seen this restructuring mania where suddenly companies have 
recognized that they can walk into a bankruptcy court, dump 
their pension liabilities onto the Pension Benefit Guaranty 
Corporation, and so basically the PBGC gets stuck with this 
huge bill. And in its defense, PBGC does the best job possible. 
Congress has authorized them to pay certain benefits, and some 
of them are not paid out. So there is a maximum benefit and 
because of that workers who either their pensions go beyond 
that maximum--and there are other benefit levels that I talk 
about in my statement that are not insured. Basically who gets 
hurt in this situation? The creditors get paid off. The 
employers can emerge at least in the short term from bankruptcy 
as a profitable company. But who is getting hurt? It is the 
workers. The workers, who have no other chance of getting these 
benefits. And I think a good point to make in this is when 
creditors lend money to a corporation they know there are risks 
involved. But when employees in good faith take a job and are 
told hey, you meet your end of the bargain, you work for us and 
in exchange for doing your work we give you wages, but not just 
wages but also deferred compensation in the form of pensions, 
they rely on that. They have been loyal to the company and 
expect loyalty in return.
    They are not expecting that one day, because a company 
wants to restructure, the company will go into the bankruptcy 
court and just be able to dump these liabilities. So it is 
really unfair to workers, which is why I think the bill we are 
discussing today has reasonable provisions to allow an 
individual to go back, to have a claim in bankruptcy court, and 
this is basically just a very modest provision, just to allow 
them to say hey, I didn't get all that I was promised that I 
worked for all of these years, so I have a chance to get back 
the difference between what the PBGC provides and what I 
earned. I think that is a highly reasonable provision.
    But again, as I said before, and there was also a quote in 
this from David Walker, who is the former Government 
Accountability Office Executive Director, who said there used 
to be a stain on bankruptcy and it is just not there any more.
    So we have to go back to respecting workers and we have got 
to go back and say if people are giving themselves to 
companies, they should get what they expect.
    I have a lot that I wanted to say. Two more things. We have 
to keep in mind that defined benefit plans are the most 
efficient and best way of providing guaranteed adequate income 
to workers when they retire. And as much as 401(k) plans are a 
good supplemental source of income, they were never meant to be 
the whole enchilada. And in the context of bankruptcies, a 
defined benefit plan has the backup of the PBGC, so even in the 
worst situation people will get something.
    But in an Enron where you have this corporate abuse that 
could happen again, and we are looking at all of these 
situations like Bear Stearns, which could be the next one to 
go, those workers are plum out of luck.
    I just wanted to makes those points.
    Ms. Sanchez. Thank you. My time has expired. Mr. Cannon.
    Mr. Cannon. Creditors have rights and a certain role in 
bankruptcy which you have referred to as vulture capital, and 
that is free capital. That is something that has no obligation 
in bankruptcy and it only comes in if the conditions are 
appropriate; is that right?
    Ms. Friedman. I am quoting from this book that was written 
by Fran Hawthorne as one example of this. I think there are a 
lot of pressures on companies to be able to restructure. We 
understand that there is pressures on companies. I think where 
the Pension Rights Center would come down on this is to say are 
there any other places where a company can cut costs besides 
getting rid of the long-term pension plan and hurting workers.
    Mr. Cannon. Clearly that is the objective to cut costs all 
of the way around, and a company that wants to come out of 
bankruptcy is going to put together a plan that does that. I 
don't think of them as vulture capital. The fact is that if you 
are in trouble and in bankruptcy, you are going to pay a higher 
rate. And the people who want to take on that kind of risk are 
willing to do it.
    What I want is an environment where you minimize the 
regulatory risk or the court's discretionary risk so that more 
capital comes in and we reduce the cost and so reduce the 
program.
    My other point is if a company goes out of business, then 
there is no pension funding. If it liquidates whatever assets 
are available go to the creditors in priority and the pension 
ends up with whatever assets it has and whatever incremental 
obligations that are owed to that pension fund by the company, 
either assets remaining, that goes to the pension fund. But 
generally speaking, there are few assets available to fund an 
underfunded pension; isn't that the case?
    Ms. Friedman. When a company terminates that is in 
distress, when the Pension Benefit Guaranty Corporation takes 
over that company, it will have a claim against the company to 
make sure that PBGC pays a certain level of benefits that have 
been authorized by Congress to do so. When there is additional 
money, the PBGC will go after that money. And in some 
situations, it is not very often, the PBGC is able to collect 
enough money to pay everybody all of their benefits.
    Mr. Cannon. Pensioners are much better off if that company 
can come out of bankruptcy and fund its pension liabilities, 
and is better for the PBGC. The purpose of bankruptcy is in 
part to protect pensions.
    Ms. Friedman. In most cases what the companies have done is 
terminate the plan. There are situations like in United where 
they were able to set up a multi-employer plan after they 
terminated the first plan. But in many cases after a company 
terminates its plan, it is just going to set up a 401(k) plan. 
Every study shows that there is no way that a 401(k) plan in 
any situation is going to be able to make up the difference of 
what is lost in the defined benefit plan, particularly for 
older employees.
    Mr. Cannon. Clearly if you have older employees who end up 
with a 401(k), they have less time to build that 401(k). But I 
will just tell you that in the long term I think that it is 
pretty clear that 401(k)s where people have control of that 
401(k) are going to be happier. The problem with Enron is you 
had people that didn't--the whole pension fund was the company 
stock. So if you had individuals with the ability to choose 
their own risk profile, typically then we would be better off, 
I believe. But that transcends the scope of this hearing, I 
think.
    Ms. Friedman. Knowing that, in all deference, I would like 
to talk to you more about that, Congressman. But just so you 
know, right now half of all 401(k) accounts have about $27,000 
in them. And even for people between 45 and 65, the median 
account balance is about $60,000.
    So going back to my white-collar employees, I think most 
people that we deal with actually think that 401(k)s are a poor 
substitute for defined benefit.
    Mr. Cannon. Society is evolving dramatically. In many cases 
401(k)s worked very well, but it is an evolution.
    If I were young and just starting a career, I would 
probably be very chary of a corporate defined benefit plan as 
opposed to my own directed 401(k).
    But that is it, Madam Chair. I yield back.
    Ms. Sanchez. The gentleman yields back. I think that one of 
the points that should not get lost here is that defined 
benefit pension plans can be wiped out, whereas other CEOs and 
top executives walk away with significant bonuses and other 
types of compensation that I think really illustrates some of 
the problems that we have been talking about today.
    I do have two opening statements that I am going to ask 
unanimous consent to insert into the record. One was the 
Chairman's opening statement and one was from Ms. Sutton who is 
a Member of the full Judiciary Committee. So without objection, 
those are entered into the record.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law
    Bankruptcy--and Chapter 11 in particular--is intended to give all 
participants an opportunity to work out their economic differences with 
the shared goal of maximizing the return for all.
    So much for theory. Now here's the reality.
    It is abundantly clear that the rights of workers and retirees have 
greatly eroded over the past two decades, particularly in the context 
of Chapter 11. Let me just cite three reasons.
    First, it is no secret that some of our courts interpret the law to 
favor the reorganization of a business over all other priorities, 
including job preservation, salary protections, and other important 
interests. Part of the problem is that the law is simply not clear, 
leading to a split of authority among the circuits.
    This is particularly true with respect to the standards by which 
collective bargaining agreements can be rejected and retiree benefits 
can be modified in Chapter 11.
    Businesses are aware of this, and take advantage of their venue 
options and file their Chapter 11 cases in employer-friendly districts. 
According to the American Bankruptcy Institute, this is among the 
reasons that Delphi, a Michigan-headquartered company, filed for 
bankruptcy in New York.
    Second, some businesses are using Chapter 11 to bust unions, or to 
at least give their management unfair leverage in its negotiations with 
unions. These companies also use Chapter 11 to take advantage of 
section 1114, which allows employers to modify retiree benefits.
    Let me be specific here. What we are talking about is terminating 
retiree health care benefits, medical benefits, prescription drug 
benefits, disability benefits, and death benefits, among other 
protections.
    Remember that these benefits were bargained for by Americans who 
gave their all to their employers and now are in retirement. 
Jettisoning them in Chapter 11, for the sake of allowing the company 
who made these commitments to shed them and go on its merry way, is a 
travesty.
    Third, as a result of Chapter 11's inequitable playing field, the 
top company executives are all too often not making the same 
sacrifices.
    As the Subcommittee was told at a hearing last year, while a 
company is using Chapter 11 to extract drastic pay cuts and benefit 
reductions from workers and retirees, or take away their jobs and 
benefits entirely, company executives may receive extravagant multi-
million-dollar bonuses and stock options.
    Even though we tried to stop excessive executive compensation in 
Chapter 11 by amending the Bankruptcy Code in 2005, creative 
practitioners have already found loopholes to exploit, and the problem 
still continues.
    And this disparity is not limited to companies who are actually in 
bankruptcy. As many of you know, the Ford Motor Company reported a 
record $12.7 billion loss for 2006. But what many of you may not know 
is that Ford paid $28 million to its new CEO, Alan Mulally, in his 
first four months on the job.
    Enough is enough. In response to these problems, I introduced H.R. 
3652, the ``Protecting Employees and Retirees in Business Bankruptcies 
Act of 2007,'' to guarantee that workers and retirees are treated more 
fairly in Chapter 11 cases. It does that by:

          requiring greater oversight and approval of all forms 
        of excessive executive compensation;

          ensuring earned wages and severance payments are 
        accorded their proper payment priority;

          requiring the bankruptcy court to take into account a 
        company's foreign assets before allowing the debtor to break 
        its collective bargaining agreements with its American workers, 
        or to modify its retirees' health benefits.

    Most importantly, H.R. 3652 restores procedural and substantive 
balance with respect to how employees and retirees are treated in 
Chapter 11.
    In the last nine years, Congress went to great lengths to grant 
advantages to creditors and big business interests over ordinary 
Americans. It is time that we return to including the interests of 
working families in the bankruptcy law, and consider how we can add a 
measure of fairness to a playing field that is overwhelmingly tilted 
against workers.

    [The prepared statement of Ms. Sutton follows:]
 Prepared Statement of the Honorable Betty Sutton, a Representative in 
Congress from the State of Ohio, and Member, Committee on the Judiciary
    Madam Chairwoman, I was proud to introduce H.R. 3652 with you and 
Chairman Conyers last fall. Thank you for holding this important 
hearing today and thank you to our distinguished witnesses for 
appearing before us to testify about inequities in our nation's 
bankruptcy laws.
    Before coming to Congress, I served as a labor lawyer in Northeast 
Ohio where I represented workers fighting for fair wages and benefits. 
I have seen firsthand the toll that blatant disregard for workers' 
rights can take on our families and communities.
    We introduced this bill last fall during a turbulent time for our 
nation's working families and our economy, which sadly continues to 
this day.
    From the mortgage foreclosure crisis and skyrocketing energy and 
food prices to unfair trade practices, American workers are under 
siege. They face cuts to their wages and healthcare, all while facing 
the constant fear that their jobs will be shipped overseas.
    When executed fairly, bankruptcy allows companies in distress to 
reorganize and successfully continue in business. But too often, 
companies have commandeered the bankruptcy process as a business 
strategy to achieve labor parity with competitors at the expense of 
American workers.
    Republic Technologies International (RTI), a steel company located 
in my district, filed for bankruptcy in 2001. Its pension benefit plan 
was underfunded, resulting in the Pension Benefit Guarantee Corporation 
(PBGC) stepping in to become the trustee of the fund in 2003.
    The pension benefits that were promised by RTI exceed the legal 
amounts that can be assumed by PBGC, and now PBGC is recouping 
overpayments that were errantly made by reducing each worker's monthly 
pension benefits.
    This is a troubling example of how the bankruptcy process is 
failing to protect American workers when their companies are struggling 
or are forced out of business.
    In its current form, the bankruptcy code allows businesses to sign 
collective bargaining agreements and then abrogate them at will, 
slashing wages and benefits. This tactic contradicts reason, and 
exhibits utter disregard for the welfare of American working families 
and it should be stopped.
    H.R. 3652 provides a new model for bankruptcy that works for 
American workers and businesses. Businesses on the verge of collapse 
will be able to recover, while workers, the backbone of the American 
economy, will still be treated honestly and fairly.
    I hope we are able to move forward on this bill in the near future.

    Ms. Sanchez. I want to thank all of the witnesses for their 
thoughtful testimony today.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and ask that you answer them as promptly as 
you can so they will be made part of the record. And without 
objection, the record will remain open for 5 legislative days 
for submission of additional materials.
    Again, I want to thank everyone for their time, and this 
Subcommittee on Commercial and Administrative Law is adjourned.
    [Whereupon, at 11:09 a.m., the Subcommittee was adjourned.]