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

     PROTECTING EMPLOYEES AND RETIREES IN BUSINESS BANKRUPTCIES ACT OF 2007

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 3652

                                   __________

                                  JUNE 5, 2008

                                   __________

                               Serial No. 110-181

                                   __________

             Printed for the use of the Committee on the Judiciary

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

                                   ----------
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                           COMMITTEE ON THE JUDICIARY

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

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

               Subcommittee on Commercial and Administrative Law

                    LINDA T. SANCHEZ, California, Chairwoman

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

                         Michone Johnson, Chief Counsel

                        Daniel Flores, Minority Counsel

                                C O N T E N T S

                                  ----------

                                  JUNE 5, 2008

                                                                       Page

                                TEXT OF THE BILL

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

                               OPENING STATEMENTS

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

                                   WITNESSES

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

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

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

     PROTECTING EMPLOYEES AND RETIREES IN BUSINESS BANKRUPTCIES ACT OF 2007

                                  ----------

                             THURSDAY, JUNE 5, 2008

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

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

    HR 3652 IH  ___________________________________________________

     deg.

                                                                          I
    110th CONGRESS
        1st Session

                                    H. R. 3652

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

                                     A BILL

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

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

    SECTION 1. SHORT TITLE.

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

    SEC. 2. FINDINGS.

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

    SEC. 3. INCREASED WAGE PRIORITY.

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

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

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

    SEC. 5. PRIORITY FOR SEVERANCE PAY.

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

    SEC. 6. EXECUTIVE COMPENSATION UPON EXIT FROM BANKRUPTCY.

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

    SEC. 7. LIMITATIONS ON EXECUTIVE COMPENSATION ENHANCEMENTS.

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

    SEC. 8. REJECTION OF COLLECTIVE BARGAINING AGREEMENTS.

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

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

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

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

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

    SEC. 11. UNION PROOF OF CLAIM.

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

    SEC. 12. CLAIM FOR LOSS OF PENSION BENEFITS.

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

    SEC. 13. PAYMENTS BY SECURED LENDER.

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

    SEC. 14. PRESERVATION OF JOBS AND BENEFITS.

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

    ``SEC. 1100. STATEMENT OF PURPOSE.

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

        ``1100. Statement of purpose.''.

    SEC. 15. ASSUMPTION OF EXECUTIVE RETIREMENT PLANS.

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

    SEC. 16. RECOVERY OF EXECUTIVE COMPENSATION.

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

    ``Sec. 563. Recovery of executive compensation

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

    SEC. 17. EXCEPTION FROM AUTOMATIC STAY.

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

    SEC. 18. PREFERENTIAL COMPENSATION TRANSFER.

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

    SEC. 19. FINANCIAL RETURNS FOR EMPLOYEES AND RETIREES.

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

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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

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

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

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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

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

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

                   A. The Bill's Key Substantive 1113 Reforms

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

                   B. The Bill's Key Procedural 1113 Reforms

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

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

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

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

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

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

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

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

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

                            Sections 3-5: Priorities

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

            Sections 6 and 7: Limitations on Executive Compensation

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

            Section 8: Rejection of Collective Bargaining Agreements

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

         Section 9: Payment of Insurance Benefits to Retired Employees

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

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

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

                     Section 13: Payments by Secured Lender

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

                 Section 14: Preservation of Jobs and Benefits

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

              Section 15: Assumption of Executive Retirement Plans

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

                 Section 16: Recovery of Executive Compensation

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

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

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

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

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

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

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

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

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

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

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