UAW statement on protecting employees and retirees in business bankruptcies

STATEMENT OF THE

INTERNATIONAL UNION, UNITED AUTOMOBILE

AEROSPACE & AGRICULTURAL IMPLEMENT

WORKERS OF AMERICA (UAW)

on the subject of

PROTECTING EMPLOYEES AND RETIREES IN BUSINESS BANKRUPTCIES ACT OF 2010 (H.R. 4677)

Submitted to the

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

COMMITTEE ON THE JUDICIARY

UNITED STATES HOUSE OF REPRESENTATIVES

MAY 25, 2010

The International Union, United Automobile Aerospace & Agricultural Implement Workers of America (UAW), represents more than one million active and retired workers. We appreciate the opportunity to submit this testimony to the Commercial and Administrative Law Subcommittee of the House Committee on the Judiciary on the subject of the “Protecting Employees and Retirees in Business Bankruptcies Act of 2010” (H.R. 4677).

 The UAW and its members have been in the headlines recently for two very large bankruptcies at GM and Chrysler that were handled outside the parts of the bankruptcy code that the legislation before us is intended to correct. In this testimony, we do not address those bankruptcies because they are not relevant to this legislation. Instead, this testimony will speak to our experience with bankruptcy in the auto parts sector and how this bill can improve the outcome of future bankruptcies or prevent them.

As evidenced by passage of labor legislation beginning with the Norris-Laguardia Act, Congress has long sought to restrict federal judicial intervention in labor disputes and instead foster the practice of collective bargaining in conducting labor relations. Section 1113 of the Bankruptcy Code - enacted by Congress in response to the Supreme Court’s ruling in NLRB v. Bildisco & Bildisco[1] that a collective bargaining agreement could be rejected by a debtor just like any other executory contract – sought to carry this long standing and well recognized practice into the bankruptcy process. 

Unfortunately, a long line of court rulings interpreting the substantive and procedural requirements for rejection of a collective bargaining agreement under Section 1113 have eroded its fundamental aspects encouraging collective bargaining. It has become all too frequent for companies to file chapter 11 and approach organized labor with all sorts of overreaching demands, oftentimes presenting proposals for contract modifications that more closely reflect a labor relations manager’s Christmas wish list than the minimum modifications necessary to permit the company to emerge from bankruptcy as the statute requires. Debtors file Section 1113 motions to reject collective bargaining agreements and Section 1114 motions to modify retiree health insurance benefits as a tool for leverage in negotiations, rather than as a last resort once negotiations have proven unsuccessful as the statute provides. 

The litigate now, bargain later approach can pollute the bargaining environment with the threat that if the union does not agree to deep concessions, the court will impose even deeper ones. As a result, companies using the bankruptcy process are provided with tools to shift a disproportionate share of the restructuring burden on to workers and retirees. Corporations are able to use bankruptcy to undermine collective bargaining agreements and slash retiree benefits while simultaneously granting lucrative compensation packages for top executives. This has had a disastrous effect on individuals and communities throughout the United States – resulting in lower wages, lost health care benefits for retirees, lower pension checks for early retires and the loss of employment opportunities through plant closings.

One example is Delphi Corporation, which filed for Chapter 11 bankruptcy on October 8, 2005.  The company was able to use the bankruptcy process to eliminate its U.S workforce and shift its jobs abroad.  Four of the Delphi’s UAW-represented plants remain in operation as General Motors plants. At those locations our members had to accept wage cuts up to 50%. In addition, they had to pay an increased share of their health care costs out of their reduced wages. For new hires, defined-benefit pensions and health insurance were eliminated entirely.

Meanwhile, in 2006, the bankruptcy court approved an incentive plan that awarded $38 million to the company’s top executives, some of whom had presided over the losses that led to the bankruptcy. Some were even under investigation for false financial reporting at the time the bonuses were approved. In 2008, the court approved an additional package of equity stakes in the reorganized company valued at more than $400 million and cash bonuses worth over $16.5 million. CEO Steve Miller, who took Delphi into bankruptcy after previously doing the same at Bethlehem Steel has said that bankruptcy is a growth industry. For him, it certainly is!

Variations on the Delphi theme have occurred over and over again in the auto parts industry at such companies as Dana Corporation, Tower Automotive, Collins & Aikman, Metaldyne, Meridian Automotive, Dura, Visteon and many others.

The proposed bankruptcy reform legislation would put a stop to the abuses that the UAW has witnessed in the auto parts sector and other unions have witnessed in the coal, steel and airline sectors. Title I increases protection for the claims of individual employees whether or not they are covered by a collective bargaining agreement. Title II requires the parties to negotiate in good faith before a motion for rejection or modification of an agreement can be filed. This protects the employees from having to negotiate while the weapon of contract rejection is pointed straight at them. It restores to the bankruptcy code the federal labor policy favoring negotiated resolution of disputes between unions and employers. In addition, Title II reaffirms the idea that corporate bankruptcies should aim to rehabilitate productive enterprises, preserving jobs and thereby strengthening communities. Title III responds to abuses in executive compensation programs still prevalent under the current law by, among other things, limiting executive compensation enhancements and tightening standards for assumption of compensation plans. Title IV allows for unions to file proofs of claim on behalf of their members and exempts labor dispute resolution proceedings, such as grievances and arbitration, from automatic stays.

Improving Recoveries for Employees and Retirees 

 Many traditional unsecured creditors in a business bankruptcy case have “limited” exposure. For suppliers or vendors, an account with a debtor commonly represents one of its many business relationships. Holders of unsecured corporate debt tend to be investment houses and financial institutions whose investments in a particular firm are limited relative to their total investments and whose total holdings are spread throughout the entire spectrum of Wall Street offerings. Workers, on the other hand, devote substantial resources to a particular firm. Through their contribution of labor, skill and knowledge, workers provide a valuable service to their employers and are compensated in numerous ways. In addition to a salary, workers typically earn vacation and paid personal time off, sick pay, severance benefits, contributions to 401(k) plans and other retirement vehicles and various medical savings accounts.

The commencement of a bankruptcy case by an employer can often result in the loss or significant reduction in medical insurance and pension benefits to retirees who spent decades working for the employer and building up their retirement benefits. When an employer enters bankruptcy, many wage, compensation and benefit obligations can end up as general unsecured claims, the lowest category of claim in a bankruptcy proceeding. Holding a general unsecured claim can often entail a lengthy wait for that creditor and a distribution of “pennies on the dollar” on the underlying obligation. The enhanced protection for the claims of individual employees, contained in Title I of the bill and described here, apply to all employees regardless of whether they are covered by collective bargaining agreements or belong to unions. Thus, the bill benefits both represented and non-represented employees.

In enacting the Bankruptcy Code, Congress initially provided for a “heightened” recognition of wage and benefit obligations earned within 180 days before a bankruptcy filing by categorizing such claims as priority claims.[2]  Unfortunately, for purposes of priority claims recognition, all wage and benefit obligations owing to an employee are capped at $10,000.00 and must have been earned within the six month period preceding the bankruptcy filing.[3] Benefits such as vacation pay are often intended as deferred compensation in payment for services already performed[4], and firms vary widely with respect to employees’ accrual of benefits (e.g., earned in one year and used in the following year). As a result of the 180 day limitation and varying vacation accrual policies, workers commonly see only a portion of their vacation pay recognized as a priority claim. And due to the priority claim limit in Section 507(a)(4) and offset requirement in Section 507(a)(4)(B), workers with benefit plan claims such as unpaid 401(k) plan contributions or unpaid medical plan benefits see their wage claims encroaching on the ability to have benefit claims reach priority status.

Section 101 of the proposed legislation addresses these shortcomings by amending the Bankruptcy Code to increase the amount of the priority wage claim in Section 507(a)(4) to $20,000 and eliminate the 180 day reachback limitation. Section 101 also amends Section 507(a)(5) to increase the priority wage claim amount to $20,000, eliminate the offset requirement and eliminate the 180 day limitation. These changes to the Bankruptcy Code will go a long way to protecting workers’ hard earned contributions to their employer and ensuring that workers are not completely vulnerable in a bankruptcy proceeding.

Existing legal precedent prohibits pension plan participants from filing clams against a debtor for any shortfall in their pension benefits as a result of a pension plan termination under the Employee Retirement Income Security Act of 1974 (“ERISA”), recognizing the Pension Benefit Guaranty Corporation (“PBGC”) as the only party able to file such claims, even when the PBGC does not subsequently make up any of the individuals’ pension shortfall. Section 204 of the proposed legislation remedies the unfair treatment accorded to pensioners and retirees. It adds a new subsection to Section 502 of the Bankruptcy Code, requiring the court to allow a claim by an active or retired participant (or by a labor organization representing such participants) in a defined benefit pension plan terminated under Title IV of ERISA for any shortfall in pension benefits accrued as of the date of plan termination as a result of such termination and limitations upon the payment of pension benefits imposed pursuant to ERISA, notwithstanding any claim asserted and collected by the PBGC with respect to such pension plan termination.

Under 401(k) defined contribution plans, which have become the primary retirement income vehicle for many Americans, workers bear the sole risk for market downturns. Since employers frequently make their discretionary contributions to such plans in the form of employer equity, workers’ retirement security can become captive to an employer’s transgressions. Cases like Enron and Worldcom demonstrate the dangers this arrangement presents to workers’ retirement savings. When an employer enters bankruptcy, a worker’s holdings in securities of their employer will stand at the bottom of the recovery waterfall. Section 102 of the proposed legislation remedies this shortcoming by elevating, to general unsecured status, a worker’s claim for losses in company stock held in a retirement savings plan when employer fraud is involved.  This goes a long way towards alleviating the harsh economic pain innocent workers can experience in business bankruptcies. This protection is directed to the “rank and file” employees of a business – the ones who frequently bear the greatest burden in a business bankruptcy. It can not be made by a senior executive officer of the employer or one of the 20 next most highly compensated employees.

With increasing frequency, companies are entering bankruptcy with limited cash availability and secured lenders’ low level of tolerance for reorganization. In many instances, lenders deliver a mandate that the debtor sell its assets under chapter 11. All too often, workers are left unpaid for the valuable services they contribute to the debtor. To secure continued cash availability during the bankruptcy proceeding, debtors often enter into financing agreements with their secured lenders that grant waivers of any claims under Section 506(c) of the Bankruptcy Code. Section 506(c) was enacted by Congress to assure that when a claimant expends money or resources to provide for the reasonable and necessary costs and expenses of preserving a secured lenders’ collateral the debtor should be entitled to recover such expenses from the secured lender. The rationale behind this is simple. People who undertake efforts to allow a business to continue operating or preserve its value during a bankruptcy proceeding should not be penalized. Such provisions waiving Section 506(c) claims raise concerns because a debtor can fail to, or be unable to, honor its contractual wage and benefit obligations to its employees for services rendered post-petition. Oftentimes medical claims and premiums, or even wages, will go unpaid while a debtor sells its assets or winds down its business. At the same time they may have not received their earned wages, workers can then be stuck paying medical claims a debtor’s insurance carrier should have covered. It is wrong for workers’ services and contributions to an employer to go unpaid, especially when such services contribute to preserving an operating business during a sale process for the direct benefit of secured lenders. That is why Section 205 of H.R. 4677 is so important. Section 205 amends Section 506(c) to deem unpaid wages and benefits owed pursuant to a collective bargaining agreement to be necessary costs and expenses of preserving property, and would allow for the recovery of such obligations even if a debtor has waived the provisions of Section 506(c) pursuant to a financing agreement.

Given the uncertainty surrounding a debtor operating in bankruptcy and the increased risk of restructuring-related plant closings and consolidations, severance pay is an important part of a safety net built to deal with loss of employment. By operation of the Bankruptcy Code, severance arrangements that exist prior to a debtor’s chapter 11 filing – either under a collective bargaining agreement or pursuant to an employer’s programs or past practice – and the benefits they confer on employees who lose their jobs are generally only recognized as unsecured, non-priority claims. As general unsecured claims, severance obligations can be paid months or years after a job loss, and frequently at a fraction of what the employee was entitled to. This is unfair and unjust to workers who have already provided valuable service to the employer. Section 103 of the proposed legislation would protect severance pay owed to workers by allowing it as an administrative expense, while excluding “golden parachutes” and similar severance provisions that benefit only upper-level management and executives. 

Bankruptcy should not shield employers from their responsibilities under federal or state laws aimed at protecting workers’ rights and interests. With increasing frequency, employers are able to disregard liability for violations of federal labor law by entering Chapter 11, even if the National Labor Relations Board (“NLRB”) or a court has ruled in favor of employees.  One example of this kind of abuse is the use of bankruptcy to avoid the obligation under the Worker Adjustment and Retraining Notification Act (“WARN” Act) to notify employees 60 days before a plant closing or mass layoff. The law provides a penalty of up 60 days pay for failure to provide 60 days notice, but bankruptcy courts have often failed to recognize court awards pursuant to the WARN Act. Section 105 responds to these employer abuses by recognizing an administrative expense claim for wages and benefits awarded pursuant to a judicial or NLRB proceeding.  This administrative claim would be recognized for awards issued after a debtor has commenced a bankruptcy proceeding irrespective of when the unlawful conduct occurred. The claim could include any award issued by a court for a layoff that occurred after a chapter 11 petition was filed, if the debtors’ payment of that award would not increase the likelihood of layoff of current employees or nonpayment of domestic support obligations.

Reinforcing the Foundation of Collective Bargaining

As indicated above, Congress moved promptly in response to the Bildisco decision by enacting Section 1113 to provide “enhanced” standards for rejection of a collective bargaining agreement.  Section 1114 was enacted by Congress responding to LTV Steel’s unilateral termination of health insurance benefits for over 68,000 retirees. This section of the Bankruptcy Code allows a debtor to modify its non-pension retiree benefits only by agreement with the authorized representative of retirees[5] or, failing agreement with the union, after meeting procedural and substantive requirements demonstrating the financial necessity for modifying such benefits. Hence, absent agreement with the retirees’ authorized representative or by order of the Court, a debtor is required to maintain its retiree benefits. Unfortunately, court rulings have eroded Section 1113 and Section 1114’s fundamental purpose: encouraging collective bargaining. It has become all too frequent for companies to file Section 1113 motions to reject collective bargaining agreements and Section 1114 motions to modify retiree health insurance benefits as a tool for leverage in negotiations, rather than as a last resort once negotiations have proven unsuccessful as the statute provides.

Sections 1113 and 1114 are broken.[6] That is a simple fact, evidenced not only by the testimony of the UAW and other unions, but equally shown in empirical studies and academic literature. A 2007 General Accounting Office study on Chapter 11 bankruptcies found that of the thirty-two contested Section 1113 motions filed between 2004 and 2006, the court granted the debtor’s motion and rejected the collective bargaining agreements in all cases.[7] Another study analyzing Section 1113 motions filed in large corporate bankruptcies in the Second and Third Circuits shows that every debtor was able to reject its labor agreements.[8] Unions, their members and retirees experience these cold facts personally. From debtor efforts to eliminate virtually all worker protections in a collective bargaining agreement to attempts to terminate all retiree benefits while simultaneously seeking tens of millions of dollars in enhanced executive compensation, the UAW is all too familiar with the horrors that the Bankruptcy Code has to offer. Reform is needed to restore Congress’ intent to facilitate negotiated resolution of labor disputes.

The Bankruptcy Code is silent as to a union’s right to receive contract rejection damages if a debtor’s Section 1113 Motion is granted. There is no logic to the Code’s incongruous treatment vis-à-vis rejection damages for executory contracts and collective bargaining agreements. Union members sustain an economic loss from the rejection of a collective bargaining agreement, just as counterparties to rejected executory contracts with a debtor. Section 104 of the proposed legislation addresses the collective bargaining agreement rejection damage issue. Economic losses resulting from rejection of a collective bargaining agreement would be recognized by amending Section 1129(a) - the section of the Bankruptcy Code dealing with the specific criteria that must be satisfied in order for a chapter 11 plan of reorganization to be confirmed - to add an additional requirement to confirmation: a plan of reorganization must provide for the recovery of damages for the rejection of a collective bargaining agreement or for other financial returns as negotiated by the debtor and labor union under Section 1113. Adding this requirement to Section 1129(a) ensures that workers receive similar treatment as parties to executory contracts rejected under Section 365 of the Code. And section 201 of the proposed legislation makes conforming changes to Bankruptcy Code Section 1113 in order to provide that rejection of a collective bargaining agreement gives rise rejection damages. 

Upon commencement of a case under chapter 11, a debtor is required to timely pay health and life insurance benefits to its retired employees.[9] Section 1129(a)(13) of the Bankruptcy Code requires that, to be confirmed, a plan of reorganization must provide for the continuation of retiree benefits either as agreed to by the debtors and authorized representative or as ordered by a Court in granting a debtor’s Section 1114 motion. Section 104 of the proposed legislation amends Section 1129(a)(13) by adding an additional requirement, namely, that the plan must provide for the continuation of retiree benefits maintained or established in whole or in part by the debtor before the bankruptcy case was filed. This amendment merely clarifies that unless retiree benefits are modified during a chapter 11 proceeding in accordance with Section 1114, the benefits will continue. In addition, Section 104 amends Section 1129(a) by adding a requirement that a plan provide for the recovery of claims resulting from the modification of retiree benefits. This amendment is akin to the contract “rejection damage” claim and has, as its basis, existing language in Section 1114 recognizing the possibility of a claim based on reduction of retiree benefits.[10] Both of the changes contained in Section 104 address Section 1114’s existing purpose to maintain retiree benefits at their pre-bankruptcy levels absent a debtor’s demonstrated financial need for modifications and, if modified, to provide retirees with a claim or other financial return to address the financial impact of a reduction in benefits.

In Title II, Sections 1113 and 1114 would be amended in several important respects. In order to ensure that any negotiations are meaningful, a debtor would be required to confer in good faith with the union, base each proposal for modification on a business plan for reorganization reflecting the most complete and reliable information available. A debtor could file a motion to reject a collective bargaining agreement or modify retiree benefits only after a period of negotiations and a demonstration that further negotiations are not likely to provide a mutual agreement between the parties. In order to prevent overreaching by debtors, these sections would be amended to provide that an application to reject or modify could be approved only if the modifications sought are the minimum savings essential to permit reorganization and the burden of cost savings does not disproportionately burden the employees and/or retirees. If a debtor has implemented a program of executive pay, bonuses or other financial returns to executives and highly compensated employees, the court would presume that the debtor has failed to satisfy reasonable proposal requirements of Sections 1113(c)(3) and 1114(f)(4). And section 201 would clarify the right of a labor organization to engage in economic self-help upon a court order granting rejection of a collective bargaining agreement under either Section 1113(d) or (e).

Controlling Executive Compensation 

Enhancement of executive compensation during chapter 11 cases has become widespread and common. Standards for approval of executive compensation have not been raised, notwithstanding the noble goals of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCA”). A specialized niche industry of compensation consultants has emerged to service corporate executives’ needs, uniformly telling executives and corporate boards alike that management is underpaid compared to its peers. Many of these same consultants also advise these very same debtors on general corporate compensation and benefits matters and are paid handsomely for it. It is no wonder then that consultants are loath to find executives “overpaid” and “paid just right”.

The problem with enhanced executive compensation in business bankruptcies is multifaceted. In cases where consolidation or sale of a company’s operations is contemplated or where labor contracts or retiree benefits might be subject to modification, proposing and enacting executive compensation can severely taint the negotiation process. Not only does it destroy the notion that all employees and stakeholders should share in the sacrifices of turning a business around, it can also erode employee moral and good will that is often crucial to the successful emergence of a debtor. The primary goal of a business bankruptcy should be preserving the going concern value of the debtor through the productive use of assets and preservation of jobs.  As such, reforms are necessary in order to curb executive compensation abuses.

Section 301 of the proposed legislation adds much needed transparency and judicial oversight to the process of granting executive compensation. First, it amends Section 1129(a)(4) of the Bankruptcy Code, making a condition to confirmation of a chapter 11 plan the requirement that any payment to insiders, senior executive officers or the next 20 most highly compensated employees be approved as reasonable, not excessive or disproportionate as compared to distributions to a debtor’s non-management workforce.

In addition, Section 1129(a)(5) is amended to further provide that any such above-mentioned payments be provided only if there is a showing that the compensation is reasonable when compared to that paid to individuals holding comparable positions at comparable companies and, more importantly, that the compensation is not disproportionate in light of the economic concessions made by the debtor’s non-management workforce.  While BAPCA intended to limit executive compensation by adding prerequisites, debtors and bankruptcy courts have found numerous ways around the Section 503(c) requirements. Section 503(c)(1) was intended to prohibit retention based compensation absent a showing that the payments are essential to retention of the individual because he has another bona fide job offer and the same or greater rate of compensation, his services are essential to the business and there is some type of similar transfer available to non-management employees or within a certain threshold of payments previously made to that individual. Section 302 amends Section 503(c)(1) by providing that the provision also applies to the debtor’s senior executive officers or the next 20 most highly compensated employees, clarifies that the prohibition on payments includes performance or incentive compensation, bonuses or other financial returns designed to replace or enhance compensation in effect prior to the case. It also amends Section 503(c)(1) to require that the Court’s findings be based on clear and convincing evidence in the record. Section 302 also replaces the existing Bankruptcy Code Section 503(c)(3) with more stringent requirements for granting payments to executives. Due to abuses under the current law, the new Section 503(c)(3) is intended to require a clear and convincing showing by a debtor that the payments for the benefit of insiders, senior executive officers or the next 20 most highly compensated employees are essential to the survival of the business, the services to be performed are essential in nature and the proposed payments are reasonable compared to individuals at comparable companies and the payments are not disproportionate in light of the economic concessions made by the non-management workforce. The changes proposed in Section 302 advance the cause of fairness, demonstrated need and reasonableness in granting executive compensation.

Equality of sacrifice among all constituents is an important part of any concessionary agreement labor agrees upon. All too often, this requirement is sidestepped by executives. Section 303 remedies this by providing that no deferred compensation arrangement for a debtor’s insiders, senior executive officers or the next 20 most highly compensated employees may be assumed if a defined benefit pension plan for the debtor’s employees has been terminated under Title IV of ERISA during a chapter 11 case or 180 days prior to commencement of the case. Further, Section 303 amends Bankruptcy Code Section 365 by adding a new provision prohibiting a debtor from assuming a plan or program to provide retiree benefits for insiders, senior executive officers or the next 20 most highly compensated employees of a debtor if it has obtained Section 1113 or Section 1114 relief to impose reductions in health benefits for active employees or retirees. Sections 304 and 305 of the proposed legislation further the goals of equality of sacrifice by allowing for the recovery by the estate of the debtor of certain compensation paid to any officer serving on the debtor’s board of directors or an individual serving as chairman of the debtor’s board of directors if relief is sought and obtained by the debtors under Sections 1113 or 1114 or Title IV of ERISA concerning its pension plans.

Preservation of Jobs, Union Proof of Claim and Protecting the Grievance Procedure

The UAW and its members have experienced a tremendous amount of uncertainty as a result of instability in the auto parts sector. Virtually every major auto supplier to file for chapter 11 in the last seven years has sold part of its business operations through an auction process governed by Bankruptcy Code Section 363(b). It is common for several bidders to emerge during the sale process. Unfortunately, bidders are not uniform in their intentions for a particular business. Some prospective purchasers are only looking to buy a bundle of customer orders or transfer a book of business away from the debtor’s facilities to their own, having no interest in the underlying productive assets. A sale in such instances, while sometimes providing consideration to the debtor, leaves the debtors’ employees without jobs, devastating workers, their families and communities. Section 203 amends the provision of the Bankruptcy Code governing the sale of a debtor’s assets. A new Section 363(b)(3) would require a court, in determining whether a bidder’s offer constitutes the highest or best offer in the sale of a debtor’s assets, to consider the extent to which a bidder’s offer would maintain existing jobs, preserve existing terms and conditions of employment and assumes or matches pension and retiree benefit obligations of the debtor. Maintaining the productive use of assets in the American economy and preserving jobs should be a priority, and Section 203 moves us a step closer in that direction.

Section 206 proceeds in a similar vein by adding a statement of purpose to chapter 11 of the Bankruptcy Code, specifying that in a chapter 11 case a debtor must have as its principal purpose the reorganization of its business to preserve going concern value to the maximum extent possible through the productive use of its assets and the preservation of jobs that will sustain productive economic activity. Section 206 also amends Bankruptcy Code Section 1129(a) – the section setting forth the criteria for confirming a plan of reorganization – adding a requirement that the debtor demonstrate that reorganization preserves going concern value again through productive use of the debtor’s assets and preservation of jobs. Rehabilitation of a business was a principal goal in creation of the Bankruptcy Code. Adding the statement of purpose and plan confirmation requirement is a logical extension of the original goal and a sound policy move aimed at strengthening the American economy and use of one of its most important assets - its productive workforce.

The Bankruptcy Code presently allows a creditor to file a proof of claim in a bankruptcy case.[11] An indentured trustee is afforded the right to file a claim on behalf of the individual bond holders.[12] While prevailing bankruptcy and federal court decisions have held that a labor union, as party to a collective bargaining agreement, may file a proof of claim on behalf of its members[13], the Bankruptcy Code is silent. Since Congress and federal courts have recognized a union’s right to assert claims, and enforce rights, on behalf of its members, there is no reason for the Bankruptcy Code to remain silent. Numerous factors, including reducing administrative burdens on the debtors and courts by allowing an omnibus or collective union claim filed on behalf of its members and retirees, weigh in favor of amending Section 501(a) of the Bankruptcy Code to permit a labor organization to file a proof of claim. Section 401 of the proposed legislation accomplishes just that.

Section 402 amends the automatic stay provision of the Bankruptcy Code. The filing of a chapter 11 petition creates a stay of judicial, administrative and other proceedings against the debtor. However, since Section 1113(f) provides that no other provision of the Bankruptcy Code may be construed to allow a debtor to unilaterally modify or alter any provision of a collective bargaining agreement, many courts have held that the automatic stay does not apply to arbitrations arising under a labor agreement.[14] Section 402 makes clear that an exception to the automatic stay is granted with respect to the commencement or continuation of a grievance, arbitration or dispute resolution proceeding established by a collective bargaining agreement that was or could have been commenced against the debtor before the filing of the bankruptcy case. The amendment to Section 363(b) also makes clear that the exception to the automatic stay also applies to payment or enforcement of awards or settlements of such proceedings.

Conclusion

In sum, the Protecting Employees and Retirees in Business Bankruptcies Act of 2010 (H.R. 4677) supports and protects public policy goals that have always been the intent of bankruptcy and labor law. These include: 

• preserving the going-concern value of businesses reorganizing under Chapter 11,
• promoting fair and good faith negotiation over litigation as the primary means of modifying collective bargaining agreements during bankruptcy, and
• equitable sharing of sacrifice among the stakeholders of a business during difficult times.

 As a result of recent rulings by the courts, bankruptcy law no longer effectively promotes these goals. The UAW believes this legislation is needed to restore the balance and to ensure that bankruptcy law promotes these important public policy goals.