United States: Bill Proposes Sweeping Changes To Protect Workers In Chapter 11

On September 29, 2020, the House Judiciary Committee advanced H.R. 7370, Protecting Employees and Retirees in Business Bankruptcies Act of 2020, a Democrat-sponsored bill, to the full chamber. If enacted into law, the bill would usher in considerable changes in commercial bankruptcy cases, including in the areas of executive compensation, employee and retiree benefits, and confirmation of a Chapter 11 plan. Some of the more salient provisions of the bill are listed below; for the complete text of H.R. 7370, click here.

Focus on Job Preservation

The bill proposes to:

• amend current law and establish the principal purpose of Chapter 11 to focus on the preservation and continuation of the business as well as the preservation of jobs.
• expand the requirements for a rejection of Collective Bargaining Agreements ("CBA") such that the debtor can no longer unilaterally seek the rejection of a CBA. Instead, the court must consider alternative proposals from the labor organization. Furthermore, if the CBA is rejected or after a modified CBA is agreed upon during the bankruptcy, the bill provides the labor organization the right to ask the court for an order to increase wages and benefits based on changed circumstances.
• require, in considering the use, sale, or lease of property, the court to give "substantial weight" to whether the purchaser or lessee of the property will (1) preserve jobs of the employees, (2) maintain the terms and conditions of employment of the employees, and (3) assume or match the pension and health benefit obligations to the retirees.¹
• prevent the court and the debtor to change the wages, working conditions, or retirement benefits of an employee or a retiree of the debtor established by a CBA that is subject to the Railway Labor Act except as provided for in that Act.
• provide the same committee standing to labor organizations as other committees, such as the creditors committee, as to the payment of insurance benefits to retired employees and to Chapter 11 plan confirmation. As such, the bill would explicitly include labor organizations as an example of a creditor that may file a proof of claim.

Increased Employee and Retiree Rights

The bill would also:

• double the amount an employee can claim for wages and benefits from $10,000 to $20,000. And unlike under existing law, which requires that those wages and benefits are earned within 180 days before the filing of the Chapter 11, the bill has no such time restraint.
• expand the amount that a committee can claim for contributions to an employee benefit plan from $10,000 to $20,000 per employee covered by the plan.
• provide a right to make a claim for stock value losses in non-management employee pension plans and 401-k plans as well as for stock value losses due to employer or plan sponsor fraud.
• add severance pay to non-management employees and contributions to employee benefit plans as allowable administrative expenses with priority. It also adds back pay, civil penalties, or damages for a violation of Federal or State labor and employment law as permissible administrative expenses with priority.
• enable an active or retired participant in a pension plan or labor organization representing the participant the ability to make a claim for any shortfall in pension benefits. It would similarly enable an active or retired participant in a 401-k plan or labor organization representing the participant the ability to make a claim for right or interest in equity securities of the debtor.
• Under the bills provision, if there is any unpaid employee from wages, accrued vacation, severance, or any other such policy or if the debtor has not made a contribution due under an employee benefit plan, these unpaid sums are categorized as necessary reasonable costs and expenses such that the debtor recovers the amount of the unpaid sums to pay the employee or employee benefit plan.
• prevent the filing of a Chapter 11 petition from automatically staying the commencement or continuation of a CBA-established dispute resolution proceeding that was or could have been commenced against the debtor before the filing of the petition.

Conditions on Management Benefits

The bill likewise proposes certain conditions on severance and bonus pay for management.

• The bill would prevent the establishment of a bonus program for the benefit of management unless it is part of a program for all full-time employees. Under current law, these programs allow for management to be given ten times the amount as non-management. The bill would change this maximum allowable multiplier to two times the amount received by non-management. The bill would impose similar requirements on severance pay to management and non-management. Should there be any transfer of funds to management, the transfer cannot be more than 10% what was typically paid to such a person before the Chapter 11 proceedings instead of the current 25%.
• The bill would prevent any plan, program, or transfer or obligation to or for the benefit of management if, on or within a year of filing the Chapter 11 petition, the debtor discontinued any plan, program, policy, or practice of paying severance pay to the non-management workforce or modified any plan, program, policy, or practice of paying severance pay to reduce the benefits under the plan.
• The bill also would prevent any deferred compensation arrangements, such as stock options, for management if a pension plan has been terminated within the year preceding the Chapter 11. The bill would prevent retiree benefits for management if there has been a reduction in retiree benefits for non-management employees or reductions in health benefits of active employees within a year of the commencement of Chapter 11 proceedings.
• Under the bill, if a debtor reduced the cost of its obligations under a CBA, a plan for retiree benefits, or a pension plan, the court can take the percentage decrease of that reduction and use that percentage to determine the amount of executive compensation that the debtor estate can recover.

Chapter 11 Plan Confirmation

Finally, the bill proposes certain additional requirements for confirmation of a plan, including that the plan:

• continues the payment of all retiree benefits regardless of whether there has been a modification to those benefits during the Chapter 11 bankruptcy.
• provides for recovery of claims from any modification of retiree benefits as well as for the recovery of damages payable for the rejection of a CBA.
• requires that any purchaser of all or substantially all of the property under the plan to (a) preserve jobs of the employees of the debtor, (b) maintain the terms and conditions of employment of the employees of the debtor, and (c) assume or match the pension and health benefit obligations of the debtor to the retirees of the debtor.
• furthers the goals of Chapter 11 as defined by the bill: the preservation and continuation of the business as well as the preservation of jobs. If there are multiple plans, the bill would have the court select the plan it determines best preserves jobs and worker interest as opposed to the current consideration of the preferences of creditors and equity security holders in selecting the plan.

If enacted into law, H.R. 7370 would represent the most sweeping changes to the Bankruptcy Code since the 2005 amendments ushered in by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Senator Durbin introduced S. 4089, H.R.'s 7370 Senate-equivalent, in the Senate on June 25, 2020 (full text here). Since then, the Republican-controlled Senate has yet to act on the bill.

We will continue to monitor the progress of this proposed legislation and provide further updates. While it is too soon to offer any concrete speculation about the bill's future, it is not unreasonable to posit that much of it will depend on the outcome of the November election.

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