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


 
AMERICAN WORKERS IN CRISIS: DOES THE CHAPTER 11 BUSINESS BANKRUPTCY LAW 
                  TREAT EMPLOYEES AND RETIREES FAIRLY?

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 6, 2007

                               __________

                           Serial No. 110-139

                               __________

         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
                 Joseph Gibson, Minority Chief 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

                              ----------                              

                           SEPTEMBER 6, 2007

                                                                   Page

                           OPENING STATEMENT

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.........................................     2
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.............................................     4
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Member, Subcommittee on 
  Commercial and Administrative Law..............................     8

                               WITNESSES

Ms. Kim Townsend, Chief Steward, Local 138, United Automobile, 
  Aerospace and Agricultural Implement Workers of America (UAW), 
  Hastings, MI
  Oral Testimony.................................................    10
  Prepared Statement.............................................    11
Mr. Michael Bernstein, Arnold & Porter LLP, Washington, DC
  Oral Testimony.................................................    13
  Prepared Statement.............................................    15
Mr. Fred Redmond, International Vice President, Human Affairs, 
  United Steelworkers (USW), Pittsburgh, PA
  Oral Testimony.................................................    20
  Prepared Statement.............................................    22
Captain John Prater, President, Air Line Pilots Association, 
  International, Washington, DC
  Oral Testimony.................................................    24
  Prepared Statement.............................................    26
Mr. Greg E. Davidowitch, Master Executive Council President at 
  United Airlines, Association of Flight Attendants, CWA, AFL-
  CIO, Washington, DC
  Oral Testimony.................................................    31
  Prepared Statement.............................................    32
Mr. Richard Trumka, Secretary-Treasurer, AFL-CIO, Washington, DC
  Oral Testimony.................................................    37
  Prepared Statement.............................................    40

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

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...........................     7


AMERICAN WORKERS IN CRISIS: DOES THE CHAPTER 11 BUSINESS BANKRUPTCY LAW 
                  TREAT EMPLOYEES AND RETIREES FAIRLY?

                              ----------                              


                      THURSDAY, SEPTEMBER 6, 2007

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

    The Subcommittee met, pursuant to notice, at 10:15 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Linda 
Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Watt, and Cannon.
    Also present: John Conyers, Jr..
    Staff present: Susan Jensen-Lachmann, Majority Counsel; 
Zachary Somers, Minority Counsel; and Adam Russell, Majority 
Professional Staff Member.
    Ms. Sanchez. Good morning. This hearing on the Committee of 
the Judiciary, Subcommittee on Commercial and Administrative 
Law will now come to order. And I apologize for starting this 
hearing late.
    I will now recognize myself for a short statement.
    Earlier this week, the Nation celebrated Labor Day, a 
special day dedicated to the social and economic achievements 
of American workers. Unlike most other national holidays that 
typically commemorate a particular person or historic event, 
Labor Day is a tribute to the American worker. As Samuel 
Gompers, founder and longtime president of the American 
Federation of Labor, observed in 1898, ``It is a day when 
workers can look forward to when their rights and their wrongs 
would be discussed.''
    Today's hearing hopefully will provide that long-overdue 
opportunity. As many of you know, in April of this year, our 
Subcommittee conducted a hearing on a recent phenomenon in 
which chief executive officers of businesses going through 
Chapter 11 bankruptcy proceedings receive outrageously large 
salaries and bonuses, while they simultaneously slash the 
wages, benefits and even jobs of workers who are the backbones 
of those businesses. As one union representative observed, 
``Chapter 11 is where the rich are getting richer while the 
poor are getting poorer.''
    Unfortunately, it appears that this is just one of many 
inequities that Chapter 11 presents to workers and retirees. 
The GAO just released a new study today finding that nearly 
one-half of the Chapter 11 employers who were reviewed in the 
study terminated their employer-funded benefit plans while they 
were in bankruptcy. About 28 percent of Chapter 11 employers 
sought to modify non-pension retiree obligations, such as 
health insurance plans. And about 29 percent of Chapter 11 
employers sought to reject collective bargaining agreements. 
These statistics I find very disturbing.
    Chapter 11 of the Bankruptcy Code was originally enacted to 
give all participants an equal say in how a business that is 
struggling to overcome financial difficulties should 
reorganize. Unfortunately, this laudable goal does not reflect 
reality, especially for American workers. As the head of the 
American Bankruptcy Institute has 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.''
    Bankruptcy is a last resort, a sort of timeout to give 
business debtors the breathing room to reorganize their 
finances. It is not intended to be and should not be used as a 
pretext to negate contracts negotiated in good faith with 
employees. If Chapter 11 is being used that way, we have a 
responsibility to re-level the playing field for American 
workers whose employers seek Chapter 11 bankruptcy protection.
    To help us learn more about these issues, we have six 
witnesses with us this afternoon. We are pleased to have Kim 
Townsend, chief steward and member of UAW Local 138; Michael 
Bernstein, partner at the Arnold & Porter law firm; Fred 
Redmond, international vice president for human affairs of the 
United Steelworkers; Captain John Prater, president of the Air 
Line Pilots Association International; Greg Davidowitch, united 
master executive council president of the Association of Flight 
Attendants; and Richard Trumka, secretary-treasurer of the AFL-
CIO.
    Accordingly, I look forward to the testimony of today's 
witnesses at our hearing. I would now at this time like to 
recognize my distinguished colleague, Mr. Cannon, the Ranking 
Member of the Subcommittee, for his opening remarks.
    Mr. Cannon. Thank you, Madam Chair.
    Today's hearing raises an issue of common interest to the 
Members of this Subcommittee: Does Chapter 11 treat employees 
and retirees fairly when a business in financial trouble seeks 
protection under the bankruptcy laws?
    While there is a shared common interest in the issues to be 
examined today, there is another shared common interest at 
stake. That interest is ensuring that businesses can recover 
and return to viability through a Chapter 11 reorganization.
    Today we will hear from a panel of witnesses, the vast 
majority of which represent organized labor. We must be 
cognizant of the fact there are additional interests at stake 
when a business is faced with financial trouble. Unfortunately, 
many of those interests are not represented here today at the 
witness table.
    A primary purpose of the Nation's bankruptcy laws is to 
permit a failing company, under court supervision, to 
rehabilitate and reorganize its business, by allowing it to 
relieve itself of the burden of oppressive debt and begin with 
a fresh start. This is a primary purpose, because returning a 
company to financial health is preferred to forcing a company 
to liquidate.
    This Nation's big businesses, the employers of the unions 
represented here today, employ tens of millions of workers, pay 
tens of billions of dollars in taxes, and keep this Nation 
competitive in the global economy.
    Corporate bankruptcy is not a financial scam, nor is it a 
gimmick perpetuated by heartless big businesses seeking to 
avoid paying their bills. The reorganization process as 
encompassed in Chapter 11 allows troubled companies to keep 
their doors open, preserving jobs and continuing to give 
consumers access to their products.
    If companies are forced to liquidate, all stakeholders 
suffer. Employees will lose their jobs; retirees will lose 
their retirement benefits; and creditors and shareholders will 
have any potential recovery diminished or eliminated. 
Liquidation hurts suppliers, customers, taxing authorities, and 
local communities.
    Essential to the reorganization process is the ability of a 
troubled company to discharge its existing obligations. In some 
cases, part of those existing obligations are going to be labor 
legacy costs, including collective bargaining agreements, 
retiree medical benefits, and defined benefit pension plans.
    Section 1113 of the Bankruptcy Code allows a company in 
Chapter 11 to reject, as a last resort, a collective bargaining 
agreement. The company can reject a collective bargaining 
agreement under section 1113 only if good-faith bargaining 
between the troubled company and the union does not produce an 
agreement, the statutory prerequisites have been satisfied and 
the bankruptcy court finds that the ``balance of the equities'' 
favors rejection.
    Section 1114 of the Bankruptcy Code makes similar 
provisions for the rejection of retiree medical benefits and 
pension plans. Rejection of a collective bargaining agreement, 
retiree medical benefits, or pension plans is not something to 
be taken lightly. But in many cases, such rejection is the only 
avenue a failing company has to return to viability and 
maintain jobs.
    Chapter 11 seeks to reconcile equitably many interdependent 
interests, just like other chapters of the Bankruptcy Code. But 
the paramount aim of Chapter 11 is to save companies that can 
still be saved. To reach that aim, we will have to strike the 
right balance between competing interests.
    In the Bankruptcy Abuse Prevention and Consumer Protection 
Act, we largely, although not completely, left many of the 
issues to be discussed today alone. Chief among those reasons 
is that some believe that placing any further restrictions, 
especially an all-out prohibition, on the termination of 
collective bargaining agreements or retiree benefits might 
actually put parties in a far worse position than we currently 
have under the Bankruptcy Code.
    Another concern of further bankruptcy reform in these areas 
is that labor legacy costs are not really a bankruptcy problem. 
That is to say that the problems with labor legacy costs that 
come to the front at the bankruptcy stage were created well 
before the company was faced with bankruptcy and only arise 
when a company faces financial problems. We don't want to use 
the bankruptcy law to fix problems that are really the result 
of gaps in other areas of the law.
    Critics of the bankruptcy laws often complain that the 
bankruptcy laws are too easy on financially troubled companies. 
In some areas, this criticism may have some merit and we on 
this Subcommittee are committed to make sure that the 
bankruptcy system is not exploited. But it is important that we 
not overreact.
    Many of this country's major corporations, including some 
of those whose union representatives are before us today, are 
still in business because the bankruptcy laws--including 
sections 1113 and 1114--allowed them to reorganize. Moreover, 
many companies have moved away from the employee benefit 
practices that are at the heart of today's hearing.
    So while we in the minority come to this hearing with open 
minds and want to work to provide for fair treatment of the 
American worker and retiree, we also believe that it is 
important that troubled businesses be able to reorganize even 
if it means rejecting certain labor legacy costs.
    Let me just say, I look forward to hearing from today's 
witnesses. And the fact that we have some amazing people--I 
don't know, Mr. Trumka, you may not be aware, but I am a big 
fan of yours. I worked in the coal industry during the time 
that you led the union there and made some amazing progress, 
largely because of your concern and the concern of the union 
was about mine safety and not necessarily numbers of jobs and 
optimizing that.
    And we just recently had, as you are aware, of course, a 
tragedy in the area that I used to represent in Utah. This was 
an awful, awful tragedy. But on the other hand, during the 
period of time we were trying to save those workers, we had 168 
Chinese workers who were drowned because the Chinese don't 
build dykes that are sufficient to protect their workers. And 
you are a huge reason why we have such a safe industry today. 
And we are going to take another look at that, mine safety, as 
a result of this disaster, which I think is largely a function 
of local geological factors that we didn't understand at the 
time that we did the mine plan.
    But I appreciate your being here today. Others, you might 
be interested that I actually worked my way through school by 
being a Teamster. I am a registered--was a registered Teamster. 
That said, the bankruptcy laws are complex and they are 
amazingly robust and bipartisan. And so if we are going to do 
something with those laws to help on the issues that are before 
us today, we have to be very clear and very specific about what 
the opportunities are to improve the law. And I think you will 
find that there is an openness to do that, although it was so 
difficult to get the bankruptcy reform bill passed last 
Congress that I am not sure anybody really wants to open it up, 
unless we have some great clarity about how and why to do that.
    Thank you, Madam Chair. I yield back the balance of the 
time.
    Ms. Sanchez. I thank the gentleman for his statement.
    I would now like to recognize Mr. Conyers, who is a Member 
of the Subcommittee and the Chairman of the Committee on the 
Judiciary, for an opening statement.
    Mr. Conyers. Thank you, Madam Chairman.
    Good morning, witnesses. It is a pleasure to see you all 
here. Wow, what a crew. We could talk about a lot of subjects, 
and sometimes they are all related. I am always happy to have 
Chris Cannon with us on whatever our subject matter is in the 
Committee, because he is one of my best hopes for 
bipartisanship in the entire 110th Congress, not just on 
Judiciary Committee. Now, I find out he has a labor background, 
which no one ever suspected before. [Laughter.]
    And so----
    Mr. Cannon. If the gentleman would yield, there are a lot 
of reasons for suspecting it.
    Mr. Conyers. Yes, but we didn't know any. So we are here 
today to examine under easily the most active Subcommittee on 
Judiciary the whole question of how bankruptcy ought to be 
reviewed by this Committee that has jurisdiction over it.
    I introduced last year--and Alan Reuther was at the news 
conference with Senator Bayh and myself--when we introduced a 
bill that was entitled the Fairness and Accountability in 
Reorganizations Act, which simply required disclosures of what 
is really going on in some of the bankruptcy provisions, 
procedures that occur.
    You know, I am reminded that 40 percent to half of all the 
bankruptcies are due to health-care indebtedness and other 
problems. And frequently, companies in other cases tell, when 
they are negotiating, and maybe some of you can confirm this, 
that if you don't agree with us, we are going into bankruptcy. 
Bankruptcy is now used as a tool of negotiation to force you 
into agreements. And it is like, ``you know what will happen to 
you there when you go in a bankruptcy,'' because a lot of this 
reorganization business is all corporate-oriented.
    And so you never get to an honest collective bargaining 
negotiation situation because you have the threat of bankruptcy 
hanging over your head. And this is something that finally in 
this 110th Congress we are going to be examining very 
carefully.
    I hope somewhere during or after this important hearing we 
get to discuss a crisis that I have always wanted to raise with 
those of the brothers and sisters of organized labor who are 
here this morning. How did we get to this circumstance in 
American economic policy where two groups can bargain in good 
faith, sometimes very strenuous bargainings, and then their 
lawyers battle, their labor leaders and presidents of companies 
battle, finally there is an agreement signed, and a year-and-a-
half later, one party comes back and says, ``Oh, by the way, 
things have gone really into the tank. Things are very bad now. 
It wasn't what we anticipated. And we want to change the terms 
of negotiations before.''
    I don't know what kind of law practice exists where one 
party can come back to the other and say, ``Things are 
different than we expected, so guess what? We want to cut labor 
forces. We want to reopen the contract we just signed with 
great celebration. We are going to have to revisit the pension 
agreement, the health care. All the legacy costs are now open. 
And, by the way, we are thinking about, under some so-called 
free trade laws, we are also thinking about moving out of the 
place. We may have to close down, even.''
    And this has never happened before, in my experience that I 
know about. And I am trying to figure out how this is 
permissible. The collective bargaining movement is under 
threat, its very existence. And, of course, there have been no 
bones about it in this Administration. Let's bust the labor 
unions. I mean, what do we need collective bargaining for? Not 
to mention that the number of people in organized labor is 
getting smaller and smaller every year. So that is the attitude 
that I bring to this hearing, and I think it is an extremely 
important one.
    I would just close with this one observation about my 
friend, Bob Nardelli, who, by his own admission, knows nothing 
about automobiles. He left Home Depot--well, I won't say they 
were in the tank, but they lost several billion dollars' worth 
of value immediately after he left--he got $210 million as a 
payout, a reward for what he did or a compensation to get him 
the heck out of Home Depot. And now he is at Chrysler.
    Now, here is my suspicion. I have to put it on the record. 
He is a slash-and-burn guy, if I have ever seen one, and the 
reason Chrysler has him is because that is what he is good at 
and that is what they want him to do. The fact that he knows 
nothing about automobiles is beside the point. What difference? 
He has an old car in his garage that he likes to pull out to 
say, ``I am with cars. I have been with cars much longer than 
any of you guys know about.''
    But this is the nature of the economy, that we have 
bankruptcy hearings with labor people before this Committee. 
And I thank the Chairwoman for her indulgence.
    Mr. Cannon. Would the gentleman yield?
    Mr. Conyers. Of course.
    Mr. Cannon. I want to thank the gentleman, first of all, 
for his very kind words and his point that the collective 
bargaining system, its very existence is under threat, is a 
point that I think is well-taken.
    I would just like to establish, since we have my bona fides 
on the record, I would actually like to take another step. I 
was part of the group that bought Geneva Steel in Utah, the 
only integrated steel mill west of the Mississippi River. And 
as part of that discussion, there was a lot of talk with the 
financing folks about getting rid of the union, and I was the 
guy who spiked that idea.
    The fact is, there is a place in America for unions. There 
is a very important place. I try to come down on the side of 
being thoughtful about what the role of unions would be, but as 
we go into this hearing, I just want the gentleman to know 
that, in fact, I am not sure we would call it a bipartisan 
agreement, but what we want here is an agreement that actually 
makes sense for America. And America is not just big corporate 
presidents who make huge salaries. It is also the guys who 
actually make America work by coming to the job everyday and 
turning the bolts and doing the other things that are necessary 
to be done.
    For mining the coal, we want to thank the miners of America 
for the fact that we have lights on right now. And so I just 
wanted to thank the gentleman again and let him know that I 
actually care enormously about this issue. And the question is, 
what do we do to actually create the appropriate balance here?
    Thank you.
    Mr. Conyers. Absolutely. And I expected the gentleman to 
make that kind of statement. I will look forward to working 
with him, as we do on health care and many other matters.
    [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

    Today's hearing addresses an area that I believe Congress has long 
neglected, namely, how American workers and retirees are treated in 
Chapter 11 bankruptcy cases.
    I think it is quite 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 certain districts in our Nation 
interpret the law to favor the reorganization of a business over all 
other priorities, including job preservation, salary protections, and 
other benefits. 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, as a result, take advantage 
of these 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 company, filed for 
bankruptcy in New York.
    Second, some in the labor community believe Chapter 11 is being 
used to bust unions or to at least give companies unfair leverage in 
its negotiations with unions.
    Well, it's not just a perception, but a reality. According to a 
just-released GAO study that I requested nearly two years ago, 30 
percent of companies reviewed sought to reject their collective 
bargaining agreements pursuant to section 1113.
    Likewise, nearly as many companies sought 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. This is a 
travesty.
    Third, as a result of Chapter 11's inequitable playing field, 
employers are able to extract major concessions from workers and 
retirees. As we learned at a hearing held earlier this year by this 
Subcommittee, executives of Chapter 11 debtors receive extravagant 
multi-million dollar bonuses and stock options, while regular workers 
are forced to accept drastic pay cuts or even job losses and while 
retirees lose hard-won pensions and health benefits. 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.
    As many of you know, the Ford Motor Company reported a record $12.7 
billion loss for last year. 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. This disclosure comes as companies like Ford, 
General Motors, and DaimlerChrysler prepare to start negotiations with 
the unions to obtain concessions and labor cost savings when their 
current contracts end in this month. A factor that will likely be 
present at the bargaining table is the threat of a potential Chapter 11 
filing.
    In recognition of the current law's shortcomings, last year I 
introduced H.R. 5113, the ``Fairness and Accountability in 
Reorganizations Act of 2006,'' to guarantee that workers are treated 
more fairly by requiring greater oversight and approval of all forms of 
excessive executive compensation.
    Specifically, this simple and effective legislation would have 
required any executive bonus package to be approved by the bankruptcy 
court for any corporation undergoing reorganization under Chapter 11.
    It also would have required the bankruptcy court to take into 
account the 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.
    Although this long-overdue measure was unfortunately not considered 
in the last Congress, I intend to pursue similar, and possibly 
expanded, legislation in this Congress in the very near future.
    We need to restore the level playing field that the drafters of 
Chapter 11 originally envisioned and to ensure that workers and 
retirees receive the fair treatment they have earned when their company 
is in bankruptcy.
    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 include 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.

    Ms. Sanchez. The gentleman yields back? Thank you.
    I would now like to recognize Mr. Watt for an opening 
statement.
    Mr. Watt. Thank you, Madam Chair. And I make an opening 
statement advisedly, because I know it is the Committee's and 
the Subcommittee's policy generally not to do it. But since 
there are not many of us here, perhaps the gentlelady is 
waiving the rule to my favor. So I will try to be brief. But 
since I am sitting behind Hank Johnson's nametag, and feel like 
I can be a little more controversial, and maybe hide behind and 
blame it on Hank, let me do that.
    But under my own name, let me first praise the Chair of 
this Subcommittee for her outstanding work that she has done 
since becoming Chair of the Subcommittee. As many of you know, 
I was the Ranking Member of this Subcommittee over the last 
several terms under the leadership of my good friend, Chris 
Cannon. And over all those years, I didn't find out that he was 
a labor person, either, Mr. Conyers. So my opinion of him was 
already pretty high, and it has escalated even further.
    And my opinion of the Chairperson of this Subcommittee, Ms. 
Sanchez, was already high before she became Chair and has 
escalated even further during her tenure. So let me say that as 
kind of the opening shot.
    The point I want to make, though, that one of the many 
deleterious things that we did during a Republican majority was 
the substantial amendments, reforms that were made to 
bankruptcy and the bankruptcy law. There are a number of 
changes that need to be made to the reform bill that was passed 
several years ago or a couple of years ago, and this is one of 
them. This is one of the areas we need to pay some attention 
to.
    And to show you kind of the disparity of the way this plays 
itself out, this is one of those areas where the judge has the 
authority to reject basically any contract negotiated, reopen 
it, rewrite it. At the same time, some of you know I sit on the 
Financial Services Committee, and there is an amazing crisis 
going on in the mortgage market. And the same judge who can 
rewrite the labor contracts has no authority to do anything 
related to mortgages, even if he finds that the terms were 
entered into outrageously--I mean, there is just nothing he can 
do.
    So basically, we have made a public policy judgment that 
the mortgage on a house is a sacrosanct contract, the labor 
agreement that may allow or may not allow a worker to pay that 
mortgage is not protected at all in the bankruptcy workout. And 
that is simply public policy decisions that we have made about 
what we value, and what we don't value, in a bankruptcy 
setting.
    And those same kind of public policy decisions, 
unfortunately, have been made throughout the system. And we 
need to go back, having made those bad choices over and over 
and over again in a number of contexts, and having seen how 
they play out in people's lives adversely, we need to revisit 
those things. And this hearing, I think, will be one of the 
steps.
    The gentlelady has already convened a hearing about this 
bankruptcy--the mortgage issue that we need to deal with. But 
there are a number of issues like that in the bankruptcy reform 
bill that was passed and that need to be revisited. And, the 
quicker we can get our arms around all of those things and put 
them into one package and get them revisited, I think the 
Nation would be much, much better served.
    So we thank you all for being here to make that record. And 
I know I talked longer than I should have, Madam Chair, and I 
apologize. But at least part of it was some good things about 
you and the Ranking Member. So those things I don't apologize 
for, but the other things I took too long to say.
    And I yield back.
    Ms. Sanchez. Thank you.
    I thank the gentleman for his statement. And without 
objection, other Members' opening statements will be included 
in the record.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing.
    I am now pleased to introduce the witnesses on the panel 
for today's hearing. Our first witness is Kim Townsend. For the 
past 20 years, Ms. Townsend has been employed as a machine 
operator at Hastings Manufacturing, LLC. She is the chief 
steward and member of the three-person bargaining committee for 
UAW Local 138, which represents the hourly workers at Hastings. 
She was present of the UAW Local 138 from May 2004 to June 
2007, before, during and after the bankruptcy and asset sale. 
She currently resides in Hastings, Michigan.
    Our second witness is Michael Bernstein. Mr. Bernstein is a 
partner in Arnold & Porter's bankruptcy and corporate 
reorganization practice and has been involved in numerous 
bankruptcy cases, including U.S. Airways, TWA, Delphi, and 
Continental Airlines. Mr. Bernstein has coauthored two books 
and has published many articles on bankruptcy and related 
topics.
    Our third witness is Fred Redmond. In 1973, Mr. Redmond 
joined the Steelworkers Union and became an active member of 
Local 3911, serving as shop steward, grievance committee member 
and chairman, vice president, and three terms as president of 
his local union. Mr. Redmond was elected international vice 
president, human affairs, of the United Steelworkers on March 1 
of 2006. In addition to his regular union duties, Mr. Redmond 
serves as chairman of the USW container industry conference and 
coordinates bargaining for the USW health care, pharmaceuticals 
and public employees sector.
    Our fourth witness on this panel is Captain John Prater. 
Captain Prater is the eighth president of the Air Line Pilots 
Association, International, elected on October 18 of 2006. As 
the ALPA's chief executive and administrative officer, Captain 
Prater oversees daily operations of the association, presides 
over the meetings of ALPA's governing body, and serves as chief 
spokesman for the union. Captain Prater currently serves as a 
B767 captain.
    Our fifth witness is Gregory Davidowitch. Mr. Davidowitch 
is the united master executive council president and serves as 
the union chief spokesperson and leader for more than 25,000 
flight attendants employed by United Airlines. Mr. Davidowitch 
began his flight attendant career on April 17, 1988, and is 
devoted to the best interests of the flight attendant 
profession as it continues to evolve.
    Our final witness is Richard Trumka. In 1989, Mr. Trumka 
was elected to the AFL-CIO executive council. He also served as 
president of the mineworkers for three terms. And in 1994, 
President Clinton named him to the bipartisan Commission on 
Entitlement and Tax Reform to represent the interests of 
working families. Mr. Trumka became the youngest secretary-
treasurer in AFL-CIO history when he was elected to the post in 
October 1995.
    I want to thank you all for your willingness to participate 
in today's hearings. Without objection, your written statements 
will be placed in their entirety into the record, and we would 
ask that you limit your oral remarks to 5 minutes.
    You will note that we have a lighting system that starts 
with a green light. At 4 minutes, it will turn yellow to warn 
you that you have a minute left in your testimony. And then it 
will turn red at 5 minutes. If you observe the lights turn red 
while you are mid-sentence, please finish your thought. We will 
allow you to do that. And we want to make sure that we have 
time for everybody's testimony. After each witness has 
presented his or her testimony, Subcommittee Members will be 
permitted to ask questions subject to the 5-minute limit.
    With the ground rules now having been stated, I would 
invite Ms. Townsend to begin her testimony.

  TESTIMONY OF KIM TOWNSEND, CHIEF STEWARD, LOCAL 138, UNITED 
  AUTOMOBILE, AEROSPACE AND AGRICULTURAL IMPLEMENT WORKERS OF 
                  AMERICA (UAW), HASTINGS, MI

    Ms. Townsend. Good morning, Chairwoman Sanchez and Members 
of the Subcommittee. My name is Kim Townsend. I am chief 
steward and a member of the bargaining committee of UAW Local 
138. Local 138 represents 175 hourly workers at Hastings 
Manufacturing in Hastings, Michigan. Hastings makes piston 
rings for Harley-Davidson, General Motors, Ford and Chrysler.
    Hastings Manufacturing was founded in 1915 and has been in 
continuous operation since then. I have worked for Hastings 
Manufacturing for 20 years. My job is to operate a machine that 
makes piston rings, and they are the oil rings that go in your 
engine.
    On September 14, 2005, Hastings filed for protection under 
Chapter 11. On December 5, it was sold in an asset sale 
auction. I was president of Local 138 in the period leading up 
to and through the bankruptcy and sale. The Anderson Group, a 
private equity firm, was the successful bidder in the asset 
sale auction. It has operated the company under the name 
Hastings Manufacturing Company, LLC, since December 14, 2005. 
We make the same products, in the same building, with the same 
equipment, for the same customers as we did before the asset 
sale.
    Just before the bankruptcy, Hastings employed about 375 
people, about 250 of whom were in the UAW bargaining unit. 
There were about 300 Hastings retirees. The union was doing all 
we could to help the company out of its financial situation. 
Management said they needed a million dollars in concessions; 
we gave them a million dollars in concessions. But it still 
wasn't enough to save the company.
    Shortly after the company filed for bankruptcy, the union 
found itself having to try to bargain a new contract with three 
potential buyers. The union had absolutely no clout going into 
these negotiations. There was very limited good faith, back-
and-forth bargaining. The buyer dictated the terms. Not 
surprisingly, with no clout, we couldn't negotiate much. If we 
didn't accept their terms, the plant doors would close, and no 
one wanted that.
    The Anderson Group agreed to maintain seniority and to 
honor accrued vacation. We had agreed to even more concessions, 
including paying most of our health-care costs. Of course, it 
was much worse for the retirees. The new owners wanted no part 
of the so-called legacy costs.
    Due to the bankruptcy, our retirees lost a part of their 
pensions and all of their health-care coverage. The PBGC took 
over the pension plan, but the PBGC only guarantees the base 
pension and not the contractual supplements. The way our 
contract worked, the monthly-base pension was not very high, 
but there was a supplement of $750 a month until you were 62, 
if you retired with 20 years or more seniority. But because the 
PBGC doesn't recognize contractual supplements, our retirees 
under the age of 62 lost as much as $500 a month, more than 
half their pensions for some people.
    On top of that financial loss, retirees had to start paying 
for the health-care insurance for themselves, their spouse, and 
their dependents, or go without health-care coverage. It was 
really a financial disaster for these folks who had given their 
entire work lives to Hastings, and it was hard for all of us 
because so many of the retirees were the parents, or the aunts, 
or uncles, or the in-laws of the active workers.
    In closing, I would just like to say that the current 
bankruptcy law seems unfair. The asset sale allowed the new 
owners to purchase the company ``free and clear,'' with no 
obligations. The net effect of the bankruptcy proceedings was 
that the business didn't change at all. The new owners just got 
rid of the union contract and the obligations to the company's 
retirees.
    We knew the new owners would start making money right off 
the bat, because the bankruptcy law allowed them to do away 
with the legacy costs of retirees. But with the way the asset 
sale works, the union was really powerless to negotiate 
anything of benefit for retirees or for active workers. I think 
the law needs to be changed so that the workers and retirees 
have some bargaining clout when we are negotiating in 
bankruptcy. And it needs to be changed to provide greater 
protection for wages, pensions, and health-care benefits.
    Thank you for inviting me to testify before you today.
    [The prepared statement of Ms. Townsend follows:]

                   Prepared Statement of Kim Townsend

    Good morning, Chairwoman Sanchez and Members of the subcommittee. 
My name is Kim Townsend. I am chief steward and a member of the 
bargaining committee of Local 138, United Automobile, Aerospace & 
Agricultural Implement Workers of America (UAW). Local 138 represents 
175 hourly workers at Hastings Manufacturing in Hasting, Michigan, 
which is located about 30 miles south of Grand Rapids. Hastings makes 
piston rings that are supplied as original equipment to Harley-
Davidson, General Motors, Ford and Chrysler, as well as to the 
aftermarket, especially outside the United States.
    Hastings Manufacturing was founded by a local family in 1915 and 
has been in continuous operation since then. I have worked there for 20 
years. For the last 14 years, my job has been to operate a machine that 
makes oil rings.
    In 2004, the company came under financial pressure from the banks, 
who took over day-to-day management of the plant around June of that 
year. On September 14, 2005, the company filed for protection under 
Chapter 11. On December 5, it was sold at an asset sale auction 
overseen by the bankruptcy court. I was president of Local 138 from May 
2004 to June 2007, before and during the bankruptcy proceedings and the 
asset sale.
    The Anderson Group, a private equity firm, was the successful 
bidder in the asset sale auction. It has operated the company under the 
name Hastings Manufacturing, LLC since December 14, 2005. We make the 
same products, in the same building, with the same equipment, for the 
same customers as we did before the asset sale.
    Before the bankruptcy, Hastings employed about 375 people, about 
250 of whom were in the UAW bargaining unit. There were about 300 
Hastings retirees.
    The contract was up in February 2004 and the union negotiated a new 
one with the company at that time. That was the first of four contracts 
the union negotiated and had ratified between February 2004 and the 
asset sale in December 2005.
    We were doing all we could to help the company out of its financial 
situation. Management said they needed a million dollars in 
concessions, and we gave them a million dollars in concessions. We gave 
up the raises we'd just negotiated in February, agreeing to take no 
increases in 2005, 2006, or 2007. We agreed to pay part of the cost of 
health care and that if your spouse was eligible for health care at 
their place of employment that they had to go on that plan; we also 
agreed to the birthday rule for dependents. We gave up one holiday. And 
we gave up the attendance incentive program under which you could earn 
five paid days off a year if you had perfect attendance. But it still 
wasn't enough to save the company.
    Shortly after the company filed for bankruptcy, the union found 
itself having to try to bargain a new contract with each of the 
potential buyers. There were three bidders, including The Anderson 
Group. We had never met any of these people before. The union had 
absolutely no clout going into the negotiations. There was very limited 
good faith, back and forth bargaining. The buyer dictated the terms.
    Not surprisingly, with no clout, we couldn't negotiate much. If we 
didn't accept their terms, the plant's doors would close and no one 
wanted that. The Anderson Group agreed to maintain seniority and to 
keep accrued vacation for the higher seniority workers who were hired 
by the new owners. We had to agree to pay most of our health care 
costs. For example, it now costs us $300 a week to get family coverage.
    We also had to agree to cut our sickness and accident benefits in 
half, from 26 weeks to 13 weeks, and to reduce the amount of time you 
were covered by health care while out on sick and accident from six 
months to 30 days. We had to agree to continue the two-tier wage 
system, with a top rate of $13.49 an hour. Finally, we gave up having 
department stewards and had to lower the number of bargaining committee 
members from five to three. We now have only two hours a month during 
which we can do union business on company time.
    Of course, it was much worse for the retirees. The new owners 
wanted no part of the so-called ``legacy costs.'' Due to the 
bankruptcy, our retirees lost a lot of their pensions and all of their 
health care coverage.
    The PBGC took over the pension plan, but the PBGC only guarantees 
the base pension and not contractual supplements. The way our contract 
had been negotiated a long time ago, the amount of the monthly base 
pension was calculated using a multiplier of the top hourly wage rate--
$14--times the number of pension credit years you had when you retired. 
But there was a supplement of $750 a month until you were 62 if you 
retired with 20 years or more seniority. But because the PBGC doesn't 
guarantee contractual supplements, retirees under the age of 62 lost as 
much as $500 a month--more than half their pension for some people.
    On top of that financial loss, the retirees had to start paying for 
the entire cost of health insurance for themselves, their spouses, and 
their dependents--or go without health care coverage. When their health 
care was terminated in November 2005, every retiree who had coverage 
under the company's health care plan got a check for $150. I don't need 
to tell you, that didn't go far.
    It was a really a financial disaster for these folks who had given 
their entire work lives to Hastings. And it was hard for all of us 
because so many of the retirees were the parents, or the aunts or 
uncles, or the in-laws of the active workers. And now, to make matters 
even worse, the PBGC is saying that some of the retirees were overpaid 
and they may have to pay money back to the PBGC.
    In closing, I would just like to emphasize that the current 
bankruptcy law seems unfair. The asset sale allowed the new owners to 
purchase the company ``free and clear,'' with no obligations. The net 
effect of the bankruptcy proceedings is that the business didn't change 
at all--the new owners just got rid of the union contract and the 
obligations to the company's retirees.
    The Hastings retirees don't exist for the owners of Hastings LLC; 
they severed all ties. The new owners started making money right off 
the bat because the bankruptcy law allowed them to do away with the 
legacy costs of retirees. But it is these same retirees and workers who 
helped build this now-profitable company.
    And, with the way the asset sale works, the union is really 
powerless to negotiate anything of benefit for retirees or for active 
workers. I think the law needs to be changed so that workers and 
retirees have some bargaining clout when we are negotiating in 
bankruptcy. And it needs to be changed to provide greater protection 
for wages, pension and health care benefits.
    Thank you for inviting me to testify before you today.

    Ms. Sanchez. Thank you for your testimony, Ms. Townsend.
    The bells that you have been hearing have notified us that 
we have two votes across the street. We are going to stand the 
Subcommittee in recess until we have a chance to vote, and we 
will come back and reconvene the hearing. Thank you.
    [Recess.]
    Ms. Sanchez. The Committee on the Judiciary, Subcommittee 
on Commercial and Administrative Law will come to order. I want 
to thank you for your patience in waiting for us to vote.
    I believe that we were at Mr. Bernstein. Mr. Bernstein, at 
this time, I would invite you to present your testimony.

                TESTIMONY OF MICHAEL BERNSTEIN, 
              ARNOLD & PORTER LLP, WASHINGTON, DC

    Mr. Bernstein. Good morning, Madam Chair, Congressman 
Cannon, and Members of the Subcommittee. Thank you for inviting 
me to appear before your Subcommittee to testify about 
important issues concerning collective bargaining agreements 
and retiree benefits in Chapter 11.
    I am a partner in Arnold & Porter LLP, here in Washington, 
DC, and I am chair of the firm's national reorganization and 
bankruptcy practice group. However, I am appearing today here 
at the invitation of the Committee in my individual capacity 
and not on behalf of my law firm or any of its clients. I am 
also not here to advocate any position today but, instead, 
simply to provide the Subcommittee with some insights into how 
the issues surrounding the modification of collective 
bargaining agreements and retiree benefits are dealt with by 
the parties and by the courts in Chapter 11 proceedings.
    Ordinarily, a Chapter 11 debtor who wants to reject a 
contract that it entered into before bankruptcy has the right 
to do so. It does require court approval, but the standard is a 
fairly deferential one, the business judgment test. However, as 
a result of the enactment of Section 1113, the rejection 
standard is much more rigorous with respect to collective 
bargaining agreements.
    Section 1113 was intended to do several things. First, it 
was intended to prevent a company from unilaterally modifying 
or ceasing performance under a collective bargaining agreement. 
Second, it was intended to establish a heightened standard for 
modification or rejection of a CBA. That is something 
substantially harder to achieve than the business judgment 
test. And, third, it was intended to promote negotiated 
solutions to these issues wherever possible.
    Section 1114, which was enacted several years later and 
deals with retiree benefits, was intended to serve similar 
purposes. The requirements for rejection or modification of a 
collective bargaining agreement under Section 1113 are outlined 
in detail in my written statement. It is a difficult standard 
to satisfy, much higher than for any other sort of contract, 
and there are numerous cases in which Section 1113 relief has 
been denied by the courts.
    These provisions were not, however, intended to make it 
impossible for a debtor to modify the terms of a collective 
bargaining agreement. Congress and the courts have recognized 
that some debtors are so burdened by above-market labor and 
retiree costs that, without reducing those costs to a market 
level, they will be unable to reorganize and unable to emerge 
from bankruptcy as viable and competitive enterprises.
    In these situations, it is in the interest of all 
constituencies, including the employees, to reduce the labor 
and retiree costs to a market-competitive level. If it were 
impossible to obtain relief from above-market labor costs, the 
result for at least some companies, particularly those that 
operate in the most competitive industries, would be 
liquidation. They simply could not survive when their 
competitors' labor costs were materially lower than their own 
costs.
    In those situations, employees would lose their jobs, 
creditors' and shareholder's recoveries would be diminished, if 
not eliminated, and other important constituencies, including 
customers and suppliers and trade vendors and taxing 
authorities and local communities, would suffer.
    Thus, while the courts should not grant Section 1113 relief 
lightly--and, in fact, do not do so--it is important that the 
courts retain sufficient flexibility to grant relief where 
doing so is necessary to preserve the business.
    History shows that, while the negotiation of labor and 
retiree modifications in bankruptcy is often quite difficult 
and quite painful, the purposes of Section 1113, which I 
outlined a minute or two ago, have been achieved.
    First, it is clear that a debtor may not unilaterally 
modify a CBA; so that objective has unquestionably been 
achieved. Second, the heightened standard established by 
Section 1113 has been applied rigorously by the courts. I can 
tell you, as somebody who has participated in the litigation of 
Section 1113 issues, that the courts do not grant the relief 
lightly, and that a considerable burden is placed upon a debtor 
who seeks a rejection order.
    Finally, Congress's objective of promoting negotiated 
solutions has been achieved. In the overwhelming majority of 
cases in which labor cost reductions are sought, the 
negotiations that are mandated by Sections 1113 and 1114 have 
resulted in consensual agreements.
    The fact that these issues--which are often highly 
charged--are usually resolved by agreement is, at least in 
part, because the company and its employees have an essential 
common interest: preserving the business as a going concern. 
Negotiated resolutions also occur because both the debtor and 
their employees each face substantial risks absent an 
agreement, so each has an incentive to try to reach consensus. 
Finally, consistent with the articulated objective of the 
statute, the courts tend strongly to encourage negotiated 
resolutions.
    In conclusion, I would say this. The issues concerning the 
modification of collective bargaining agreements and retiree 
benefits are very difficult ones. Nobody is happy about the 
idea of reducing wages or benefits. However, there are some 
cases in which labor cost modifications are necessary in order 
for the debtor to reorganize and to emerge as a viable and 
competitive business. And in those cases, it is better for the 
necessary modifications to be made rather than to see the 
reorganization fail and the company to go out of business.
    [The prepared statement of Mr. Bernstein follows:]

               Prepared Statement of Michael L. Bernstein

    Madam Chairman S nchez, Congressman Cannon, and members of the 
Subcommittee, thank you for inviting me to testify at your hearing on 
``American Workers in Crisis: Does the Chapter 11 Business Bankruptcy 
Law Treat Employees and Retirees Fairly?'' 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 
reorganization 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    Section 1113 of the Bankruptcy Code addresses particularly 
difficult issues. It attempts to balance the interest of employees in 
preserving the wages, benefits and work rules for which their unions 
negotiated against the need of a chapter 11 debtor to achieve a cost 
structure that enables it to reorganize and emerge as a viable business 
that is able to compete in the marketplace. Section 1114 presents 
similar issues involving retiree benefits. The interests of employees, 
retirees, companies seeking to reorganize and their creditors and other 
stakeholders are all legitimate, and often compelling, but they are 
frequently difficult to reconcile.\2\ Sections 1113 and 1114 of the 
Bankruptcy Code are the mechanism that Congress established to address 
these competing interests. While the process of negotiating labor 
agreement modifications in bankruptcy is a difficult one, these 
provisions have proven to be effective mechanisms to balance the 
competing interests and to promote negotiated resolutions.
---------------------------------------------------------------------------
    \2\ The balancing is more complex than simply a desire on the part 
of labor for more pay and benefits and a desire by management to reduce 
costs. Labor also has an interest in the company having a cost 
structure that enables it to remain viable, because otherwise it will 
likely be forced to liquidate and employees will lose their jobs. 
Similarly, management has an interest in providing wages, benefits and 
work rules that are at least at a market level, so that the company 
will be able to retain its employees and attract new employees.
---------------------------------------------------------------------------
    An important tool available to debtors seeking to reorganize in 
chapter 11 cases is the ability to reject contracts. Rejection 
(essentially, a court-approved breach or abrogation) is often necessary 
to enable a debtor to restructure its business and to emerge from 
bankruptcy as a viable going concern. For example, a debtor may be 
burdened by an expensive long-term lease for space it no longer needs 
or an agreement to purchase some product at what has turned out to be 
an above-market price. Section 365 of the Bankruptcy Code permits a 
debtor to reject such contracts with court permission. Under Sec. 365, 
the court uses a ``business judgment'' standard to determine whether to 
approve a rejection of a contract. This is a relatively deferential 
standard.
    Section 1113 was enacted in response to the Supreme Court's 
decision in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), which 
held that a debtor could unilaterally alter the terms of its collective 
bargaining agreements under Sec. 365 of the Bankruptcy Code without 
having thereby committed an unfair labor practice. When the decision in 
Bildisco was announced on February 22, 1984, ``labor groups mounted an 
immediate and intense lobbying effort in Congress to change the law.'' 
\3\ Several months later, Sec. 1113 was enacted as part of the 
Bankruptcy Amendments and Federal Judgeship Act of 1984.\4\ Section 
1113 was enacted to ensure that debtors could not unilaterally alter 
the terms of a collective bargaining agreement, but instead could do so 
only after satisfying a heightened standard and obtaining bankruptcy 
court approval.
---------------------------------------------------------------------------
    \3\ See In Wheeling-Pittsburgh Steel Corp. v. United Steelworkers 
of Am., AFL-CIO-CLC, 791 F.2d 1074, 1082 (3d Cir. 1986).
    \4\ Pub. L. No. 98-353 (1984).
---------------------------------------------------------------------------
    The standard for modification or rejection of a collective 
bargaining agreement under Sec. 1113 is far more difficult to satisfy 
than the business judgment standard.\5\ Further, Sec. 1113 provides 
that unilateral termination or alteration of any provision of a 
collective bargaining agreement is prohibited.\6\ Instead, a debtor is 
required, under the Bankruptcy Code, to adhere to the terms of a 
collective bargaining agreement until it has complied with all the 
procedural and substantive requirements of Sec. 1113 and obtained court 
approval for rejection, or negotiated consensual modifications with its 
employees.\7\
---------------------------------------------------------------------------
    \5\ 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.'').
    \6\ See 11 U.S.C. Sec. 1113(f), which reverses the portion of the 
Bildisco opinion holding that a debtor could unilaterally modify or 
terminate provisions of a collective bargaining agreement.
    \7\ Where a debtor requires interim relief from a collective 
bargaining agreement, it may apply for such relief under Sec. 1113(e), 
but such interim relief is available only when it is ``essential to the 
continuation of the debtor's business, or in order to avoid irreparable 
damage to the estate.''
---------------------------------------------------------------------------
    Based on the text of Sec. 1113, courts have established a stringent 
nine-part test to determine whether a collective bargaining agreement 
may be rejected.\8\ The test is:
---------------------------------------------------------------------------
    \8\ 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); In re Appletree 
Mkts., Inc., 155 B.R. 431 (S.D. Tex. 1993); In re Elec. Contracting 
Servs. Co., 305 B.R. 22 (Bankr. D. Colo. 2003); In re Nat'l Forge Co., 
289 B.R. 803 (Bankr. W.D. Pa. 2003); In re Blue Diamond Coal Co., 131 
B.R. 633 (Bankr. E.D. Tenn. 1991); In re Ind. Grocery Co., 138 B.R. 40 
(Bankr. S.D. Ind. 1990); In re Big Sky Transp. Co., 104 B.R. 333 
(Bankr. D. Mont. 1989); In re Amherst Sparkle Mkt., Inc., 75 B.R. 847 
(Bankr. N.D. Ohio 1987); In re Salt Creek Freightways, 47 B.R. 835 
(Bankr. D. Wyo. 1985). Other courts have combined factors one, two, and 
five from the American Provision analysis, resulting in a seven-part 
analysis. See, e.g., In re Carey Transp., Inc., 50 B.R. 203, 207 
(Bankr. S.D.N.Y. 1985), aff'd sub nom Truck Drivers Local 807 v. Carey 
Transp., Inc., 816 F.2d 82 (2d Cir. 1987).

        2.  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.\9\
---------------------------------------------------------------------------
    \9\ See, e.g., In re Century Brass Prods., Inc., 795 F.2d 265, 273 
(2nd Cir. 1986) (``The purpose [of Sec. 1113(b)(1)(A)] is to spread the 
burdens of saving the company to every constituency while ensuring that 
all sacrifice to a similar degree.''); see also In re Maxwell 
Newspapers, Inc., 981 F.2d 85, 89 (2nd Cir. 1992) (``This statute 
[Sec. 1113] requires unions to face those changed circumstances that 
occur when a company becomes insolvent, and it requires all affected 
parties to compromise in the face of financial hardship. At the same 
time, Sec. 1113 also imposes requirements on the debtor to prevent it 
from using bankruptcy as a judicial hammer to break the union.'').
---------------------------------------------------------------------------
        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.
        9.  The balance of the equities must clearly favor rejection of 
        the collective bargaining agreement.

    The debtor must satisfy all nine of these standards in order to 
obtain relief. Failure to satisfy any of the factors will result in 
denial of the debtor's motion to modify or reject the collective 
bargaining agreement.\10\
---------------------------------------------------------------------------
    \10\ Most often when courts deny Sec. 1113 relief to a debtor it is 
on the grounds of failure to negotiate or bargain in good faith, 
failure to show that the debtor's proposal was ``fair and equitable,'' 
and/or failure to meet the ``necessary'' or ``essential'' standard. See 
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.''); In re GCI, 
Inc., 131 B.R. 685 (Bankr. N.D. Ind. 1991) (debtor failed to negotiate 
in good faith); In re George Cindrich Gen. Contracting, Inc., 130 B.R. 
20 (Bankr. W.D. Pa. 1991) (debtor ``did not provide sufficient 
information to enable union to determine whether the specific 
concessions sought by debtor were reasonable or necessary''); In re 
Pierce Terminal Warehouse, Inc., 133 B.R. 639 (Bankr. N.D. Iowa 1991) 
(debtor failed to prove that the proposed collective bargaining 
agreement modifications were ``necessary'' to permit reorganization and 
failed to ensure that all affected parties were treated fairly and 
equitably); In re Express Freight Lines, Inc., 119 B.R. 1006 (Bankr. 
E.D. Wis. 1990) (debtor's proposal contained modifications that were 
not necessary to reorganization and the proposal was not fair and 
equitable to all concerned); In re Ind. Grocery Co., 136 B.R. 182 
(Bankr. S.D. Ind. 1990) (debtor ``has not borne its burden of proof 
that it is fair and equitable to ask for wage cuts. . . .''); In re 
William P. Brogna and Co., 64 B.R. 390 (Bankr. E.D. Pa. 1986) (proposal 
was not fair and equitable); Wheeling-Pittsburgh Steel Corp. v. United 
Steelworkers of Am., AFL-CIO-CLC, 791 F.2d 1074 (3d Cir. 1986) 
(reversing decision authorizing rejection because the bankruptcy court 
failed to consider and determine whether the proposed modifications 
both were necessary and treated all parties fairly and equitably); In 
re Cook United, Inc., 50 B.R. 561 (Bankr. N.D. Ohio 1985) (debtor 
failed to show that its proposed collective bargaining agreement 
modifications were necessary to permit reorganization and that its 
proposal was fair and equitable); In re Valley Kitchens, Inc., 52 B.R. 
493 (Bankr. S.D. Ohio 1985) (debtor failed to satisfy the requirement 
that the proposal deal only with modifications necessary to permit 
reorganization); In re Fiber Glass Indus., Inc., 49 B.R. 202 (Bankr. 
N.D.N.Y. 1985) (debtor had failed to show how its proposed reductions 
were necessary to reorganization); In re K & B Mounting, Inc., 50 B.R. 
460 (Bankr. N.D. Ind. 1985) (debtor failed to show the proposed changes 
were fair and equitable); In re Am. Provision Co., 44 B.R. 907 (Bankr. 
D. Minn. 1984) (debtor failed to show that the proposed collective 
bargaining agreement modifications were necessary).
---------------------------------------------------------------------------
    Some courts, in deciding whether to allow rejection of the 
collective bargaining agreements, have focused on the term 
``necessary'' in Sec. 1113(b). In Wheeling-Pittsburgh Steel Corp. v. 
United Steelworkers of Am., AFL-CIO-CLC, 791 F.2d 1074, 1088 (3d Cir. 
1986), the court focused on the word ``necessary'' and concluded that 
Congress intended the word ``necessary'' to be construed strictly. The 
court commented 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.'' 
Id. The court suggested that the use of the word ``necessary'' equated 
to ``essential'' and that rejection under Sec. 1113 was to be used only 
when necessary to prevent liquidation. In 1987, the Second Circuit 
rejected the Third Circuit's approach. 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.'' While the ``necessary'' standard outlined by the Third 
Circuit in Wheeling is more stringent than the standard articulated by 
the Second Circuit (and other courts), in practice, even outside of the 
Third Circuit, courts impose a heavy burden upon a debtor that is 
seeking to modify its collective bargaining agreements, and if the 
changes go beyond what is needed in order to reorganize and emerge as a 
viable and competitive business, then--regardless of precisely how the 
term ``necessary'' has been defined--the changes are unlikely to be 
authorized by the courts.
    Section 1113 was designed to encourage negotiated resolutions. It 
requires the company to engage in good faith negotiation before it 
seeks relief under Sec. 1113 and to continue such negotiations even 
after filing a Sec. 1113 motion. In practice, courts have been vigilant 
to assure that a debtor seeking Sec. 1113 relief is not just ``going 
through the motions'' of negotiation, but is in fact engaging in good 
faith negotiation. At Sec. 1113 hearings, the courts typically hear 
extensive testimony about the course of negotiations, the details of 
each proposal and counterproposal, the number and length of meetings, 
and the information exchanged. If a court is left with the impression 
that the company did not negotiate in good faith--making every 
reasonable effort to reach agreement--it will ordinarily deny relief. 
If the court believes that further negotiations might yield an 
agreement, it may defer ruling on a rejection motion and order the 
parties back to the negotiating table. The strong emphasis that the 
bankruptcy courts place on negotiated resolution of labor issues 
appears to be consistent with the goal of Congress in enacting 
Sec. 1113. While no Senate or House Report was submitted with the 
legislation, statements made at the time of enactment suggest that 
Congress intended the provision to encourage negotiated 
resolutions.\11\
---------------------------------------------------------------------------
    \11\ For example, in discussing the legislation, Senator Hatch 
stated ``I feel that the conference version is a practical, workable 
mechanism. This provision will require negotiations to attempt to save 
both the labor contract and the business prior to court adjudication to 
reject the contract. . . . Only if these good faith negotiations fail 
does the court get involved in granting an application to reject the 
contract.'' See 130 Cong. Rec. H7489 (June 29, 1984), reprinted in 1984 
U.S.C.C.A.N. 576, 591. Congressman Rodino, Chairman of the House 
Committee on the Judiciary, also commented that the provision would 
work to ensure ``that a process of negotiation will take place between 
the employer and the union in a reorganization case. . . .'' Id. at 
577.
---------------------------------------------------------------------------
    In practice, the goal of encouraging negotiated resolutions has 
been achieved. In the overwhelming majority of situations where a 
debtor sought to modify a collective bargaining agreement, the issues 
have been resolved by agreement of the company and the union. This is 
true, in large part, because both the debtor and its employees face 
substantial risks absent a consensual resolution.
    The company's risks include the following:
    First, absent an agreement, the company's request for Sec. 1113 
relief may be denied by the bankruptcy court, with the result that the 
company cannot obtain any relief from the terms of its collective 
bargaining agreement. Even if the court is convinced that the changes 
proposed by the debtor are necessary, relief may be denied if the court 
believes that the debtor has failed to negotiate in good faith, to 
provide the union with sufficient information, to spread the sacrifice 
among labor and other constituencies in a fair and equitable manner, or 
to satisfy any of the other requirements for relief. Companies 
reviewing the case law will observe that denial by the courts of 
Sec. 1113 relief is not uncommon. If a company cannot modify its 
collective bargaining agreements, its reorganization effort may be 
doomed to failure. Thus, if the company can achieve adequate (even if 
not ideal) cost savings through negotiation, it has every incentive to 
do so.
    Another risk to the company is that, even if it prevails in court, 
the company could face a break-down in employee relations, which may 
imperil the company's future. It is difficult for a company--
particularly one trying to rebound from bankruptcy--to prosper with an 
unhappy and resentful workforce. Any time there are modifications to a 
collective bargaining agreement, there is likely to be some unhappiness 
among the labor group that was called upon to make a sacrifice, but the 
extent of acrimony is likely to be much greater where the modifications 
were imposed by a court, after litigation, as opposed to having been 
agreed upon by the parties, as a result of open and good-faith 
negotiations.
    Finally, there may be a risk that the union will strike after a 
collective bargaining agreement is rejected. Unions often threaten to 
strike if Sec. 1113 relief is granted. Particularly, in the case of a 
company that is already suffering financial distress, a strike may 
destroy the company. Of course, destroying the company is not in 
labor's interest any more than it is in the interests of any other 
constituency, but the company nonetheless faces a risk that an employee 
group, perhaps acting out of anger or resentment or with any eye toward 
influencing the outcome in future cases, will strike even if doing so 
would destroy the business.\12\ Avoiding a strike is another incentive 
for a company to seek an agreement rather than litigate against its 
unions.
---------------------------------------------------------------------------
    \12\ In some recent airline bankruptcy cases, courts have enjoined 
threatened strikes following Sec. 1113 decisions, where a strike would 
have been likely to have put the airline out of business. See 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); Comair, Inc. v. Air Line Pilots Ass'n, Int'l 
(In re Delta Air Lines, Inc.), 359 B.R. 491(Bankr. S.D.N.Y. 2007); In 
re Mesaba Aviation Inc., 350 B.R. 112 (Bankr. D. Minn. 2006). Because 
they involved airlines, these cases were governed by the Railway Labor 
Act (``RLA'') rather than the National Relations Labor Act (``NRLA''). 
It is less clear that the federal courts could enjoin a strike against 
a company whose labor relations are governed by the NRLA rather than 
the RLA. See Northwest Airlines Corp. 483 F.3d at 173 (Commenting that 
``[i]n cases governed by the NLRA, we have also hinted that a union is 
free to strike, even following contract rejection under Sec. 1113.'').
---------------------------------------------------------------------------
    The unions, and the employees they represent, also face risks if no 
agreement is reached. First, they run the risk that the company may 
prevail in rejection litigation, leaving the employees without any 
collective bargaining agreement or potentially with more substantial 
pay and benefits reductions and work rule modifications than could have 
been achieved through negotiation.
    Another risk to the union is that in litigation the court is forced 
to make ``up or down'' decisions, while in negotiations the union has 
more flexibility to construct an agreement that is responsive to the 
particular concerns of its membership, prioritizing those issues that 
are most important to the employees it represents.\13\
---------------------------------------------------------------------------
    \13\ In negotiations, it is not uncommon for a debtor to try to 
establish a level of cost savings that it needs to achieve in order to 
be viable, but then to give the union considerable flexibility in how 
to achieve that level of cost savings so that the union can prioritize 
those items that are of greatest concern to its membership. The union 
is obviously better able to do this than a court would be.
---------------------------------------------------------------------------
    The union also faces the risk that, even if it wins the litigation, 
it may destroy the company in the process. Many companies that seek 
Sec. 1113 relief do in fact need that relief in order to remain viable 
and competitive. Typically, these companies are paying wages and 
benefits and offering work rules that are more generous than their 
competitors, and they need to adjust their wages, benefits and work 
rules to a market level in order to reorganize and remain in business. 
If the union refuses to make concessions and succeeds in defeating the 
company's Sec. 1113 motion, the result may be a liquidation of the 
company and loss of all jobs. Thus, the union faces not only the risk 
of losing the Sec. 1113 litigation, but often the equally great risk of 
winning.
    These risks, faced by the company and its employees, create 
bargaining leverage for both sides. As a result, Sec. 1113 cases are 
settled much more often than they are litigated. In the best of 
circumstances, they are treated by the parties as ``business problems'' 
rather than ``us versus you'' disputes, with the company and the union 
sharing information and analysis and collaborating to arrive at a 
solution that will result in a workable, fair and market-competitive 
labor cost structure. Even in those cases with more hostility, though, 
the parties eventually tend to come to the conclusion that a negotiated 
solution is preferable to the alternatives. The fact that the unions, 
as well as companies, tend to be advised by experienced counsel, 
financial advisors, and other professionals, who recognize the risks to 
each side, promotes consensual resolutions. Finally, the courts tend to 
push all the parties for consensual resolution. Most judges seem to 
prefer a solution crafted by the parties to one imposed by the court. 
The courts recognize that encouraging consensual resolutions is 
consistent with the intent of Congress in enacting Sec. 1113 and also 
that an arrangement worked out between the parties is likely to be more 
responsive to each of their concerns, and more workable in practice, 
than one imposed by the court.
    In the relatively few cases where the parties are not able to reach 
agreement, and the court must therefore rule on a Sec. 1113 motion, the 
debtors sometimes prevail and the unions sometimes prevail. Each case 
that is litigated will, of course, be decided based on its own 
particular facts. However, as a general matter it would be fair to say 
that the burden imposed on a debtor seeking to reject a collective 
bargaining agreement over a union's objection has been a heavy one, and 
the courts have rigorously imposed the requirements set forth in the 
statute.
    Many of the same concerns and competing issues are raised by 
Sec. 1114. Section 1114 provides that the debtor ``shall timely pay and 
shall not modify any retiree benefits,'' unless the parties all agree 
to the modifications or the debtor follows the procedures in the 
statute and receives court approval to modify such benefits.\14\ The 
requirements for obtaining court approval to modify retiree benefits 
are similar to the requirements set forth in Sec. 1113, including the 
need to first attempt to negotiate before seeking court approval, the 
requirement that any modifications be ``necessary'', and the fair and 
equitable requirement.\15\ In fact, Sec. 1114, which was enacted 
approximately four years after Sec. 1113, tracks the language of 
Sec. 1113 in important respects.\16\ Judicial interpretation of 
Sec. 1114, as well as legislative statements made at the time of 
enactment, suggest that the standards are intended to be very similar 
or identical.\17\
---------------------------------------------------------------------------
    \14\ See 11 U.S.C. Sec. 1114(e).
    \15\ Prior to attempting to modify the benefits, the debtor must 
``make a proposal to an authorized representative of the retirees,'' 
the proposal can only provide for ``those necessary modifications in 
retiree benefits that are necessary to permit reorganization of the 
debtor,'' and the debtor must assure ``all of the affected parties are 
treated fairly and equitably.''  See 11 U.S.C. Sec. 1114(f)(1)(A).
    \16\ Compare Sec. 1113(b) to Sec. 1114(f), setting forth the 
conditions precedent to requesting modification of retiree benefits. 
Also, compare Sec. 1113(c) to Sec. 1114(g), establishing the standards 
for modification of retiree benefits.
    \17\ See In re Horsehead Indus., Inc., 300 B.R. 573, 583 (Bankr. 
S.D.N.Y. 2003) (``The statutory requirements under both sections [1113 
and 1114] are the same. Accordingly, the discussion relating to 
requirements under 1113 also applies to 1114.''); In re Ionosphere 
Clubs, Inc., 134 B.R. 515, 519-20 (Bankr. S.D.N.Y. 1991) 
(``[C]ompliance with 1114 is substantially and procedurally the same as 
compliance with 1113.''). The Senate Report (Judiciary Committee) No. 
100-119, provides the following comment about the intent of Sec. 1114: 
``These standards are intended to be identical to those contained in 
Section 1113. In adopting this standard the Committee believes that it 
is important to use a standard with which the courts are already 
familiar. The Committee believes that the Section 1113 standards strike 
a fair and reasonable balance between the need to protect the rights of 
retirees and the rights of other creditors.'' See S. Rep.100-119 (July 
17, 1987), reprinted in 1988 U.S.C.C.A.N. 683, 687-88.
---------------------------------------------------------------------------
    In practice, Sec. 1114 issues are treated much like Sec. 1113 
issues. The retirees are represented either by a labor union or by a 
retiree committee. The union or committee engage counsel and other 
professionals to represents its interests. Most often, the company and 
the retirees' representatives reach agreement on modifications that are 
necessary to give the company a workable cost structure and that 
``spread the pain'' among present workers, retirees, creditors and 
other constituencies.
    In conclusion, issues involving modification of collective 
bargaining agreements or retiree benefits are among the most difficult 
issues faced by the parties, and the courts, in chapter 11 cases. The 
prospect of reducing employees' wages and benefits, or retirees' 
benefits, is not something the courts take lightly. A debtor proposing 
to do this faces a heavy procedural and substantive burden. At the same 
time, courts recognize, as they must, that some debtors are so 
hamstrung by above-market or otherwise unaffordable labor and retiree 
costs that, without relief from such costs, they will not be able to 
emerge from bankruptcy as viable and competitive enterprises. If these 
companies are forced to liquidate because they cannot reduce these 
costs, all constituencies will suffer, including workers who will lose 
their jobs, retirees who will lose their benefits, creditors and 
shareholders whose recoveries will be diminished or eliminated, 
suppliers and customers, taxing authorities, and local communities. 
Sections 1113 and 1114 provide a framework for the parties, and when 
necessary the courts, to balance these competing concerns and 
interests.
    While in any given case, one party or the other may be more or less 
satisfied with the outcome, as a general matter Sec. Sec. 1113 and 1114 
have worked well in achieving a balance between the objectives of 
preserving bargained-for wages, benefits and work rules to the maximum 
extent possible and achieving a cost structure that will enable chapter 
11 debtors to reorganize. Congress' goal of placing a heightened burden 
on debtors seeking to modify labor agreements, providing all parties 
with bargaining leverage, and encouraging negotiated resolutions has 
been largely achieved.

    Ms. Sanchez. Thank you for your testimony.
    At this time, I would invite Mr. Redmond to begin his 
testimony.

TESTIMONY OF FRED REDMOND, INTERNATIONAL VICE PRESIDENT, HUMAN 
       AFFAIRS, UNITED STEELWORKERS (USW), PITTSBURGH, PA

    Mr. Redmond. Thank you. Good morning, Madam Chair and 
Members of the Committee.
    I would first like to bring you greetings on behalf of the 
1.2 million active and retired members of the United 
Steelworkers. Our members are found in nearly every 
manufacturing industry, as well as health care, service and 
public employment. On behalf of the steelworkers union, I am 
filling in this morning for International President Leo Gerard, 
who is unable to appear today. But Leo has a very, very strong 
passion toward this issue that we are discussing, so I thank 
the Subcommittee for the invitation to appear.
    Unfortunately, Madam Chair, our union is all too familiar 
with the Chapter 11 process. And for me, one corporate 
bankruptcy hit especially close to home. The aluminum plant 
that I worked in, in a small town right outside of Chicago, 
Illinois, called McCook, went through bankruptcy in the McCook 
Metals case.
    The company ultimately liquidated, and that meant the 
termination of a defined pension benefits and retiree health 
insurance program for men and women that I have known my entire 
adult life, including family members. So I cannot forget their 
losses, nor those suffered by all the steelworkers in other 
cases. And that is, in part, why I appear before you today.
    If we look at the steel cases alone, more than 40 steel 
companies earlier in the decade filed bankruptcy cases. And 
that was the result of great overcapacity in the world steel 
industry, followed by unfair imports from America's trading 
partners. During that period of time, more than 55,000 
steelworkers were laid off. The Pension Benefit Guaranty 
Corporation terminated pension plans covering 240,000 
steelworkers and retirees, and nearly 200,000 retirees and 
surviving spouses lost retiree health insurance coverage during 
that period of time.
    Now, beyond steel, in the aluminum, iron ore, glass, paper, 
and automotive parts industry, steelworkers have also faced 
devastating corporate bankruptcies. Our folks at the bargaining 
table have had to wrestle with enormous challenges within a 
system that is stacked against the interests of workers and 
retirees. In light of our experience, I am here today to ask 
the Subcommittee to lead a reform of the Bankruptcy Code aimed 
at treating the American worker and retirees more fairly.
    The last major reform to the Bankruptcy Code that focused 
on worker and retiree interests were enacted in the 1980's, and 
the steelworkers union was central in those deliberations. 
Insofar as the ability of a reorganizing company to reject a 
negotiated labor agreement is concerned, legislation in the 
1980's sought to balance collective bargaining rights against 
the need of an employer with proven distress to obtain 
necessary and limited relief. We believe Congress have always 
intended that this balance to allow a reorganizing company to 
reject a labor agreement was only as a last resort; that is, 
only after full and earnest bargaining had failed, and only 
when it became necessary to avoid liquidation.
    But the experience of the last 20 years illustrates that 
this balance has been upset. Employers have pushed aggressively 
for changes to labor and pension and retiree insurance 
agreements, often as the first shot rather than as a last 
resort.
    So in light of the strict time limit, let me simply touch 
upon four specific areas in which I would urge the Subcommittee 
to adopt reforms. First, we suggest to Congress that we should 
seek to recapture the balance that I was referring to, giving 
stronger recognition to the important role of collective 
bargaining, and limiting the right of employers to violate 
labor agreements.
    Second, reform should assign higher priority to the payment 
of employee and retiree obligations, allowing them to be paid 
before other creditors who are more able to absorb losses than 
is a worker and a worker's family. These other creditors with 
deeper financial resources include highly compensated lawyers 
and investment bankers.
    And, third, reform should enshrine the principle of shared 
sacrifice and do it with specificity, meaning that executives 
should not be allowed to improve their own salaries and 
benefits while workers and retirees see their quality of life 
devastated.
    Speaking of that last subject, controlling executive 
compensation in bankruptcy, Congress in 2005 limited the 
ability of companies to ask for retention bonuses to be paid to 
executives of bankrupt companies simply for remaining with the 
company. In fact, it was a steelworker leader from Ohio, David 
McCall, who first pointed out the abuses of executive retention 
schemes in testimony before the Senate Judiciary Committee in 
early 2005.
    Employers, however, have found loopholes in the current 
law, Madam Chairman, and now simply recast and rename these 
retention schemes as so-called incentive programs. This is 
semantics. As one judge in a recent steelworker case said, in 
considering one of these so-called incentive programs, ``If it 
walks like a duck, quacks like a duck, then it is a duck.'' And 
Congress must close this loophole.
    And, fourth, bankruptcy reform also must take into account 
the impact of sales and liquidations upon workers and retirees. 
For example, Congress should clarify that a bankruptcy judge 
may, in supervising the sale or auction of assets, give 
preferential weight to the buyer who intends to retain jobs and 
benefits in the community as opposed to a buyer who simply 
wishes to liquidate assets. Congress should also, in our 
opinion, take special steps to protect their health insurance 
benefits of retirees in the sale process to ensure that 
retirees are not left at the side of the road while a proper 
buyer moves on.
    So, Madam Chairman, we recognize that reforming the U.S. 
Bankruptcy Code will not, by itself, solve all of the problems 
of American industry, American manufacturing, and at least not 
to exacerbate the problems being faced by so many American 
workers and retirees.
    So I want to thank you very much for your attention toward 
this issue that we take very seriously. Thank you, Madam 
Chairman.
    [The prepared statement of Mr. Redmond follows:]

                   Prepared Statement of Fred Remond

    I am Fred Redmond, International Vice President (Human Affairs) of 
the United Steelworkers (USW). The USW has 850,000 members in the 
United States and Canada. Our members are found in nearly every 
manufacturing industry, not only steel, but paper, forestry, rubber, 
energy, mining, automotive parts, and chemicals, as well as health 
care, service and public employment. On behalf of the USW, and filling 
in for International President Leo Gerard, who is unable to appear 
today, I thank the Sub-Committee for the invitation to appear today.
    Our union is all too familiar with the Chapter 11 process. And for 
me, one corporate bankruptcy hit especially close to home. The aluminum 
plant I worked in for 25 years in McCook Illinois, near Chicago, went 
through bankruptcy in the McCook Metals case. The company ultimately 
liquidated, and that meant the termination of a defined benefit pension 
and a retiree insurance program. Men and women with whom I had worked 
for years, including family members, lost almost everything in the 
McCook bankruptcy. I cannot forget their losses, nor those suffered by 
Steelworkers in other cases, and that's one reason why I appear before 
you today.
    Looking at steel cases alone for just a minute, more than 40 
steelmakers earlier this decade filed bankruptcy cases, and that was 
the result of great overcapacity in the world steel industry followed 
by unfair imports from America's trading partners. The human dimensions 
were vast. Many of our largest steel industry employers were affected--
Bethlehem Steel, LTV Steel, National Steel, Wheeling-Pittsburgh Steel, 
WCI Steel, and Republic Technologies. More than 55,000 Steelworkers 
were laid off in that period. The Pension Benefit Guaranty Corporation 
terminated pension plans covered nearly 240,000 steelworkers and 
retirees. And, nearly 200,000 retirees and surviving spouses lost 
retiree health insurance coverage.
    The steel industry recovered substantially, as a result of both the 
tariffs imposed in March 2002 and the sacrifices made by our members to 
restructure the industry. Over these years our union has also led an 
effort for steel industry consolidation, which did not come without a 
price, but which has helped to create a stronger industry that even now 
faces still more real and threatened increases in foreign imports.
    Beyond steel, in such industries as aluminum, iron ore, glass, 
paper, and automotive parts, USW members and retirees have also faced 
devastating corporate bankruptcies. Our bargainers have had to wrestle 
with enormous challenges and do so within a system that is stacked 
against the interests of workers and retirees. In light of our 
experience, I ask the Sub-Committee today to lead a reform of the 
Bankruptcy Code aimed at treating American workers and retirees more 
fairly.
    The last major reforms to the Bankruptcy Code that focused on 
worker and retiree interests were enacted in the 1980s, and the United 
Steelworkers was central in those deliberations. Insofar as the ability 
of a reorganizing company to reject a negotiated labor agreement is 
concerned, legislation in the 1980's sought to balance collective 
bargaining rights against the need of an employer with proven distress 
to obtain necessary and limited relief. We believe Congress always 
intended this balance to allow a reorganizing company to reject a labor 
agreement only as a last resort, that is, only after full and earnest 
bargaining had failed and, even then, only when necessary to avoid 
liquidation.
    But the experience of the last 20 years illustrates that this 
balance has been upset. The courts have interpreted the bankruptcy law 
in such a way as to regularly grant employer requests for relief under 
a more lax standard than we believe Congress had intended. Employers 
now push aggressively for changes to labor and pension and retiree 
insurance agreements, often as a first shot rather than a last resort. 
In light of this experience, there are numerous ways in which Congress 
can and should reform the bankruptcy laws to treat worker and retiree 
interests more fairly.
    First, Congress should seek to recapture the balance I referred to, 
giving stronger recognition to the important role of collective 
bargaining and limiting the right of employers to violate labor 
agreements, which is after all what rejection really amounts to. This 
would include defining more narrowly the meaning of the term 
``necessary to reorganization'' so as to force employers to clear a 
higher bar and placing meaningful limits on the length of proposed 
concessions. Honoring the collective bargaining process also would 
protect the fundamental right to strike, which has been a particular 
concern to our brothers and sisters in the airline industry.
    Second, reform should assign higher priority to the payment of 
employee and retiree obligations, allowing them to be paid before the 
claims of other creditors who are typically more able to absorb losses 
than is an individual worker and his or her family. Among the other 
creditors with greater financial reserves are highly-compensated 
lawyers and investment bankers.
    Third, reform should enshrine the principle of shared sacrifice and 
do it with specificity, meaning that executives should not be allowed 
to improve their own salaries and benefits while workers and retirees 
are forced to sacrifice their quality of life. Before exposing workers 
and retirees to cuts, the courts should simply ask whether executives 
and managers have first made sacrifices themselves.
    On this subject--controlling executive compensation in bankruptcy--
Congress in 2005 limited the ability of companies to ask for retention 
bonuses to be paid to executives of bankrupt companies simply for 
remaining with the company. In fact, it was a Steelworkers leader from 
Ohio who first pointed out the abuses of executive retention schemes in 
testimony to the Senate Judiciary Committee in early 2005. Employers, 
however, have found loopholes in the current law and now simply recast 
and re-name these retention schemes as so-called ``incentive 
programs.'' This is semantics. As one judge in a recent USW case said 
in considering one of these so-called ``incentive'' programs: ``if it 
walks like a duck, and quacks like a duck, it's a duck.'' Congress must 
close this loophole.
    Fourth, bankruptcy reform also must take into account the impact of 
sales and liquidations upon workers and retirees. For example, Congress 
should clarify that a bankruptcy judge may, in supervising the sale or 
auction of a company's assets, give preferential consideration to a 
purchaser who plans to retain jobs and benefits in the community as 
compared to the buyer who would simply liquidate assets. Congress also 
should take steps to extend protection to retiree health benefits in 
sale situations. Even where a seller in bankruptcy meets an exacting 
standard for modifying retiree benefits, Congress should require the 
buyer as well to set aside monies to restore some of the devastating, 
and oftentimes, life-threatening losses of health care benefits 
suffered by retirees. That will ensure that retirees are not left by 
the side of the road as a profitable buyer moves forward.
    We at the USW know that a different bankruptcy process is possible. 
We represent approximately 280,000 members in Canada. Our Canadian 
employers have not been immune from many of the same problems that have 
afflicted our U.S. employers, though Canadian employers have not been 
hamstrung by the gross inefficiencies of the U.S. health care system. 
In the Canadian insolvency process, we are not aware of any judge who 
has used the legal process to void a collective bargaining agreement, 
and our union was instrumental in 2005 in leading the Canadian House of 
Commons to pass legislation that confirmed that collective bargaining 
agreements are beyond the authority of the courts (though that law is 
now under attack by the current government). Our experience in Canada 
proves that worker interests need not be subordinated in the bankruptcy 
process.
    Madame Chairperson, we recognize that reforming the U.S. Bankruptcy 
Code will not, by itself, solve all of the problems of American 
industry. We do not confuse prevention with cure. And on the prevention 
side are vital questions about our trade and tax policies, our lack of 
international health care competitiveness, the need for a pro-
manufacturing agenda, and other policies that stop the hemorrhaging of 
jobs in American industry. At the same time, the bankruptcy laws should 
work in tandem with manufacturing-friendly measures and, at the very 
least, not exacerbate the problems being faced by so many American 
workers and retirees. The lives of far too many American workers and 
retirees have been crushed by corporate reorganizations. Congress can 
begin to set things right by reforming the bankruptcy laws. Thank you 
very much Madame Chairperson.

    Ms. Sanchez. Thank you, Mr. Redmond, for your testimony and 
your recommendations.
    I would invite Mr. Prater to begin his testimony.

 TESTIMONY OF CAPTAIN JOHN PRATER, PRESIDENT, AIR LINE PILOTS 
           ASSOCIATION, INTERNATIONAL, WASHINGTON, DC

    Mr. Prater. Good morning, Madam Chairwoman, and Members of 
the Subcommittee. On behalf of the 60,000 ALPA members who fly 
for 41 airlines in the United States and Canada, I want to 
thank you for this opportunity to describe how airline 
management has exploited this Nation's bankruptcy laws 
following the tragic events of 9/11, and how you can act to 
level a playing field that kept workers on the sidelines.
    Unfortunately, I am no stranger to airline bankruptcies. 
Having flown for Continental Airlines for 29 years, I know 
first hand the effect that the deregulation act of 1978 and the 
bankruptcies that followed had upon our industry and our 
pilots. During the 1980's, we fought this battle to prevent 
management's unilateral abrogation of labor contracts and 
advocated for bankruptcy legislation to protect American 
workers. Nearly 24 years later, we are back fighting once again 
to restore balance to the Bankruptcy Code.
    The events of 9/11 presented a narrow window of opportunity 
for airline managements to crush workers, and they took 
advantage of that window of opportunity with complete abandon. 
While pilots and other workers rallied to save our airlines 
after that dark day in September, management and the law we 
discussed today forced us to give too much. Now that the 
emergency is over, it is time to fix the Bankruptcy Code.
    Since 2001, pilots have given more than $30 billion in 
concessions to save our airlines and our jobs. As one example, 
pilots at United Airlines endured two rounds of concessions 
that included pay cuts of 30 percent, followed by another 12 
percent, harsher work rules, less job security, and a 
terminated pension plan. After United returned to 
profitability, those pilots have so far been rewarded with only 
a 1.5 percent pay raises and forms of profit sharing worth 
about 0.5 percent of their annual W-2 earnings.
    In contrast, United's CEO received a compensation package 
last year worth over $40 million, a 3,500-plus percent increase 
over the prior year. I ask you: Who saved United Airlines? The 
CEO who made business decisions that led to bankruptcy, or the 
pilots and the workers who did their jobs flawlessly, gave up 
salary and pensions, and flew more hours? I challenge any 
person in this room or in this industry to tell me the pilots 
and their fellow United employees did not save that airline.
    Pilots at Hawaiian Airlines faced a Section 1113 motion by 
a profitable company as a lever to wrest employee concessions 
to either facilitate a sale or to improve the carrier's 
competitive position. After having already made pre-petition 
concessions demanded by management to avoid a Chapter 11 
filing, pilots were then stunned when management approved a 
self-tender of the airline's stock at well below market rate 
following September 11th and before the bankruptcy filing. You 
can't make this up. No one would believe us.
    Delta's management used bankruptcy at two airlines. First, 
they exacted deep concessions from mainline pilots while in 
bankruptcy; then, they had the gall to claim that wholly owned 
subsidiary Comair was simply not profitable enough and also 
needed to enter bankruptcy. The bankruptcy judge there did not 
dispute our claims and argument that Comair's Section 1113 
motion for a 22 percent pay cut would qualify some full-time 
pilots for Federal welfare assistance. He simply ignored that 
fact.
    In the end, we reached a concessionary agreement, but it 
wasn't pretty, and it isn't pretty today. Not long after that, 
Delta was boasting that it had plenty of cash on hand to fight 
a hostile takeover attempt by U.S. Airways, and the only reason 
U.S. Airways could try to buy another airline was because it 
had used the bankruptcy process twice to cut the wages and the 
work rules and terminate all the pension plans of its workers.
    Wait, it gets worse. The most egregious case of bankruptcy 
abuse involved Mesaba Aviation, which flies as Northwest 
Airlines, which was also in bankruptcy. Not only did Mesaba 
refuse to bargain in good faith, but its management argued in 
court against the pilots' rights to withhold their services if 
their contract was rejected, a right that every other party to 
a rejected contract has under the Bankruptcy Code. Two 
bankruptcy courts, a Federal district court and the 2nd Circuit 
Court of Appeals, affirmed that airline employees can be forced 
to accept the utter destruction of their contract, but may not 
strike in response. Again, we can't make this up; we are living 
it.
    The willingness of the courts to enjoin any strike in 
response to the imposition of unilateral terms has taken away 
any incentive for airlines to negotiate. Why bother, when you 
can dictate terms in bankruptcy court?
    Clearly, Congress must once again overhaul the Bankruptcy 
Code. Managements have found the loopholes in the law, and the 
judges have only been too willing to let them exploit those 
advantages. The current Bankruptcy Code must be overhauled so 
that the breach of a collective bargaining agreement can be 
sanctioned only and when truly necessary and only to provide 
the employer with what it truly needs: to ensure the company's 
survival.
    I would like to sum up by saying that we thank you and the 
Subcommittee for the opportunity to testify today. I sincerely 
believe that Congress must restore the balance to the 
bankruptcy process so that, when our next crisis hits, our air 
transportation system will serve the public's and the Nation's 
best interest.
    I would be happy to entertain any questions. Thank you.
    [The prepared statement of Mr. Prater follows:]

                   Prepared Statement of John Prater

    Good morning Madame Chairwoman and members of the Subcommittee. I 
am Captain John Prater, President of the Air Line Pilots Association, 
International. ALPA represents 60,000 professional pilots who fly for 
41 airlines in the United States and Canada. On behalf of our members, 
I want to thank you for the opportunity to testify today about the 
urgent need for legislation to restore balance and basic fairness to 
the Section 1113 process under Chapter 11 of the Bankruptcy Code.
    In the aftermath of the events of Sept. 11, 2001, ALPA and other 
labor unions faced continuous efforts by airlines to use the bankruptcy 
process as a razor-sharp tool to strip away working conditions and 
living standards that were built over decades of collective bargaining. 
Airline workers have borne far more than their fair share of the pain 
to save their airlines, as massive pay cuts, lost pensions and other 
deep concessions clearly attest. Section 1113 of the code has been 
applied by the bankruptcy courts, at management's instigation, in a 
manner far removed from the original intent of these provisions. 
Instead of protecting employees, the 1113 process has been used by 
employers to unfairly gut the wages and working conditions of airline 
and other employees. These same employers also used the bankruptcy law 
to rubber stamp multimillion dollar rewards for the corporate 
executives who perpetrate these abuses on workers.
    After 9/11, many airline managements used the 1113 procedures to 
not only gut employee wages and working conditions, they also exploited 
the bankruptcy process to cut staff to the bone. Both of these factors 
have combined to make piloting a far less desirable job than it used to 
be, contributing to increased pilot frustration, attrition and turnover 
at a number of airlines. Added to the understandable employee 
frustration and anger, these additional, related problems make the 
implications of failing to restore balance to the bankruptcy process 
more serious than just ending the immorality of this unfairness. The 
current imbalance has created a poisoned environment that has greatly 
undermined labor relations and employee good will in the airline 
industry, which are critical to the efficient operation of our 
essential national air transportation system.
    Indeed, ALPA has seen that airline managements' successful efforts 
through Section 1113 to turn back the clock decades on workers' pay, 
rights and benefits have far exceeded any legitimate shared economic 
sacrifices that might have been necessary for the economic survival of 
the airlines. For example, a typical pilot at United Airlines endured 
two rounds of concessions that included a 30 percent pay cut, a second 
pay cut of 12 percent, harsher work rules, less job security, and a 
terminated pension plan. In 2007, that pilot has so far received only a 
1.5 percent pay raise and forms of profit-sharing worth only about 0.5 
percent of his W-2 earnings. As harsh a reality as that is, imagine 
that pilot's disbelief and anger upon learning that the airline's CEO 
received a compensation package last year worth over $40 million 
dollars. The contrast of many unionized airline employees losing more 
than a third of their pay, work rules, and decades-old pension 
benefits, while outrageous executive compensation and benefits programs 
are approved for top airline managers, is enough to show that the 
current Section 1113 process is unbalanced and grossly abused.
    Similar horror stories exist among the thousands of pilots flying 
in the US Airways family of airlines, as managers there departed the 
scene with golden parachutes, leaving behind employees who now struggle 
mightily to take care of their families while delivering millions of 
their passengers safely day after day. Distressing tales of employee 
suffering wrought by the 1113 process are also told by pilots and other 
workers at Northwest, Delta, Comair and Mesaba.
    As the Subcommittee knows, the Section 1113 procedures are the 
mechanism 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 its enactment, in 1984 the Supreme Court ruled in the 
Bildisco case that an employer could walk away from binding collective 
bargaining agreements after a bankruptcy filing without first making 
any showing of necessity as to the need to reject the terms of the 
agreement. In response, the Congress, at the urging of ALPA and other 
unions, acted swiftly to establish procedures that sought to protect 
the rights of employees in bankruptcy to prevent such results. The so-
called 1113 process was inserted into the bankruptcy code to require a 
showing of justification and good-faith bargaining between labor and 
management in order to obtain needed concessions. Failing such a 
consensual agreement, a company could impose dictated terms and 
conditions on its employees after court process only if those 
concessions were determined by the court to be truly necessary to its 
survival.
    Since that time, the employee protective purpose of Section 1113 
has been turned on its head by the bankruptcy courts and subverted by 
employers to achieve precisely the contract-destroying, worker-bashing 
results that Congress originally sought to prevent. ALPA has seen the 
requirements of Section 1113 repeatedly ignored or misapplied, without 
due regard for the financial security interests of airline employees 
and their families. The most extreme examples of the one-sided nature 
of the current process are in recent court decisions which allow 
management to reject binding collective bargaining agreements and 
impose working conditions, while prohibiting employees from withdrawing 
their services under those agreements, as other parties facing such 
rejection are routinely allowed to do under bankruptcy law. Corrective 
legislation is urgently needed to restore the original intent and 
purpose of these Section 1113 provisions, and to restore balance and 
basic fairness to the bankruptcy process as it impacts honest workers 
called upon to sacrifice to help save their employers.
    ALPA believes that Congress must act to overhaul the Section 1113 
process by: (1) tightening the standards governing when management can 
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; (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 in 
response to a breach of their collective bargaining agreements if a 
consensual agreement between the parties cannot be reached. This 
clarification is 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.
    All of these changes are urgently needed to restore some semblance 
of a level playing field in collective bargaining between workers and 
management, and to deter employers from ever again using the bankruptcy 
process as the vehicle for widespread and unjustified abuse of workers. 
I will now describe a number of additional examples which show what has 
gone wrong with the current administration of the 1113 process, both in 
the corporate boardrooms and in the courts, and illustrate why such 
legislation is so urgently needed to correct the employer abuse which 
has flourished unchecked in the current environment.

I. THE BANKRUPTCY COURTS HAVE ALLOWED EMPLOYERS TO USE THE SECTION 1113 
PROCESS AS LEVERAGE TO GUT LABOR CONTRACTS WITHOUT REQUIRING EMPLOYERS 
TO SHOW THAT THE CONCESSIONS ARE NECESSARY OR FAIR.

    The courts, egged on by opportunistic employers, have progressively 
undermined the ``necessity'' standard for granting employer relief in 
Section 1113. As I have alluded to, this standard is supposed to allow 
only those changes in working conditions that are truly ``necessary to 
permit the reorganization'' of the employer. In practice, these limits 
have all but been ignored by both employers and the bankruptcy courts, 
which in many cases have used the bankruptcy process as leverage to 
simply jam draconian wage and benefit cuts down employees' throats. 
These scorched-earth tactics of using the 1113 procedures to force 
extraction of concessions that are not truly necessary or otherwise 
achievable in consensual bargaining have led to widespread tension and 
resentment among employees, creating lasting damage to labor relations.
    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 pilots and the flying public. Congress 
needs to take steps to restore support for consensual negotiations in 
such circumstances. Both employers and the bankruptcy courts need to be 
reined in to ensure that the numerous recent abuses of the 1113 process 
are never repeated.
    It gets worse: we have 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. In the case of the bankruptcy of 
Hawaiian Airlines, 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.
    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 
arbitration tribunal, which took the matter out of the hands of the 
bankruptcy court, did management finally reduce its demands and, in 
response to ALPA's demands, offer the pilots a bankruptcy claim in 
exchange for substantial concessions. After a consensual agreement was 
reached on this basis, the Company completed its successful 
reorganization and returned to profitability. I would note legislative 
reforms should build off this success and allow consensual use of such 
expert arbitration panels versed in the industry as an alternative to 
court proceedings in 1113.
    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.
    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. This case alone cries out 
for legislative remedy.
    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. After the 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 pay 
cut but 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, taken together, show beyond doubt that 
the current 1113 process, which 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 unwarranted 
concessions from employees. These examples also show that consensual 
solutions to financial crises are always superior to the imposed 
alternatives. The current 1113 process undermines consensual, 
legitimate solutions to financial crises. Necessary modifications to 
that process must correct these imbalances and support superior 
consensual solutions.
    Reforms are also needed to ensure that an employer would not be 
permitted to commence the 1113 process seeking court permission to 
reject a collective bargaining agreement unless there has been good-
faith bargaining over proposed modifications to the agreement for a 
reasonable period of time and the parties reach impasse. Reforms should 
also include setting specific limits on the scope of labor cost relief 
that can be sought by an employer, including requiring clearly 
expressed financial contributions that would be asked of employees to 
help the carrier exit bankruptcy, which would not be permitted to 
extend more than a short time period following successful exit of the 
employer from bankruptcy. Such a provision would help prevent the abuse 
of employers ``locking in'' long-term drastic concessions which 
continue long after the exit of bankruptcy, as has been the case at 
United, Northwest, US Airways, Delta, Comair and Mesaba. Reforms should 
also require the court to consider whether alternative proposals for 
relief from the union would be sufficient to permit successful 
reorganization. Additionally, the bankruptcy court should be required 
to consider the effect of the proposed cuts on the workforce, the 
employer's ability to retain a qualified workforce and the effect of a 
strike in the event the collective bargaining agreement is allowed to 
be rejected. All of these changes are necessary to ensure that the 
sacrifices that are extracted from employees are truly fair, reasonable 
and necessary, and to stem employer abuse of the current administration 
of the 1113 process.

 II. THE CURRENT DOUBLE STANDARD UNDER CHAPTER 11: DEEP SACRIFICE FOR 
              WORKERS, HUGE PAYOUTS FOR THOSE AT THE TOP.

    Modifications should require that the economic relief sought from 
employees not be disproportionate to the treatment of executives and 
other groups. These changes are urgently needed 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 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.

    We urge reforms that would include a requirement that compensation 
to be paid to officers and directors be subject to oversight for 
reasonableness by the court as part of the employer's emergence from 
bankruptcy. Under current law, executive compensation is only required 
to be disclosed in the reorganization plan but is not subject to court 
review. The courts should be required to ensure that executive 
compensation is reasonable and not disproportionate in light of the 
other concessions made by other groups during bankruptcy.
    Reforms are also needed to require the court to impose an adverse 
presumption against granting employee relief if the employer has 
implemented an executive compensation program either during bankruptcy 
or within six months prior to bankruptcy. If such a program has been 
implemented, a presumption should be created that the employer has not 
met the requirement that the proposed cuts not overly burden the 
affected employee group. These changes are urgently needed to stop any 
future court-assisted looting of employees by greedy executives of the 
type that has already occurred.

 III. MORE UNFAIRNESS: DEEP CONCESSIONS ARE EXTRACTED FROM EMPLOYEES, 

    while other stakeholders suffer few or no adverse consequences.
    Legislative reforms are also needed because employees have also 
suffered extreme unfairness at the hands of the 1113 process compared 
to other stakeholders and participants in the bankruptcy process. For 
example:

          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.

    Reforms should require the bankruptcy court to conclude, before it 
can allow an employer to reject a collective bargaining agreement, that 
the economic relief sought from employees is not disproportionate to 
the treatment of other stakeholder groups. This is not the case today, 
and it is a basic flaw of the current system that needs urgent 
correction.

 IV. EVEN MORE UNFAIRNESS: AIRLINES USE SECTION 1113 TO AVOID BINDING 
   OBLIGATIONS TO EMPLOYEES, BUT HAVE CONVINCED SOME COURTS THAT THE 
  BANKRUPTCY LAWS IMMUNIZE THEM FROM FACING ANY EMPLOYEE SELF-HELP IN 
                               RESPONSE.

    The last item that I wish to bring to the Subcommittee's attention 
is what I perceive to be the most egregious of the many aspects of 
unfairness that exists in the current administration of the Section 
1113 system that I have highlighted today. As I have explained, 
airlines have used the Section 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 that has not been 
enough for them. They have gone to the bankruptcy and federal courts 
and asked them to declare that airline employees do not have the right 
to respond to these unilateral, fundamental breaches of their 
collective bargaining agreements by withholding services, as common 
sense, fairness and the basic tenets of labor law would seem to 
dictate. In fact, two bankruptcy courts, a federal district court, and 
the Second Circuit Court of Appeals have ruled that airline employees 
can be forced to accept the utter destruction of their fundamental 
rates of pay and working conditions in collective bargaining 
agreements, but may not strike in response. This approach, of course, 
leaves employees 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 withhold services under a labor contract 
after it is rejected, which is a right that every other party to a 
rejected contract has under the current bankruptcy code. In fact, a 
split panel of the Second Circuit 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.
    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 rather than dictate terms 
in bankruptcy. Airline employees have a right under the Railway Labor 
Act to strike after a bankruptcy court grants a motion to reject a 
collective bargaining agreement under Section 1113 and management 
imposes new inferior rates of pay, benefits, job security and/or 
working conditions. We believe that under the Norris-LaGuardia Act 
(which was enacted in the 1930's to generally preclude injunctions 
against strikes) bankruptcy judges and U.S. District Court judges do 
not have jurisdiction to issue injunctions against such strike activity 
when management has acted unilaterally to change the status quo and 
tear up a binding labor contract outside of the negotiations process.
    It is essential that any reform legislation explicitly preserve the 
right of airline employees to strike after a Section 1113 contract 
rejection, and our proposal does that. If the rule were otherwise, as 
some courts have concluded, management would be allowed to impose 
conditions without having to face the prospect of a strike. Such 
blatant inequality allows management free reign to impose conditions 
without any check on the kind of overreach and abuse that has occurred 
to date. Legislation is needed to restore 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.'' 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 that corrective 
legislation is urgently needed to fix the misinterpretation and abuse 
of the 1113 process that has snowballed in the last five years. 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. Thank you, Captain Prater.
    At this time, I would invite Mr. Davidowitch to present his 
testimony.

  TESTIMONY OF GREG E. DAVIDOWITCH, MASTER EXECUTIVE COUNCIL 
PRESIDENT AT UNITED AIRLINES, ASSOCIATION OF FLIGHT ATTENDANTS, 
                  CWA, AFL-CIO, WASHINGTON, DC

    Mr. Davidowitch. Thank you. Good morning, and thank you, 
Chairwoman Sanchez, for holding this important hearing. I am 
here today on behalf of AFA-CWA's 55,000 members at 20 airlines 
around the country.
    The lives of too many airline workers and retirees have 
been devastated by the exploitation of corporate bankruptcy. As 
president of the flight attendant's union at United Airlines, I 
spent 38 months of my life, day in, day out, battling 
unfettered corporate greed during the longest airline 
bankruptcy in history.
    Something must be done to level the playing field. 
Bankruptcy must no longer be used as a business strategy that 
simply transfers money to executives' pockets and leaves hard-
working Americans with nothing more than slashed pay, 
diminished health care, destroyed retirement, and the prospect 
of personal bankruptcy. Flight attendants have lost their homes 
because of management's cuts; others have had to move back in 
with their parents, sell their car, cancel college classes, and 
lose custody of children.
    One hundred and forty thousand airline workers have lost 
their jobs. We have seen drastic wage cuts. For example, at 
Mesaba Airlines, management's demands for cuts in wages would 
have reduced some flight attendants' pay to less than $10,000 
per year before taxes. This is nothing short of corporate-
induced poverty, shifting responsibility for a living wage from 
the company to the taxpayers.
    Management has slashed our medical benefits and, with a 
devious twist, has also cut retiree medical benefits, a move 
authorized by the law, but until now was largely taboo. United 
enticed flight attendants to retire early in order to preserve 
their retiree medical benefits. After enticing thousands of 
flight attendants to agree to leave the company in exchange for 
guaranteed retiree health benefits, management then went to the 
court to file their Section 1114 motion, demanding immediate 
individual retiree cost increases that were 10 times that cost 
of premiums with no cap on future increases. In the end, 
retirees were forced to shoulder $300 million in changes to 
their health-care benefits that were approved by the bankruptcy 
court.
    However, United's maneuver prompted the bankruptcy court to 
appoint a special examiner shortly after they filed their 
Section 1114 motion. While the examiner questioned the tactics 
of United management, the bottom line was that the law allowed 
management to do what they did. A law designed to give extra 
protection to retiree medical benefits had been turned on its 
head.
    While other major carriers struggle to protect their 
pension promises with help from Congress, management at United 
Airlines and U.S. Airways destroyed workers' pensions. AFA-CWA 
fought to save those pensions using every legal avenue at our 
disposal, but the bankruptcy court approved a legal maneuver by 
management that made an end run on the pension protections in 
the law.
    It should be noted that the agency that was created by 
Congress to protect the interests of the workers' pensions had 
a hand in destroying our retirement security for a short-
sighted gain of $1.5 billion. And at the same time, they put 
the country's entire pension system billions of dollars closer 
to total collapse. This was neither fair nor did it make sense 
as a matter of public policy.
    We should be clear that one United employee's pension did 
survive. CEO Glenn Tilton was careful to shield his own $4.5 
million pension trust from termination. If this Committee wants 
to enact a law that will be 100 percent effective at all times, 
let me suggest this: Adopt legislation mandating that pensions 
of corporate executives are treated exactly the same as those 
of other employees. If workers' pensions are terminated, 
executive pensions must be terminated, too, no exceptions.
    I protect that, if such a law were passed, not a single 
additional worker would have to suffer the loss of a pension 
plan in bankruptcy or that any other provision of their 
collective bargaining agreement that is not absolutely 
necessary for the survival of their company. It is really just 
that simple.
    Finally, no consideration of the fairness of the current 
bankruptcy process would be complete without the mention of 
executive bonuses and executive compensation in the bankruptcy 
process. It is simply out of control. Although flight 
attendants are obligated to work under concessions for an 
additional 4 years following the exit from bankruptcy, there is 
no evidence that United's top executives had to make any 
sacrifices at all.
    In the end, how could any of this be considered fair? I 
implore the Committee to fix the bankruptcy law before there is 
any more devastation. Put an end to management abuses in the 
use of bankruptcy laws as just another business tactic to cut 
costs and line their own pockets. Level the playing field for 
the workers we represent and enact a law that provides 
protection of restructuring a company for the good of the long-
term, dedicated workers who are committed to the success of 
their companies.
    Thank you.
    [The prepared statement of Mr. Davidowitch follows:]

               Prepared Statement of Greg E. Davidowitch

    Good morning, and thank you Chairwoman Sanchez for holding this 
important hearing. We are truly fortunate to have someone like yourself 
and Chairman Conyers in the position to help shape a reform of 
corporate bankruptcy laws so that what I and many other workers around 
this country have faced the past several years does not happen again. 
My name is Greg Davidowitch and I am the Master Executive Council 
President of the Association of Flight Attendants-CWA, AFL-CIO at 
United Airlines. I am here today on behalf of AFA-CWA's 55,000 members 
at 20 airlines around the country.
    In a way, it is unfortunate that as a flight attendant and airline 
worker in the U.S. aviation industry, I am qualified to testify on the 
subject of today's hearing. The lives of so many airline workers and 
retirees have been devastated by the exploitation of corporate 
bankruptcy. I spent 38 months of my life, day in and day out, battling 
unfettered corporate greed as management used the bankruptcy laws like 
a weapon to obliterate pay, pensions, healthcare and the jobs of hard-
working Americans. The depth of my experience and the devastation 
experience by the workers I represent will only be summarized in this 
testimony; there is simply too much to tell. Something must be done to 
help level the playing field so that bankruptcy is no longer a 
``business strategy'' that simply transfers money to executives' 
pockets and leaves the rank-and-file employees with nothing more than 
slashed pay, diminished health care, destroyed retirement security, 
bitterness, mounting debts and the prospect of personal bankruptcy.
    Before I address the impact the bankruptcy process has had on AFA-
CWA flight attendants, let me take the Committee back to the fall of 
2002. This Committee needs to understand how my airline wound up in 
bankruptcy in the first place.
    United Airlines was driven into bankruptcy by the Bush 
Administration. The decision of the Air Transportation Stabilization 
Board (ATSB) to reject United Airlines' request for $1.8 billion in 
loan guarantees was the opening salvo by the White House in an 
unprecedented attack on not just United Airlines employees, but also on 
the jobs, wages and working conditions of workers throughout the 
airline industry.
    The ATSB was established by Congress to provide assistance to the 
airline industry as it attempted to recover from the economic impact of 
the historic terrorist attacks of September 11th. As one of the two 
airlines whose planes were hijacked for use in that devastating 
attack--attacks that included the horrible murder of flight attendants, 
pilots and passengers--United Airlines was in a unique position to need 
the assistance that the ATSB was created to provide. In fact, United's 
situation was a clear example of what Congress intended when it voted 
to create the ATSB with strong bipartisan support.
    When it met to give final consideration to United's application for 
this vital economic assistance to recover from the attacks of 9/11, the 
three-member ATSB, with representatives appointed by the White House 
from the Federal Reserve, the Treasury Department and the Department of 
Transportation, rejected the application as inadequate. This was 
despite the fact that the employee groups at United had already agreed 
to concessions to keep the airline out of bankruptcy. These agreements 
with AFA-CWA and the other unions at the airline would have generated 
$5.8 billion in labor cost savings over 5 and a half years--part of a 
package of cost cuts that United management believed were sufficient to 
save the airline and return it to profitability. But the ATSB demanded 
even greater cuts, and decided that bankruptcy was the preferred option 
despite agreement by all of United's decisions makers--at that time--
that deeper cuts were not necessary.
    The White House realized that it could use the ATSB as a tool for 
re-engineering the airline industry, particularly airline labor costs. 
As one of the only industries remaining with a majority of union jobs, 
the Bush Administration seized the opportunity to exploit bankruptcy as 
a business strategy for social engineering. It was an opportunity to 
destroy the voice of the hard-working people of the middle class by 
cutting union jobs and obliterating the protections and benefits 
negotiated and earned by union members. The ATSB was created by 
Congress to administer loan guarantees designed to save the airlines 
from liquidation in the aftermath of September 11. But the White House 
decided to use the denial of the loan guarantees to force an economic 
reshaping of the airline industry. As far back as the Reagan 
Administration, Republican-appointed Secretaries of Transportation had 
complained that the only thing wrong with the airline industry was that 
airline workers are paid too much. Forcing United into bankruptcy was 
the Administration's way of pushing costs far lower than would have 
been possible or necessary in any other scenario. They knew the 
economics of this competitive industry would do the rest--forcing 
similar cost cutting at all the major airlines. Their strategy--
unfortunately for airline workers--was devastatingly effective. 
United's bankruptcy and drastic slashing of employee wages and benefits 
created a cascade of similar actions throughout the industry. Airline 
employee wages, benefits and work rules across the industry were soon 
slashed to levels not seen in decades.
    The story that unfolded at United and other airlines in bankruptcy 
would have been difficult to imagine only five to ten years ago. Like 
most major carriers, United racked up record profits during the late 
1990s, having expanded domestically and internationally. It grew its 
fleet by more than one-third, to a total of over 600 aircraft. Flight 
attendant ranks swelled from 15,000 in 1990 to nearly 27,000 by 2000. 
However, with the collapse of the US airline industry in late 2001, 
United Airlines found itself losing more than $9 million a day; not 
simply because of September 11, but also because of the reckless 
spending, poor planning and other failures of airline management. For 
example, one failed management business maneuver included an ill-
conceived merger with U.S. Airways that cost the airline hundreds of 
millions of dollars and yielded a personal profit of $50 million for 
just one executive even though the merger was never approved.
    By mid-2002, United was headed toward a record annual loss of over 
$3 billion, and management began hurried negotiations with the unions 
that represented the various employee groups. Labor groups ratified a 
concession package valued at $5.8 billion over five years, including a 
$412 million cut by United Flight Attendants to help the airline avoid 
filing for bankruptcy protection. Apparently it was not enough; at 
least not enough for the White House.
    As this Committee looks into whether the current bankruptcy system 
is fair to workers, I think you will agree that there was nothing fair 
about this process from the perspective of the workers. The White House 
apparently had no concern with fairness.
    The devastation we see today for airline workers is the aftermath 
of the decision by the White House not to help stabilize United 
Airlines. It only took the destabilization of one major carrier to 
trigger a domino effect of labor cuts throughout the industry. One 
hundred forty thousand airline workers have lost their jobs. Workers 
who were not forced out have lost our pensions. We have seen our wages 
cut by as much as 20 to 40 percent. Management has forced changes in 
work rules that cause us to work many more hours at reduced pay, and to 
be away from our homes and our families for more days every month. 
Management has slashed our medical benefits, even cutting retiree 
medical benefits--a move authorized by the law but until now was 
largely taboo.
    Many of our flight attendants--and many other airline workers--have 
had their lives destroyed by these bankruptcies, and by management's 
use of the law to force devastating cuts on the employees. There have 
been over 150 airline bankruptcies since the industry was deregulated 
in 1978, with at least twenty-one in just the six years since September 
11.
    These most recent rounds of bankruptcy have been especially 
devastating. One needs to look no further than the numbers. At several 
of the airlines represented by AFA-CWA, which have gone through 
bankruptcy, the slashing of union jobs has been dramatic. At ATA 
Airlines when the company entered bankruptcy on October 26th, 2004 the 
company had 1,946 active flight attendants and as of April 16, 2007 
there were 877 actively employed flight attendants. When Mesaba 
Airlines entered bankruptcy on October 13, 2005 there were 611 flight 
attendants on the Mesaba payroll. On April 16, the total number of 
flight attendants on the payroll had been reduced to just 336. Aloha 
Airlines had 440 employed flight attendants on December 1, 2004. As of 
April 16, 2007 there were 386 flight attendants employed by Aloha. 
USAirways had 7,790 active flight attendants when they entered 
bankruptcy and almost five years later, their number of active flight 
attendants was down to 4,770. The nearly 12,000 flight attendant jobs 
cut at United Airlines is another chilling example. At the same time, 
there are more passengers traveling today than there were in the year 
2001 prior to these cuts, resulting in an unprecedented productivity 
increase--an increase which, to date, has largely only gone to enrich 
executives and shareholders.
    The total annual flight attendant cost cuts have been dramatic at 
carriers throughout the industry. Over a five year period between 2002 
and 2006, annual flight attendant costs at ATA were reduced from $62 
million a year to $38 million. At Northwest the costs went from $631 
million to $533 million. US Airways went from $623 million to $267 
million. At United the annual costs went from $1.4 billion to $945 
million, and prior to the cuts the 27,000 flight attendants only 
comprised 7.1% of the total labor cost at our airline.
    The painful cuts absorbed by the employees were repeated, numerous 
and stretched out over several devastating years of uncertainty. US 
Airways, where AFA has represented the flight attendants for decades, 
went through bankruptcy twice, with multiple rounds of concessionary 
bargaining each time. At my carrier, United, management dragged the 
employees through two rounds of full-blown Section 1113 negotiations, 
while holding bankruptcy court rejection of our entire collective 
bargaining agreement like a gun to our head each time.
    In between rounds of Section 1113 negotiations in 2003 and 2005 
United management launched an attack on our retiree medical benefits 
under Section 1114 of the Bankruptcy Code in January of 2004. Once 
again they used the law and the threat that all benefits would be cut 
off as a hammer to beat drastic cuts out of the workers who had 
invested their entire working lives in the airline. United management 
added an especially devious twist to this attack on their employees. 
For months before they actually filed their Section 1114 motion they 
pretended that they had no intention of filing such a motion. They even 
enticed workers to retire early before July of 2003 in order to 
``preserve'' their retiree medical benefits. After getting thousands of 
United flight attendants to agree to leave the company in exchange for 
``guaranteed'' retiree health benefits, they then went to the court to 
file their Section 1114 motion, demanding immediate increases of costs 
for individual retirees that were 10 times the cost of premiums with no 
cap on future healthcare costs. A coalition of unions and retiree 
representatives negotiated a lower premium increase with a cap on 
future costs for retirees, but sadly, retirees were forced to shoulder 
$300 million in health program cuts that were approved by the court in 
June of 2004. Tens of thousands of retirees were devastated that their 
health benefits had been slashed through the rarely used section of the 
bankruptcy code.
    The twist in this bankruptcy approved process came just shortly 
after thousands of United employees, most with many decades of 
commitment to United Airlines, fell victim to management's deceit. Just 
after they voluntarily left their careers and income in the hopes of 
preserving their medical benefits, United management filed its Section 
1114 motion seeking permission to slash those promised benefits. This 
bankruptcy court-approved move is one of the most outrageous examples 
of unfairness for the workers.
    That maneuver prompted the bankruptcy court to appoint a special 
examiner shortly after the section 1114 motion was filed. While the 
examiner questioned the tactics of United management, the bottom line 
was that the law allowed management to do what they did. The bankruptcy 
court gave its blessing for this bait and switch--which devastated 
thousands of flight attendants--and blessed this underhanded tactic by 
management. A law designed to give extra protection to retiree medical 
benefits had been turned on its head, and was now another weapon in 
management's arsenal.
    As if the cuts in wages, work rules and medical benefits were not 
enough, United management also destroyed our pensions, as did other 
carriers in bankruptcy. Still other major carriers struggled to protect 
their pension promises with help from Congress, but management at 
United and US Airways walked away from their promises and used the 
bankruptcy process to destroy pensions. AFA-CWA fought to save those 
pensions, using every legal avenue at our disposal. Unfortunately, in 
the end, tens of thousands of flight attendants found themselves facing 
an uncertain retirement as the bankruptcy court approved a legal 
maneuver by management that made an end run on the pension protections 
in the law.
    In meetings with the Pension Benefit Guarantee Corporation (PBGC), 
in an effort to save the flight attendants' pensions, we were told that 
the agency thought the United flight attendants' pension plan could and 
should be saved. We worked in good faith with the PBGC toward that end, 
and negotiated with United management. Management, however, refused to 
reach a consensual agreement and turned instead to the bankruptcy court 
to terminate our pension plan. We were in the courtroom on April 22, 
2005 with AFA-CWA and PBGC attorneys ready to oppose United's motion, 
when principals from United and the PBGC entered the courtroom and 
announced that a deal had been struck: the PBGC was to receive one and 
a half billion dollars in consideration of its bankruptcy claim and the 
pension plans of over one hundred thousand United employees and 
retirees would be terminated.
    Flight attendants never had the opportunity to defend our pension 
plan according to the provisions within the Employee Retirement Income 
Security Act (ERISA) and the Bankruptcy Code. They dressed up this 
sell-out in legal sheep's clothing, sufficient to withstand the 
scrutiny of the courts under the current law. But no one was fooled--
the PBGC reversed course and set off on the path of terminating our 
pensions precisely because United management agreed to pay the agency 
over a billion dollars. So, the agency that was created by Congress to 
protect the interests of workers' pensions instead had a hand in 
destroying our retirement security for a short-sited gain of 1.5 
billion dollars while putting the country's entire pension system 
billions of dollars closer to total collapse. Instead of saving airline 
employee pensions, it made a deal with United management that dumped 
billions of dollars of liability for our pensions onto the taxpayers. 
Is that fair? Does that even make sense as a matter of public policy? 
Despite what management, the PBGC and the courts might have said, 
Congress could never have envisioned that the law would be twisted into 
results like this.
    The claims of United management, like the executives at other 
airlines, that the impact of the pension termination may be mitigated 
assumes that United flight attendants will now have to work an extra 
nine years to recover the benefit levels they had in their defined 
benefit plan. Their analysis disregards the present value of money and 
also makes a number of highly unlikely financial assumptions. 
Especially ridiculous is their formula assumption that flight 
attendants would receive a four percent annual wage increase every year 
between the date of termination and the date of retirement, at the same 
time that wages were being cut an additional 9.5% in a second round of 
Section 1113 labor contract cuts. That simple statement, obviously 
misleading, is designed to confuse and mislead flight attendants and 
others as to the impact on our Members. Nevertheless, the self-serving 
statement is typical of the assertions United management makes on this 
specific issue as well as numerous others.
    Is there any fairness in the current law regarding termination of 
pension plans in bankruptcy? One other event at United should answer 
that question for this Committee. One pension plan survived the United 
bankruptcy. Or, more accurately, one person's pension plan survived. 
CEO, Glenn Tilton, was careful to shield his own pension from 
termination. Prior to the bankruptcy he executed a legal maneuver, 
putting his $4.5 million pension into a trust that successfully 
insulated it from the bankruptcy. Is it fair that the law allows this 
drastic disparity of treatment between employees of a bankruptcy 
company? Obviously not.
    It is difficult to describe the sheer scope and the magnitude of 
the devastation. Billions of dollars have been extracted from the 
compensation of airline workers. When our good friend Representative 
George Miller of California conducted the first ever E-hearing during 
the United bankruptcy, the testimony submitted by our members was 
nothing short of heart-wrenching. United flight attendants told of 
losing their homes because of management's cuts. Others have told us 
they have had to move back in with their parents, sell their car, 
cancel college classes, or lose custody of a child. Personal 
bankruptcies have become commonplace among airline workers and with 
good reason--how could anyone be expected to survive when their 
earnings are slashed 20, 30 even 40 percent? At Mesaba Airlines, 
management's demands for cuts in wages would have reduced some flight 
attendant's pay to less than $10,000 per year before taxes. That is 
nothing short of corporate-induced poverty, shifting responsibility for 
a living wage from the company to the taxpayers.
    Finally, no consideration of the fairness of the current bankruptcy 
process would be complete without mention of the issue of management 
bonuses and compensation. If the current system had any element of 
fairness it would not allow massive bonuses and incredible compensation 
packages for the very executives who took these companies into 
bankruptcy in the first place, and who then inflicted massive pay cuts 
on the workers under color of law.
    But, that is exactly what happens. A huge bonus for executives of a 
bankrupt corporation is simply wrong in light of the enormous 
sacrifices made by the workers during the course of the bankruptcy. 
They often give lip service to the concept of pay for performance, but 
the reality is much different: huge bonuses while workers take cuts. 
Management typically demands that the workers' concessions be locked in 
for four, five or even six years. But for management employees they 
steadfastly refuse to make any long-term commitment to such cuts, while 
making very modest upfront cuts to give the appearance of fairness.
    Mesaba President and COO John Spanjers was asked under oath in a 
Section 1113 hearing in bankruptcy court to provide some assurance that 
management cuts would stay in place for the same length of time as 
those of the employees. Spanjers flatly refused to agree that he and 
his management team would live under the sacrifice he was asking the 
employees to make. He is not alone. His colleagues at other airlines 
have taken bonuses and quickly renegotiated contracts or shifted titles 
to increase pay during bankruptcy and in the months immediately 
following bankruptcy while workers continue to suffer the effects years 
after Chapter 11 is closed.
    While airline employees have shouldered the heavy financial burden 
of the bankruptcy process, airline management has suffered incredibly 
little--if any at all--sacrifice. While the front line employees have 
seen their numbers slashed, pay drastically reduced, benefits 
eliminated and work rules destroyed, the management level employees 
reap unearned rewards.
    Our experience with management compensation at United illustrates 
that management compensation in the bankruptcy process is simply out of 
control. Although every other United employee is obligated to work 
under four additional years of concessions following the date of exit 
from bankruptcy, there is no evidence that United's top executives have 
agreed to make any sacrifices during the next four years. To the 
contrary, 400 members of management stand to cash in on an excess of 
$400 million. After destroying our contract and career, United's CEO 
alone reaped over $40 million in 2006, 2000 times the pay of a first 
year flight attendant. The bonuses were awarded regardless of their 
past or future performance. When the judge ruled on this cash reward 
for management following objection by the unions he acknowledged our 
concern, but essentially said there was nothing he could do about it 
because the law did not give him the authority to second guess 
management compensation, or a standard by which to determine ``how much 
is too much.'' The same judge had already approved millions of dollars 
in Key Employee Retention Program (KERP) bonuses, several times over, 
during the course of the bankruptcy.
    In a report prepared to defend their additional bonuses, United 
management argued that the Management Equity Incentive Plan (MEIP) was 
intended to align the interests of management and other stakeholders. 
If one were to accept this premise, then the executives of this company 
do not deserve one penny more than what they are currently compensated. 
If the executives interests were to be aligned with those of the 
workers they too would need to experience the grief associated with 
losing their home, losing their jobs, or not being able to make ends 
meet. At some point, the greed exhibited by corporate executives must 
be stopped. That time is now.
    Such equity bonuses clearly do not reflect either sound business 
judgment or good faith, much less respect for the enormous sacrifices 
of flight attendants and other workers. If there is so much equity 
available to enrich management, that equity rightfully belongs to those 
who have sacrificed the most to ensure our company's survival.
    All too often management focuses its efforts not on the success of 
the corporation, but on their own personal gain. This profiteering 
comes predictably at the expense of the dedicated workers who strive 
daily to ensure our airlines' viability and success. The prospect of a 
select group of executives rewarding themselves at the expense of 
flight attendants and other employees adds fuel to a simmering fury and 
to a relationship void of trust. Companies with overly-generous 
salaries, KERPs and very lucrative management profit sharing programs--
far above any reasonable measure for a company in bankruptcy--simply 
cannot pass the test of fairness in using the current law to force 
billions of dollars in annual concessions from employees.
    In the beginning of its bankruptcy, United claimed a successful 
reorganization depended upon ``the fair treatment of employees.'' 
Management promised to ``equitably share the pain of United's 
restructuring.'' Unfortunately, the record reflects an entirely 
different reality, at United and at most of the other airlines that 
have been through bankruptcy. In every instance, employees have been 
forced to make life-changing sacrifices while executives are richly 
rewarded. In light of the sacrifices made by the dedicated front-line 
workers whose commitment has been critical to the success of these 
airlines, these snatch-and-grab schemes by management not only evidence 
poor judgment, but also reflect downright avarice.
    To the Committee's question of fairness I can only respond with my 
own question: how could any of this be considered ``fair?'' Any 
conversation about terminated pensions, reduced healthcare, slashed 
wages, destroyed careers and lives in shambles could never be measured 
with fairness.
    I would implore you, on behalf of thousands of AFA-CWA members, and 
tens of thousands of workers in the airline industry, and many more 
hundreds of thousands of workers in other industries: fix the 
bankruptcy law before there is any more devastation. Put an end to 
management abuses and their use of the bankruptcy laws as just another 
business tactic to cut costs and line their own pockets. Level the 
playing field for the workers we represent. Enact a law that provides 
the protection of restructuring a company for the good of the long-term 
dedicated workers who are committed to the success of their companies.
    Again, thank you Chairwoman Sanchez for the opportunity to testify 
today. I look forward to answering any questions that you or any 
members of this Committee may have.

    Ms. Sanchez. Thank you.
    At this time, I would invite Mr. Trumka to present his oral 
testimony.

  TESTIMONY OF RICHARD TRUMKA, SECRETARY-TREASURER, AFL-CIO, 
                         WASHINGTON, DC

    Mr. Trumka. Thank you, Madam Chairman and Members of the 
Committee.
    On behalf of the 10 million members of the unions of the 
AFL-CIO, I would like to express our gratitude to you and this 
Subcommittee for holding this oversight hearing on the 
bankruptcy system's treatment of America's workers.
    Our bankruptcy laws are a critical safeguard in our 
economy, but one that has become dangerously unbalanced. For 75 
years, Congress has repeatedly acted to define bankruptcy as a 
process of shared sacrifice among corporate constituencies. 
Congress has always recognized that employees are uniquely 
vulnerable in bankruptcy. But unlike other creditors, employees 
generally have only one employer, have only one retirement 
plan, and have only one health-care plan, yet today the 
bankruptcy system has become effectively a device for the 
wholesale transfer of wealth from workers to other creditors.
    It is become a system that exploits workers' 
vulnerabilities, rather than seeking to create a balance 
between workers and other creditors. As you listen today to 
witnesses telling the grim stories of what happened to workers 
in airlines, steel and auto part plants, remember that no mere 
lender of money gets treated this way. No bank president will 
sit across the table from their families after the bankruptcy 
court has done its work wondering how to provide health care to 
their children or what retirement will mean. No CEO, no matter 
how dismal the failure, contemplates losing their home or faces 
a court order to refrain from quitting their job after their 
pay was cut in half.
    In America in 2007, our bankruptcy system reserves that 
fate for the people who do that work, who make the planes, 
forge the steel, mold the rubber, and stamp out the part. So 
how did we get here?
    First, bankruptcy judges have allowed the procedural 
details of major bankruptcy cases to structurally disadvantage 
workers. Debtors have been allowed to deal with motions, to set 
aside labor contracts, and attack worker benefits separately 
and in advance of addressing the fate of other creditors. 
Frequently, the other creditors are left nearly whole.
    Second, bankruptcy courts have increasingly treated 
procedural protections--Section 1113 provides for workers 
collective bargaining agreements--not as a last resort, but as 
formalities, signaling a willingness to set aside contracts 
early in cases, which emboldens management to not make 
concessions in the bargaining that precedes the filing of an 
1113 motion by management.
    Third, bankruptcy courts have agreed to pay packages that 
actually reward management that took the company into 
bankruptcy as a strategic choice rather than forcing management 
to share in the pain.
    Fourth, the PBGC has treated bankruptcy and the abandonment 
of pension obligations as a routine part of the landscape, 
rather than using every tool in their arsenal to make companies 
meet their obligations under their plan. The result? The 
retirement security protections Congress sought to provide all 
Americans working in the private sector through ERISA have been 
rendered an empty gesture by the bankruptcy courts.
    Fifth, while Congress recently increased the wage priority, 
both the amount of the wage priority and the status of 
severance and health benefits under the wage priority have 
proven to be insufficient to protect workers in major 
bankruptcies, like Enron and the following.
    And, finally, and most appalling, as President Prater 
noted, in the last 2 years, we have seen decisions holding that 
airline workers covered by the Railway Labor Act whose 
contracts were rejected by bankruptcy courts did not have the 
right to strike following a rejection of their contract. Our 
bankruptcy law says to workers in the airline industry, ``You 
can have your contracts rejected, but unlike every other 
creditor, you cannot act to protect yourself.''
    Oil companies can withhold fuel delivery. Aircraft leasing 
companies can take back airplanes. Bankers can refuse to lend. 
But mechanics, flight attendants and pilots are not entitled to 
the rights that we give other commercial actors.
    Last month, the AFL-CIO sponsored a presidential forum in 
Chicago. Seventeen thousand people attended. And the most 
powerful moment of the forum came from--not from the 
presidential candidates, but from Steve Skvara, who was here a 
little earlier, a retired worker at bankrupt LTV Steel. See, 
Steve can't afford health care for himself and his wife after 
the bankruptcy courts and the PBGC stripped him and his co-
workers of one-third of their pensions and their retiree health 
care.
    Steve asked, ``What is wrong with America, and what will 
you do to change it?'' Well, I bring Steve's question here 
today to this Subcommittee. What is wrong with the bankruptcy 
system is not a mystery, and Congress can act to fix it.
    The AFL-CIO and all of its affiliates look forward to 
working with you, Chairman Sanchez, and the entire Subcommittee 
and the entire Congress to do just that: Fix a bill that is 
crying out for fixing.
    Thank you.
    [The prepared statement of Mr. Trumka follows:]

                Prepared Statement of Richard L. Trumka















                                

    Ms. Sanchez. Thank you for your testimony, Mr. Trumka, and 
thank you to all our witnesses.
    We will now begin our round of questions. And I will begin 
by recognizing myself first for 5 minutes.
    My first question is for Ms. Townsend. In your written 
testimony, you state that Hastings employees currently pay for 
most of their own health-care costs and that it costs about 
$300 a week for family coverage. Does this mean that Hastings 
employees currently are paying $1,200 a month for family 
health-care insurance?
    Ms. Townsend. Some of those are, if they choose to take the 
top coverage.
    Ms. Sanchez. And how are those employees able to pay those 
premiums?
    Ms. Townsend. They are not paying very well. They basically 
aren't taking home a paycheck.
    Ms. Sanchez. Okay. Do you think that the Hastings retirees 
got a fair shake in the bankruptcy, or do you think that they 
bore the brunt of the restructuring?
    Ms. Townsend. They bore the brunt of the restructuring.
    Ms. Sanchez. And did the business of the company change as 
a result of the bankruptcy, or do you think the bankruptcy just 
served as a mechanism for getting rid of the benefits of the 
workers and the retirees?
    Ms. Townsend. It just served as a mechanism to get rid of 
the contract and the retirees' negotiated benefits.
    Ms. Sanchez. And is that just your sentiment, or do you 
think the overwhelming majority of employees feel the same?
    Ms. Townsend. Overwhelming majority.
    Ms. Sanchez. Okay, thank you.
    Mr. Redmond, in your prepared statement, you account how 
you personally experienced the impact of Chapter 11 while an 
employee at the McCook Metals company. When the company 
liquidated, it resulted in the termination of the company's 
defined benefit pension plan and the retiree insurance plan, is 
that correct?
    Mr. Redmond. That is correct.
    Ms. Sanchez. Can you explain to us what it means to have 
your defined benefit pension plan terminated, what the impact 
is?
    Mr. Redmond. Well, the impact on the defined pension 
benefit plan--and this was a Taft-Hartley plan that was assumed 
by the Pension Benefit Guaranty Corporation--and that plan was 
negotiated for specific payments based on your years of 
service. And we have seen people in the McCook situation that, 
because of the funding situation with the PBGC and the rules 
that has been established by the PBGC, some of those people 
lost as much as 50 percent of their scheduled pension payments 
that they would have been entitled to had the plan not 
liquidated.
    Ms. Sanchez. And please explain for me what the retirees 
had to do after they lost their insurance coverage?
    Mr. Redmond. Well, after they lost their insurance 
coverage, then the majority of the retirees that were young 
enough or able enough to go out and get other jobs, they had to 
find alternative means to try to assume some form of health 
care. There was an effort made by the union to try to reemploy 
some of these folks, along with the State, do retraining 
programs in other industries. But in this particular 
liquidation, the insurance plan was completely terminated, and 
most of those folks was left without insurance, except those 
that qualified by age for Social Security, to get Medicare on 
the Social Security.
    Ms. Sanchez. Thank you.
    Mr. Bernstein, Mr. Trumka and I think Mr. Redmond alluded 
to the idea of shared sacrifice. Do you think that all 
participants in a Chapter 11 case, including the CEOs and other 
managerial types, should have to share the pain that line 
workers must endure over the course of a company's financial 
restructuring?
    Mr. Bernstein. Yes, Madam Chair, I do believe that there 
should be shared sacrifice among all constituencies in a 
Chapter 11 reorganization. I think that, in determining the 
extent and nature of the shared sacrifice, however, it is 
important to keep in mind the market forces under which a 
Chapter 11 company operates so that it needs to pay its 
salaried employees, and its union employees, and its executives 
market-based wages so that it can be competitive.
    And in determining the way that the shared sacrifice is 
structured, those market forces need to be taken into account. 
And, indeed, in Section 1113, one of the factors that the court 
must find exists in order to grant the debtor 1113 relief is 
that the 1113 proposal is fair and equitable. And the way that 
has been interpreted by the courts is meaning that the pain, if 
you will, is spread in an appropriate manner among the various 
constituencies.
    Ms. Sanchez. Okay, correct me if I am wrong, but it sort of 
seems fundamentally unfair for a CEO, such as Glenn Tilton, to 
preserve a $4.5 million pension fund from termination while the 
pension plans of all other United employees are terminated. And 
I think it was Mr. Davidowitch who suggested, ``Hey, if you are 
going to wipe out the pension plans of the line workers, why 
not write into existence a law that says all pensions, 
including managers and corporate CEOs, if one of them goes, 
they all go?''
    Don't you think that that would be a huge step toward 
ensuring the pensions would only be wiped out in the most 
compelling of circumstances?
    Mr. Bernstein. Well, I think that, as it is, the cases in 
which the courts allow pensions to be terminated or modified 
are very compelling circumstances and only those circumstances.
    Ms. Sanchez. And yet the CEOs can retain their pensions? 
Does that sound like shared sacrifice?
    Mr. Bernstein. I don't know the details of Mr. Tilton's 
overall compensation package, but I would say--and so I can't 
speak to his personal situation--but what I would say as a 
general matter is that there is no reason for corporations in 
bankruptcy to be paying materially above-market compensation to 
anybody, including the senior executives.
    However, in looking at the full compensation package for 
salaried people or executives or even the CEO, a Chapter 11 
company needs to look at what the market for CEOs is and pay 
compensation and benefits and pension benefits that is at least 
at the market level so that the airline or the other company in 
Chapter 11 is able to retain its management, just as it needs 
to pay its represented workforce, its union workers, market 
wages, or else they will leave and go to a competitor.
    Ms. Sanchez. Well, it seems to me that, in some instances--
and my time is expired, so I will be brief--in some instances, 
the line workers are bearing the brunt, and they are often 
getting slashes to their salaries and their benefits, which 
puts them, you know, below market. But because either they 
can't strike or because there aren't any other employment 
opportunities in the areas where these folks live, they are 
not--the pain is not shared equally among the two classes of 
workers.
    And with that, I will yield. And I would recognize the 
Ranking Member of the Subcommittee, Mr. Cannon, for 5 minutes 
of questions.
    Mr. Cannon. I would just make the point by beginning and 
say that the disproportion between workers and executives is 
that there is--the market is likely different. And I think the 
goal of what we do here ought to be to create a more robust 
economy so that workers have the choice of leaving and going to 
someplace where they will get better compensation, as well.
    I will just tell you, an under 3 percent unemployment rate 
in Utah, workers write the ticket, and that is America. I think 
that is the good part of it.
    Let me ask you, Mr. Redmond, is the standard United 
Steelworkers contract, does that include a defined benefit 
program still or have you shifted to a defined contribution?
    Mr. Redmond. In most of our contracts, we still have the 
defined benefit, but in many others we have shifted to defined 
contribution plans.
    Mr. Cannon. Are you familiar with the Geneva Steel mill and 
the history of the contracts there in Utah?
    Mr. Redmond. Vaguely. Vaguely. Not that much, but----
    Mr. Cannon. I think they were the very first that had a 
defined contribution contract. Are you familiar with that?
    Mr. Redmond. I know that Geneva did, that the Geneva Steel 
contract did go from defined benefits to defined contributions, 
that is correct.
    Mr. Cannon. Right, and that happened earlier, like 1987, 
right?
    Mr. Redmond. That is correct.
    Mr. Cannon. There was some attempt by the United 
Steelworkers to renegotiate that and make it a defined benefits 
program. Are you familiar with that?
    Mr. Redmond. Yes, somewhat, yes.
    Mr. Cannon. Do you recall the worker response, that is the 
union member response to that?
    Mr. Redmond. No, no, I am not.
    Mr. Cannon. It was like a rebellion. It was like, ``We are 
going to leave the union if you try to change our defined 
contribution,'' because they got such a--my understanding. 
Look, I get this--this is not my testimony that I stand by. I 
just have heard that the defined contribution contract became 
much more beneficial than what it would have been if it was 
defined benefits.
    Mr. Redmond. If I may, Congressman, it is a matter of, you 
know, the situation that we are dealing with when we go to the 
bargaining table. And our recommendation, what we are asking is 
that the imposition of terminating the collective bargaining 
agreement be strictly used as a last resort.
    Now, we have had many situations where companies have came 
to us as a first resort, tried to negotiate as opposed to 
liquidating, and in some of those situations--in a great 
majority of those situations--we found it necessary, due to the 
financial situation of the company, in order to keep jobs in 
the community, to go from a defined benefit to a defined 
contribution. So we are not opposed to that particular concept.
    Mr. Cannon. But you are saying you respond to companies. 
Have you gotten to the point at United Steelworkers where you 
are willing to say there may be a huge benefit long term to 
having a defined contribution plan instead of a defined benefit 
plan?
    Mr. Redmond. No, we have not taken that as a institutional 
position, and we have not taken that as a position clearly 
across the board portending to our collective bargaining 
agreements, no, sir.
    Mr. Cannon. Have you done anything with health savings 
accounts, which would do essentially the same thing for health 
care, give people sort of a control of their money and the 
opportunity to accumulate value in a health savings account?
    Mr. Redmond. We have been involved in some situations where 
the health safety account approach have made some sense to some 
distressed companies that we have had, and we have sat down in 
a few of our contracts and negotiated health savings accounts.
    Mr. Cannon. But you have done that in response to ailing 
companies, as opposed to going into healthy companies and 
talking about health savings accounts?
    Mr. Redmond. Well, we have done them in response to the 
collective bargaining process. We have been in collective 
bargaining situations where health-care savings accounts made 
sense. We have been in collective bargaining situations where 
we have rejected health-care savings accounts because they did 
not make sense.
    These decisions were made by the bargainers at the table, 
and they are mostly based on the financial situations of the 
companies and also the willingness amongst our membership to 
apply different approaches to try to deal with the health care 
situation.
    Mr. Cannon. Let me shoot to Ms. Townsend. You lost your 
pension. I suspect you lost your health-care benefits, as well; 
I think you said that. Would you have preferred to have had a 
defined contribution plan, where you owned whatever it was that 
you put in, and a health savings account, where you owned the 
value in that health savings account and that would have been 
able to keep those? Or do you think that the union 
representation was adequate in that regard?
    Ms. Townsend. I do believe we were adequate in that regard, 
because our people don't make enough money to be able to have 
the health savings account. It costs more money out of pocket 
to have those kinds of accounts and to have money up front----
    Mr. Cannon. There is sort of a transition period where you 
have to have the money in the----
    Ms. Townsend. Yes.
    Mr. Cannon. But your union could have negotiated a 
relationship which would have safeguarded you and other 
employees through that period. Have you looked at that?
    Ms. Townsend. Yes, we have.
    Mr. Cannon. And is that something that you would have found 
attractive?
    Ms. Townsend. No, we did not find that attractive.
    Mr. Cannon. But now, after having looking back to the 
bankruptcy and the loss of your benefits, would that have been 
more attractive? Would it be more attractive to you now?
    Ms. Townsend. I still contend no, and so have our members.
    Mr. Cannon. Thank you.
    Ms. Sanchez. The time of the gentleman has expired. Thank 
you, Mr. Cannon.
    Mr. Conyers, you are recognized for 5 minutes of questions.
    Mr. Conyers. Thank you very much.
    What an incredible picture is being painted here today. The 
whole economy is in need of reexamination, and opening up 
bankruptcy is only one small part of this equation. What is 
wrong with this economic picture, and how do we begin to turn 
this ship around and get it moving right?
    And so we have a lot of great lawyers that are working with 
us on shaping a new bankruptcy approach. And we are going to be 
working on that. We want to hear from some of these judges, and 
we want to have fair hearings, so that there won't be any 
complaints about, you know, how we came to the conclusions.
    But I am thinking of Harry Lester, of the steelworkers in 
Detroit, who told me, because I was going to China--and I went 
before the steelworkers had a big conference in Dearborn 
recently--and he said, ``Congressman, when China gets through 
building all of their steel mills, there will be no way that 
any steel company in the United States of America will be able 
to compete with them.'' He said that is what it looks like, the 
prospect, to be.
    I raise the question with all of you about universal health 
coverage, as I have with Chris Cannon, instead of health 
accounts. I mean, more costs going out of the employees wages 
to protect them against health incidents, to me it is like we 
don't know that, in most industrial countries in the world, 
they already have had universal health care and that we don't 
have to copy anybody's. We can and have created a system that 
is better than theirs, because we have learned from them. So 
the Ranking Member on the Subcommittee and I have talked about 
health care, and we are in constant dialogue about it.
    We don't have a full employment policy in America. How many 
of you remember the Humphrey-Hawkins Full Employment and 
Balanced Growth Act? As we move from this industrial era to a 
digital era, we have to find out what gives all these companies 
the right to start breaking contractual agreements. You can't 
do that in any other circumstance in America where you say, 
``Things have gone bad now, fellows. Guess what? The contract 
we signed in broad daylight, sober, doesn't count anymore, and 
you have to come around, we have to renegotiate that.'' The 
lawyer being told that would laugh at his colleague if that 
were raised.
    We have trade laws that encourage taking industries and 
shops and plants out of America, that encourage it. They aren't 
neutral on it. It is encouraged. We all know how this is 
hemorrhaging our workforce. And it is not just people--has my 
time expired? Is that red?
    Ms. Sanchez. It goes quickly doesn't it, Mr. Conyers?
    Mr. Conyers. What color light am I?
    Ms. Sanchez. You have a red light.
    Mr. Conyers. I don't have my glasses on. But let me just 
say this, because I really wanted to get a response from 
everybody on this table on the next round about where we come 
down on this, because this system--you talk about a powerful 
economic system that is now going into the waste basket.
    Here we have people that go to work everyday that are 
opening up the Detroit News and the Detroit Free Press to 
wonder if there is anything about their company thinking about 
going out, or an equity firm that knows nothing about an 
industry buying it out merely to usually rip it off, and 
bankruptcy, here we come, or whatever, or sell it to another 
higher bidder. Just take the profit out of it, and keep moving, 
as has been reported here.
    So it goes back to this old phrase, ``Everything is 
everything.'' This is all connected up. Fixing bankruptcy is 
only a small, but vital, sliver of the revisitation of how we 
set this country straight. And there has been too little 
oversight, no hard examination of where we are going.
    I would just close on this note, because I hear--and I 
can't believe my ears--we have young people going around 
saying, ``Why go to college? First of all, we can't afford it. 
But second of all, it may not make any difference anyway, 
because now everybody is changing jobs every couple of years.''
    I mean, people--when my dad came to Detroit, you got one 
job, and you work in it until you retire. That was it; that was 
the tradition. And all of this is being changed and very little 
of it is being realistically examined. And that is why I think 
this may be one of the most important hearings that the 
Judiciary Committee's Subcommittees, of which there are five, 
will be holding this year.
    This could be a very important beginning change that could 
go through the whole Congress. Almost every other Committee is 
involved in this, and that is why I praise the Chairwoman and 
the Ranking Member for putting this together today.
    Ms. Sanchez. Thank you. Does the gentleman yield back? The 
gentleman yields back his time.
    I would now like to recognize Mr. Watt for 5 minutes of 
questions.
    Mr. Watt. Thank you, Madam Chair.
    Two things. Let me just start by saying two things. Number 
one, how delighted I am that the Chairman of the full Committee 
followed the precedent that his father set and, once he got in 
one job, stayed in it all the way through a career. Isn't that 
a wonderful thing?
    Now, his father might have been in--I don't know what his 
father did, maybe worked for the automobile industry or he 
did--there are different careers, but in that sense we are so 
indebted to his father and to the fact that he stayed the 
course in one career and has become our leader in this 
Committee.
    The second point I want to make is just to apologize to the 
witnesses for not being able to be here and hear your 
testimony. My intent was to be here. I thought I had an hour of 
general debate on a bill that was on the floor before they 
would reach the amendment I had. And when we went to vote, they 
told me that they would probably take 5 minutes in general 
debate, and then I would be on with my amendment. So I had to 
stay on the floor and do my amendment.
    But I did want to come back and participate in this 
discussion, because I think it is so timely and important that 
we try to establish the things that need to be addressed in 
bankruptcy reform that need to be changed. I have spent a good 
portion of my life before I heard the adage, ``Consistency is 
the hobgoblin of small minds,'' trying to reconcile things and 
kind of make them consistent.
    While we were out on the break, I taught an introductory 
civil rights class. I sat in as a guest instructor, and I 
started with this basic phrase that they start the Constitution 
with, ``We hold these truths to be self-evident that all''--and 
then I left a blank--``are created equal.'' In a sense, my 
whole aspiration has been to make sure that that blank was 
filled not only with White men--because that is what they were 
talking about when they wrote it--but to make sure that it 
applied to everybody.
    So if I am looking for consistency in things, you all will 
have to forgive me. I keep looking for a consistent world.
    And so, Mr. Bernstein, I am going to start with you, and 
then I hope the rest of the panel will weigh in. How can I make 
consistent the notion that a bankruptcy court can rewrite a 
labor contract in bankruptcy, but a bankruptcy court cannot 
rewrite a mortgage contract in bankruptcy? Is there some way 
that I can reconcile those two concepts? I am just interested.
    Mr. Bernstein. Let me start with the general rule, 
Congressman, in section 365, which says that, as a general 
matter, any contract in bankruptcy can be rejected by the 
debtor. The debtor has to go to the bankruptcy court, but the 
standard--as I said in my remarks--is a deferential one. And so 
ordinarily the debtors' business judgment, if it is rational, 
is approved, and the contract is rejected.
    For collective bargaining agreements, Congress in 1113 
enacted a substantially higher standard so that it is much more 
difficult for a debtor to reject a collective bargaining 
agreement than it would be any other sort of contract.
    Now, with respect to home mortgages, these are not treated 
under the Bankruptcy Code as executory contracts. They are 
treated as secured loans. So the concept of rejection of the 
contract simply doesn't apply under the code. However, there is 
a concept called cram-down, where a debtor, under some 
circumstances in bankruptcy, can modify the terms of the 
secured debt, and ordinarily that can be done with secured 
debt. That is not the same as rejecting or abrogating the 
contract, but it can, under some circumstances, modify the 
terms of the loan.
    And you are correct that, with respect to home mortgages, 
which are secured debt, not executory contracts, there is a 
prohibition on lien splitting under those circumstances. That 
is a particular provision in the code that prohibits lien 
splitting for individual debtors, but it has really nothing to 
do with the notion of rejecting contracts.
    Mr. Watt. Before anybody else responds, can I just take 15 
seconds to explain to Mr. Bernstein that----
    Ms. Sanchez. Without objection, the gentleman is granted 2 
additional minutes.
    Mr. Watt [continuing]. That I took my constitutional law 
from a gentleman named Robert Bork at Yale University. And most 
of what he said in my constitutional law class sounded about as 
bizarre as what you just said. Most of what he said, I never 
agreed with. It was a great way to learn the law.
    But I understand that there are distinctions that we have 
made. I guess the question I am asking is, how in the world can 
you rationalize that? And I mean, you probably gave as--I mean, 
you gave a lawyer's answer. There are distinctions that we have 
made as a matter of public policy. I think the question I was 
asking was a broader question of, is there some public policy 
rationale to this? Or maybe you all will want to weigh in.
    Mr. Prater wants to weigh in.
    Ms. Sanchez. The time of the gentleman has expired, but we 
will allow the witnesses to answer.
    Mr. Prater. Thank you, Madam Chairwoman.
    The problem is, is that bankruptcy has destroyed collective 
bargaining at the companies where we try to negotiate a 
contract. Market rates for labor are set at the bargaining 
table, not by a bankruptcy judge. Now, a bankruptcy judge can 
dictate to us what our labor is worth. It has destroyed 
industries.
    Anybody like the airline industry that has been created out 
of 21 bankruptcies in the last 5 years knows, let us establish 
our value as working men and women by negotiating, but we can't 
be forced to take the rate given by the bankruptcy judge. Give 
us the right to withhold our services. Don't let the judge take 
away our right to withhold our service. Establish that. We will 
establish a fair market price for our services to our employer.
    Thank you, sir.
    Ms. Sanchez. There is enough interest, I think, for a 
second round of questioning, so I will recognize myself for 5 
minutes.
    Captain Prater, you note in your prepared statement that, 
in the aftermath of September 11, 2001, ALPA and other unions 
faced continuous efforts by airlines to use the bankruptcy 
process as a razor-sharp tool to strip away working conditions 
and living standards that were built over decades of collective 
bargaining. Why did the events of September 11, 2001, cause 
this marked change in the airline industry? And how were its 
workers treated?
    Mr. Prater. As workers in the industry, we recognize the 
devastation caused to our industry. We were willing and did 
meet with all of our managers to try to find the solutions to 
stay out of bankruptcy. Many places we took round after round 
of concessions trying to find those consensual approaches to 
avoid bankruptcy and then had the bankruptcies foisted upon us.
    At that point, the system turned. We were no longer able to 
negotiate. We were dictated to. Yes, the process was met; 1113 
made the judge call both parties together. But at the end of 
the day, the hammer was hanging over our head.
    Now, there is no pilot that wants his or her airline to go 
out of business. We established those long-term relationships 
with our employer. We made those decades' worth of pension 
plans by taking money out of our pocket and putting it into 
those pension plans. So to see those pension plans, 5 out of 
the 6 people at this table have looked at members in the eye, 
who are 58, 59, 60 years old, and seen the faces when their 
pension plans have been killed. We have had to live with that.
    That is why we are here asking for the help of Congress to 
allow us to not see those faces again. Thank you, ma'am.
    Ms. Sanchez. Thank you.
    In light of the Delta Airlines case, you argue that a 
neutral expert arbitration panel should resolve certain labor 
issues in a Chapter 11 case rather than a bankruptcy judge. Can 
you please explain why?
    Mr. Prater. Yes, we found that--again, we are looking for 
the consensual approaches that will work between management and 
labor. And we found specifically in that case that, by removing 
it from the bankruptcy judge, taking it off of the bench and 
putting it into negotiations with a third-party neutral and 
arbitrator, we were able to reach a consensus.
    It was very difficult. Again, those members lost their 
pensions. They lost over 40 percent of their wages. We are 
asking to be able to get that back, but would hate to see this 
repeated in other industries. Our entire industry has been 
ravaged by the use of bankruptcy over labor.
    Ms. Sanchez. Thank you.
    Mr. Davidowitch, you note that there have been 150 airline 
bankruptcies since the industry was deregulated in 1978, 
including 21 bankruptcies just in the 6 years since September 
11, 2001. I would like you to please explain, if you can, the 
role that deregulation, if any, has played in the financial 
well-being of the airline industry and explain why you think so 
many airlines have filed since September 11, 2001.
    Mr. Davidowitch. Well, in short, the barriers to entry into 
the aviation industry are little to none existent. So anybody 
with a big ego and a pocketful of cash can go out and buy some 
planes and start up a new service.
    The discussion relative to what has happened in the 
industry is, one, it is a vital service that we provide to our 
Nation's communities, the people that we represent and the 
families that we support, or is it a commodity? If it is viewed 
as a vital service, then certainly there should be certain 
regulations put into place to protect the workers, as well as 
the communities in which they live and support.
    So when we look at what has transpired in the near term, in 
the events since September 11th, what has occurred--it is taken 
it one step further. We now see a degree of social engineering 
that has occurred, the abandonment of corporate social 
responsibilities, pulling the rug out from workers mid-career, 
late-career, creating the next generation of impoverished 
Americans with no retirement security and no health care.
    Nobody more than the long-term dedicated employees of these 
companies want to see that company be successful. Their futures 
are inextricably linked. So any premise, any belief that the 
employers and the unions can't sit down at a level playing 
field and find a truly consensual agreement is without merit.
    The current process forces employees to negotiate with a 
gun to their head. It is just that simple. The notion that 
employees are facing no work, a company liquidating, is 
nonsensical. It is a red herring. Employees want to see their 
companies be successful because their families' future, their 
own future are linked to the success of that corporation.
    It is not a question of companies liquidating. What we are 
confronted with at the bargaining table, under the current 
process, is being put into a position of facing the rejection 
of our entire collective bargaining agreement that puts the gun 
to the heads of the employees.
    Ms. Sanchez. Thank you.
    My time has expired, but I am going to ask for some 
indulgence from the Members of the Subcommittee and ask for 1 
additional minute. I have one last question I would like to get 
through.
    Any objection? Without objection, so ordered.
    Mr. Trumka, my final question was reserved for you. My 
question is, do you believe that Chapter 11 has effectively 
become a device for transferring the wealth of workers to other 
creditors? And why or why not?
    Mr. Trumka. Well, the answer is, unquestionably, yes. And 
quite frankly, I would like to answer, if you might, and answer 
part of what Representative Conyers asked and part of what 
Representative Watt's asked.
    You see, about in the 1970's, we began to adopt policies in 
this country that can best be described as growth based on 
corporate profit; in other words, everything that was good for 
corporate profit is the policy that we would adopt. Therefore, 
Mr. Watt, that is why you can, say, reject the union contract 
and not a mortgage contract, because both of those maximize 
corporate profit.
    What we should be looking at in the country is a policy 
that is based on growth based on worker prosperity, so that 
more prosperity to the workers actually stimulates the economy 
and pushes it up. All the policies that we have been adopting, 
including bankruptcy, feed into the growth based on corporate 
profit. That is why they have been interpreted the way they 
are; that is why they have hurt workers the way they are; that 
is why they are the way they are.
    Each one of those policies has roughly two things in 
common: One, they inevitably transfer power from workers to 
their employer; and, two, they ultimately result in fewer good 
jobs in this country. So, you see, the bankruptcy court or the 
bankruptcy policies that were originally put into the country 
to help protect workers and make sure that the pain is shared 
equally by all the constituents, it is skewed.
    You can look at policy after policy, Representative 
Conyers, that does precisely that very thing. So when you say 
that bankruptcy is just the tip of the iceberg, I have never 
heard a more correct or eloquent statement, because truly it 
is.
    Ms. Sanchez. Thank you, Mr. Trumka. My time is expired.
    I would turn to Mr. Cannon for 5 minutes of questions.
    Mr. Cannon. I am struck by the nature of the discussion of 
the panel, because we are talking about sort of like class 
warfare here, workers versus management, whereas I think the 
major difference--and, Mr. Prater, I want to particularly ask 
you about this--the major difference here is that managers 
could walk, because they are in a competitive environment, 
whereas employees are engaged in a collective group. And so you 
are now talking about the rights of an individual to walk, a 
manager, and his ability to bid up his price, versus the 
ability of a group.
    And I think, Mr. Trumka, this actually comes back to your 
concept that--your statement transcends what I think we can do 
in this hearing, so I am not going to come back and talk about 
that so much, that is, with larger policy, whether we want to 
support workers and workers' wealth versus corporate profits. 
What I want is a world of freedom.
    And so I want to focus--and that is why I want to come back 
to you, Mr. Prater--I want to focus on the difference here. 
Don't we do better as a society--and this is the big picture 
here--don't we do better as a society empowering every 
individual, not just the managers, not just the guys who have 
the degrees, but empowering every individual? They are not 
policies that you, as unions, can implement that would empower 
your people.
    In other words, if you want your people as a block to 
empower you, as unions, then you want to keep them tied in with 
defined benefits and Medicare, medical plans, and that sort of 
thing, and then you are negotiating as a group, as opposed to 
saying, ``Let's give every individual in America the 
opportunity for mobility.''
    So take a defined benefits plan that is portable to your 
next job, take a health savings account or some other kind of 
health plan that is portable so you can take to your next job, 
isn't that where we really want to go? Don't we want to make 
all Americans, like the big guys that were--what was the term 
that--that are the beneficiaries of the transfer of wealth from 
the collective--don't we want to make all Americans portable, 
independent and in a market so they can raise their value, Mr. 
Prater?
    Mr. Prater. Thank you, Congressman. What is the market 
value of a pilot, and should we be willing to just cross lines 
to other companies at a moment's notice?
    Mr. Cannon. No, I don't think that is the issue. The issue 
is, can we let that pilot work with a company he loves and 
induce the company to want to keep him because he can go, as 
opposed to being a member of a collective where he loses 
significantly if he changes employment? That diminishes the 
power of the union, but it empowers the individual. Now, that 
doesn't mean the individual goes willy-nilly to whatever 
employer, but it means that he has the ability to negotiate 
himself.
    Mr. Prater. We use a system of seniority that everyone is 
well aware of in different industries. But the value of not 
leaving is, I am expected to pass along my knowledge, as a 
senior captain, to the next generation of pilots. If I value my 
experience and my knowledge so much that I want to bargain for 
myself, why would I create a competitor?
    No, that is not the way we do it. We know, on a seniority 
system, we are entitled. We need as a profession to pass our 
value, our experience to that next generation. How do we just 
leave one employer and start over? That is a problem. Right 
now, with 30 years of flying experience, if I start over 
tomorrow, I will start at a new pilot's salary of $17,000 a 
year. How transportable is that?
    Mr. Cannon. Well, that is not. But if you have been around 
for 30 years, you've got a lot of experience. You have a lot of 
value. In part, that value will be passed on wherever you go to 
other pilots, because they are going to look to you for your 
guidance and counsel and experience. That experience has value.
    Now, if you leave an employer because--if you have a 
contract system that demeans you by, when you leave an 
employer, from whatever your salary is to a new pilot's salary, 
that is silly. Why do you want to support a system that would 
do that?
    Mr. Prater. I think you missed part of the reason that we 
are collectively organized and try to work under a contract. It 
is so that we can stand up to our employer if pushed too far. 
If an employer says, ``Yes, you have been on duty for 16 hours, 
but go ahead and take that trip, because that airplane is full 
of passengers,'' that individual can't stand up and say, 
``No,'' unless he has a union to back him. That happens, sir.
    Mr. Cannon. If you have been working 16 hours--I know it 
does.
    Mr. Prater. That happens.
    Mr. Cannon. Clearly, it is going to happen, and those 
things will happen. And there are some regulations that try to 
constrain that, but there is also some latitude. But there are 
also market forces that effect that, because if you force a 
pilot to fly more than he is capable of doing and the airplane 
crashes, then you lose a lot more than just the lives of the 
people involved in that plane. You lose your market position.
    Now, the value of lives is incalculable, frankly, but there 
are forces here at play. What you are arguing is that the 
collective is better from the individual. And in America, we 
sort of think that the individual and his rights are primary. 
And it seems to me that that is where, as unions, that is the 
future.
    We are not back in the 1920's, when mine workers had no 
choices. We are in a world where, if unions adapt, there are 
great things that can be done. I am a big fan of collective 
bargaining. There is a place for you all to play. But limiting 
your members' choices just seems to me to be the wrong way to 
go.
    Mr. Prater. Well, certainly, within the collective 
bargaining, we are not trying to limit--you know, we are 
looking forward. You asked many questions about the value of a 
defined contribution plan? Our members have said, ``Get our 
money out of that company now. Don't let them hold on to one 
red cent into a defined benefits plan.'' So that is where we 
will go in the future. But we have to think about those people 
who have already served 25, 30 years.
    Mr. Cannon. I see that my time has expired, but I just want 
to--are you saying that your members--may I have an 
additional----
    Ms. Sanchez. The gentleman is recognized for an additional 
minute.
    Mr. Cannon. Are you saying that you are providing--that 
your union is providing the defined benefits plan and keeping 
the funds in the union? Or are you saying it is moving away 
from defined benefits toward defined contributions?
    Mr. Prater. At the bargaining table, we are moving into 
more defined contribution plans, because our members have seen 
the failure of the defined benefit plans.
    Mr. Cannon. I think that is very good. Congratulations. 
Thank you.
    I yield back.
    Ms. Sanchez. The time of the gentleman--the gentleman 
yields back his time.
    Mr. Conyers is recognized for 5 minutes of questions.
    Mr. Conyers. We want to stay in contact with everybody 
here, and I think this discussion has to continue. And I will 
look forward to it.
    Ms. Townsend, what would you like to leave the Subcommittee 
with, as we close down on this second round of questions?
    Ms. Townsend. What I would like to leave the Committee with 
is to look into the bankruptcy court system and give us more 
rights when we are sitting at that table negotiating, because 
when we sit there and we have no clout and no power, and you 
have to take what they are shoving at you, you have no 
recourse, other than to keep the doors open and you have a job.
    Mr. Conyers. Sure.
    Ms. Townsend. But that is all you have.
    Mr. Conyers. Counsel Bernstein, what would you leave us 
with?
    Mr. Bernstein. Two points, Congressman. One, Section 1113 
at the Bankruptcy Code is working as Congress intended it to 
work. And although the issues, as you have heard today, are 
very difficult and sometimes quite painful, the bankruptcy 
courts are rigorously applying the statutes.
    Second, that in whatever modifications the Committee may 
consider to the bankruptcy laws, I would urge the Committee not 
to make Chapter 11 reorganizations more difficult than they 
are. They are very difficult already. Most Chapter 11 cases 
fail, and that doesn't work well for employees, and it doesn't 
work well for creditors, and it doesn't work well for anybody 
else.
    So the objective of Chapter 11 when it was enacted was to 
facilitate successful Chapter 11 reorganizations, and no 
modification to the code should be made which materially 
detracts from that objective.
    Mr. Conyers. Yes, the name Delphi comes to mind when you 
mention Chapter 11. And that is a very interesting situation 
that we will need to go into as this subject matter goes on.
    Mr. Redmond, what are your parting comments?
    Mr. Redmond. Well, I would, first of all, like to leave the 
Committee with the four recommendations that are in our written 
testimony for you to give some consideration to. But I would 
also like to just go back to a question that Representative 
Cannon made in regards to collective action versus individual 
action.
    And I just want to respond by saying you mentioned Delphi. 
And what this is about is leveling the playing field when it 
comes to collective bargaining and making collective bargaining 
a priority as far as the steelworkers are concerned.
    In Delphi, where the steelworkers represent between 850 and 
900 members, the day that Delphi walked into bankruptcy court 
and filed for liquidation, they also walked into the courts and 
filed for liquidation of the current collective bargaining 
agreement on the same day. Dana Corporation, we had a similar 
situation, whereas Dana Corporation filed for liquidation, they 
also filed to liquidate the collective bargaining agreement.
    So the thing that we would like to leave with the Committee 
is this: The collective bargaining agreement, in our opinion, 
should have some priority, in terms of having discussions with 
corporations when they encompass financial difficulties. And in 
light of their right to file for Chapter 11, we think that they 
also have an obligation to promote the integrity of the labor 
agreement and to sit down with the union and try to negotiate 
alternatives.
    And when we speak about defined plans of defined 
contributions as opposed to defined benefit plans, then these 
are the sort of things that take place through the collective 
bargaining process and we think is very, very important to 
maintain the integrity of the process as a first beginning, as 
opposed to a last resort.
    So I just want to thank you, Mr. Chairman.
    Mr. Conyers. I am going to ask--well, I will put my 
statement in the record. But part of the problem is that the 
law is simply not clear, leading to a split of authority among 
the circuits. It is no secret that certain districts in our 
Nation interpret the law to favor the reorganization of 
businesses over other priorities, including job preservation, 
salary protections, and other benefits.
    This is particularly true with respect to the standards by 
which collective bargaining agreements can be rejected and 
retiree benefits modified in Chapter 11. Businesses as a result 
take advantage of these 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.
    Now, I don't know what is so great about a law that allows 
these companies to forum shop. Boy, when they hear a trial 
lawyer trying to do that, this Congress collectively hits the 
roof. ``How dare they do that!'' As a matter of fact, we 
changed the whole law and started creating legal restrictions 
on forum shopping, and yet here it is, laying here for the 
advantage of corporations.
    I ask unanimous consent to take a minute to go down to the 
rest of the folks----
    Ms. Sanchez. Without objection, it will be granted. I am 
just going to make the Members of the Subcommittee aware that 
we have one more person who has 5 minutes of questioning, and 
there is another hearing scheduled in this very room at 1 
o'clock. So we are going to need to wrap up testimony very 
quickly.
    I will allow the witnesses to answer.
    Mr. Conyers. Mr. Prater?
    Mr. Prater. I will be as succinct as you like our members 
to be when they are on the P.A. and you are trying to get a 
little sleep on the way home. Quite simply, I disagree 
completely with Mr. Bernstein. The 1113 section has not worked 
in the Bankruptcy Code.
    My family has had five airline bankruptcies, two for me, 
three for my wife. It has not worked: 1113 came into being in 
1984 when Congress recognized that management should not have 
the unilateral right to abrogate a labor contract. Yet it 
passed that to a judge, and what we are living with now is the 
fact that management is getting their way in bankruptcy court. 
So it has not worked, and we would like to work with Congress 
to help modify that.
    Thank you.
    Mr. Conyers. Thank you.
    Mr. Davidowitch. Here is the irony in the current corporate 
bankruptcy law. The executives who are largely responsible for 
putting the company into bankruptcy in the first place are 
rewarded lavishly with bonuses and enhanced compensation 
packages during the course of the bankruptcy and rewarded 
lavishly upon exit from bankruptcy, while the workers see their 
rights destroyed under Section 1113 and Section 1114, having 
their health care cut and their pensions taken away from them.
    What I would suggest to this Committee, at a minimum, is to 
restore the balance that Congress intended when the Bankruptcy 
Code was last reformed to level the playing field. At a 
minimum, employees should have the right to strike, to withhold 
their service when their terms of their collective bargaining 
agreement has been changed. The unfairness that exists under 
the current application of the law and how it has been 
interpreted over the years has really created a lopsided scale 
of justice for the flight attendants and for other workers.
    Mr. Conyers. Thank you.
    Mr. Trumka?
    Mr. Trumka. Thank you.
    First thing I would like to do is respond to Representative 
Cannon and say that, in fact, there is class warfare going on 
in this country, and we have been attacked continuously for the 
last 30 years, the workers of this country. And the notion that 
you can empower individuals to do better than they will 
collectively I think is nearly laughable.
    I came out of a coal mine, and I can tell you something: 
That coal mine was owned by a large steel company. And I could 
have stood up and yelled at the top of my lungs, I could have 
done everything there, and I can promise you that they would 
given not two hoots about me. It was the fact that we were able 
to come together, individually, and have a greater voice, and 
to sit down at the table as equals with the management.
    And I can tell you this, that in a labor-management 
relationship, when you come together as equals, you make much 
better decisions for everybody. And I will give you a classic 
example. My son, who is 3 years old, came to me one day and 
said, ``I want something.'' And I flippantly said, ``No.'' I 
didn't have to give him a reason. I didn't have to explain to 
him. It was no. It was no because I had the power and he 
didn't.
    Then my wife came to me, made a request--not necessarily a 
request. She said she was going to do something. I can 
guarantee you that it wasn't a flippant no, because the balance 
of power was a whole lot different there. That is what happens 
when workers join together and they can have a collective 
voice. We all make better decisions.
    The other thing----
    Mr. Cannon. Would the gentleman yield just a moment?
    Ms. Sanchez. Mr. Cannon and Mr. Trumka both, I respect you 
mightily. We have another hearing scheduled here in 10 minutes. 
Mr. Watt has not gotten an opportunity to ask his final round 
of questions.
    Mr. Watt. Madam Chair, this sounds like a good discussion.
    Ms. Sanchez. Wait, wait, wait. If I can get a promise from 
Mr. Watt that he is willing to yield, his 5 minutes to allow 
this exchange----
    Mr. Watt. I will yield to the gentleman----
    Mr. Cannon. And I won't take much time, except to say that 
we are not in very much of disagreement. There was a time when 
you needed collective bargaining. That time has transformed 
itself as labor has become more scarce. My goal in life is to 
be labor scarce and well-paid, and that means--and I think 
that--and I have been preaching this for years and years to the 
unions.
    And of all people, Mr. Trumka, you are one of the leaders 
in having actually accomplished this--that is, that if you guys 
empower your employees to work in many places, and the demand 
for workers goes up, that is when the employee is no longer a 
3-year-old child. That is when he is an adult and an American 
and has all the respect that America affords to individuals.
    So we are not very much in disagreement there.
    Ms. Sanchez. I will allow Mr. Trumka a minute and a half to 
respond, and then we will conclude this hearing. Mr. Trumka, 
you get the final word.
    Mr. Trumka. I just say that that is good to hear that we 
are not that far apart, because there is a whole lot different 
than treating your workers, and giving them skills, and telling 
them to empower them as individuals. Those skills help them 
empower them collectively so that we all do a lot better, and 
that is what we do.
    Just to come back quickly to the bankruptcy bill and leave 
you with this parting word, currently all incentives that exist 
in the bankruptcy bill as interpreted give them to management 
to take on labor first and foremost. They should be changed so 
that the incentive is that if you take on and create pain for 
workers, the pain will be shared equally with you.
    Ms. Sanchez. The time of the gentleman has expired. We are 
going to conclude our hearing, and I want to thank all the 
witnesses, again, for their time in coming today to give their 
testimony. 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 as promptly 
as you can to be made part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any additional material. 
Again, I thank everybody for their time and their patience, and 
this hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 12:55 p.m., the Subcommittee was adjourned.]

                                 
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