Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005

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Mr. DURBIN. Mr. President, this is the bankruptcy reform bill. It is about 500 pages long. If I went to Illinois and asked the people I represent what they think we should do when it comes to bankruptcy, I am virtually certain that the first thing they would say to me is, you have to do something about these horrible corporate bankruptcies, Enron, WorldCom, and the list goes on, and the abuses which these officers and CEOs have demonstrated as heads of these corporations, the fact that because they were feathering their own beds when their companies went bankrupt, hurting shareholders, hurting employees, hurting investors in pension plans, and hurting retirees.

I think my constituents in Illinois are right. When it comes to bankruptcy, that is the scandal in America. We read about it every day. There is another criminal trial. Somebody is on trial because of corporate malfeasance that lead to bankruptcy. It is going on right now.

When one takes a look at this 500-page bill, how many pages in this bill address corporate bankruptcies? Five. Ninety-nine percent of this bill hardly relate to corporations at all. Ninety-nine percent relates to individuals and families who, through no fault of their own, in most circumstances, are crushed by debt and go to bankruptcy court. Ninety-nine percent of this bill relates to bankruptcies of people who have a medical diagnosis they never anticipated and end up in treatment incurring medical expenses that their health insurance does not cover. That is almost half of the cases in bankruptcy court.

So this bill is designed to make the bankruptcy process more difficult for those individuals and families to get out from under their debt. That is what this is about. So that at the end of the day, when we pass this legislation--and surely we will--the credit card companies and the banks will end up keeping people in debt longer. So that people facing a crushing debt, when all is said and done, will not be able to walk out of that court, having been declared bankrupt, and start their lives again. That is what this bill addresses.

My amendment goes to the 5 pages about corporate bankruptcy. I believe this: If we are going to hold Americans and families to a high moral standard, if we are going to say to them that before they go into a bankruptcy court, pay their bills and prove to the court that they cannot pay their bills before we let them off the hook, if we are going to say that it is immoral and unjust for someone to go into a bankruptcy court and ask to be declared bankrupt and leave their bills and assets behind, if they, in fact, can pay, then fair enough.

But my amendment says, if we are talking about justice and high moral standards, should we not also talk about these corporate CEOs and insiders? Should they not be held to a high moral standard? Should they not be held to the standard of justice? Sadly, this bill does not do it.

When a corporation files for bankruptcy, their workers are left standing at the back of the line behind all the other creditors. Many of them lose their retirement savings, health care benefits and opportunities to get back to work and back on their feet.

The story of Bethlehem Steel Corporation is a good illustration. After years of decline in the steel industry, Bethlehem Steel dissolved in January of last year. Along with the end of Bethlehem Steel, 95,000 retired steelworker employees, who literally helped build America, lost the health care benefits they were promised. These are workers who, at the expense of their own health, went to work every day, played by the rules, paid into their pension plans, anticipated their health care, and yet because of the bankruptcy of Bethlehem Steel they were left unprotected. They lost their pension. They lost their benefits. They have nothing.

The problem is not limited to just steel companies. WorldCom, a telecommunications company; Adelphia, a cable company; PG&E and Enron, energy companies; Conseco, an insurance company; Financial Corporation of America and HomeFed, banks; United Airlines, U.S. Airways, TWA, all in the transportation business; Texaco, K-Mart, Polaroid, household names. These are some of the once great corporate giants that ended up in bankruptcy. They employed hundreds of thousands of Americans, but once the companies filed for bankruptcy, their employees were left with nowhere to turn.

This bankruptcy bill does not even talk about those bankruptcies and those employees and the problems that they face.

Many of the companies that filed for bankruptcy over the past few years are also associated with world-class scandals: Global Crossing, WorldCom, Adelphia, and, of course, the grand-daddy of them all, Enron. Those corporate giant names are synonomous with corruption, malfeasance, and greed; they are synonomous, from my point of view, with immoral corporate conduct and unjust treatment of their shareholders, workers, and retirees.

It is even more painful to think that while the workers and retirees of these scandal-tainted companies were left with little more than their dignity, the corporate executives and the insiders escaped with their treasures.

When companies are headed for bankruptcy, the corporate insiders know it is going to happen long before the worker out in the plant, and that is especially true when these same insiders are cooking the books. They know where the corporate loot is hidden, and they are going to get their hands on it when they can.

One might say that as soon as he saw the tip of the iceberg far ahead of the ship, the captain of the Titanic sneaked out on the deck, jumped in the lifeboat, went overboard with food, water, and life-vests, and left everybody else behind. That is what happened. Bon Voyage!

Let me describe a case study of the worst: Enron. This is the poster child for corporate corruption.

Enron of Houston, TX. During the 1990s, Enron was the envy of every executive in corporate America: creative, aggressive, growing fast, money coming in hand over fist, Fortune 500's top 10 list of assets with close to $100 billion, and doing business in far-flung reaches of commerce.

By the year 2000, Enron stock had increased in value by 1,700 percent since its first shares were issued in the 1980s. It had 21,000 employees in the United States and all around the world.

But not everything was coming up roses for Enron. Behind the glass walls of the corporate skyscraper in Houston, something very opaque was going on.

Listen to these famous names: Ken Lay, Jeff Skilling, Andrew Fastow. The company's top three executives obviously realized their astronomical success was not based on reality or truth. It was based on hype, speculation, and deceit. It was all smoke and mirrors.

Wall Street analysts later were forced to admit that they made out-of-control valuations of this company based on the puffery of these corporate bandits. All the while, these executives cooked up ingenious schemes to move assets on and off the books, create phony partnerships, offshore accounts, and so-called ``special purpose entities.''

These were just corporate accounting tools designed to move around assets on paper. Why would they do that if they had nothing to hide? Ken Lay, Jeff Skilling, Andrew Fastow, and others at Enron were undeniably the masters of manipulation.

We talk in this bankruptcy bill about what we are going to do with people who are abusing the bankruptcy court. This bill addresses the waitress with a second part-time job who is a single mother raising a couple of children who just was diagnosed with breast cancer and ends up with medical treatment and bills she cannot pay. She is forced finally to go to bankruptcy court.

This bill says, we are going to take care of her. In this bill we will give her a long list of things to do to prove that she is not taking advantage of the bankruptcy court.

But when it comes to these smoothies--Ken Lay, Jeff Skilling, and Andrew Fastow at Enron, and other corporations--this bill is silent. We are for morality when it comes to working families. Obviously, we are not for morality when it comes to these corporate cheats.

They kept the perception up at Enron that they were making money even when they were not, but eventually it fell apart.

On October 16, 2001, Enron reported a third-quarter loss of $618 million and shareholder equity loss of $1.2 billion. The date October 16, 2001, is important. A week later, on October 22, the Securities and Exchange Commission announced an inquiry into the company.

On November 8, 2001, Enron filed an amendment to its financial report revising its income back 4 years to 1997, 4 years of lies, it turns out, once they were caught. They came forward and disclosed $586 million in losses, and obviously investor confidence and their stock values cratered.

The next day Ken Lay entered into a deal with Dynergy Corp. to sell Enron for $10 billion, in a desperate attempt by him to keep that company afloat. A few days later he was forced to admit that Enron was not worth the amount he wanted to sell it for.

Naturally the deal with Dynergy was called off, and on December 2, 2001, Enron filed for bankruptcy.

Let me tell you what happened to two groups of Enron employees during the last few weeks of the company's solvency.

Here is Mr. Lay. Everybody knows his face now. CEO Ken Lay is the man who made over $200 million from Enron stock, and $19 million in bonuses. Other executives in the Enron Corporation received bonuses as high as $5 million. While that was going on, while the company was heading toward a bankruptcy, there were over 5,000 employees who lost their jobs and thousands more who lost millions in retirement savings.

Our bill goes after the employees who lost their jobs. Our bill goes after the employees who lost their health care. Our bill goes after retirees who ended up penniless and were forced into bankruptcy court. We are going to get real tough on them.

But how about Mr. Lay? What price is he going to pay for his misconduct? In this bill, no price at all. Everyone knows about Ken Lay's extravagance.

I won't venture to assert whether Ken Lay had any actual insight or knowledge which he took advantage of insider information as he made sales of stock he held in Enron. Those are decisions for a judge and jury.

But what is certain is that Ken Lay pocketed $81.5 million in loan advances from his company while Enron was cascading toward bankruptcy--$81.5 million for this man who couldn't run his company correctly. All told, he received over $200 million in Enron stock and $19 million in bonuses.

During the same time Jeff Skilling raked in $66.9 million.

The board of directors was sharing in these good times as well. Sixteen members of the corporate board made a combined total of $164 million, just on selling shares they had in the company. If you add all the other corporate insiders and executives at Enron with the corporate directors and all the amounts they pilfered from the company from 1998 to 2001, the grand total comes to well over $1 billion.

Now let's see how the employees at Enron fared.

There is an old country song by Jerry Reed called, ``She Got the Goldmine, I Got the Shaft.'' It could be the theme song for Enron workers.

Of the 21,000 people worldwide who worked for Enron, 12,200 were enrolled in their pension plan. Over 60 percent of the assets in the plan invested in Enron stock and all of Enron's matching contributions went into company stock as well. But the Enron stock, which once sold as high as $90 during its heyday, became worthless. The workers' losses were aggravated during the course of the weeks when they were locked out of the pension plans and could not even sell the stock as the value of the stock was cratering.

Under Federal law, companies are not allowed to let their employees withdraw their investment while the company switches pension plan administrators. And wouldn't you know it, Enron chose to switch their plan administrator on October 16, 2001.

Remember that date? That's the very same date I mentioned earlier, when they announced they were writing off more than $1 billion in charges to their books. This meant that thousands of employees sat by helplessly and watched their retirement plan literally disappear before their eyes.

On October 18, 2001, while Enron workers were frozen out of amending their pension plan, the stock price was down to $32 a share. By the time the hurricane blew over and they finally could get to their funds, Enron stock value plummeted to 26 cents per share. Needless to say, the company went into bankruptcy. The employees at Enron could do nothing but sit by and watch their savings melt away during that time.

Thousands of these employees lost their jobs as a result of the Enron bankruptcy. Hundreds, perhaps thousands, were forced into bankruptcy themselves. But during the months and years that led up to this disaster, 29 Enron insiders and top execs walked away with over $1 billion.

I have talked to some of these Enron executives. There is no good explanation. Sadly, this legislation on bankruptcy we are discussing today will not hold them accountable.

Let me give another case study: Polaroid. This is a company that many of the people in Congress from Massachusetts know all about. It filed for chapter 11 protection on October 12, 2001, just a couple of months before Enron did.

Let me show you the chart on Polaroid. CEO Gary DiCamillo ran the company into the ground but received $1.7 million. Other executives got $4.5 million. Over 6,000 employees lost health and life insurance, and thousands lost severance pay. Forced to invest 8 percent of their pay in company stock, they lost their retirement savings, too.

So these corporate insiders--whether Enron or Polaroid or WorldCom or others--were lining their own pockets, taking money out of the company destined for bankruptcy, and the ultimate losers were the employees and the retirees.

The amendment which I sent to the desk is an attempt to level the playing field for employees, pensioners, and others who find themselves shut out of court when companies they work for file for bankruptcy.

There are two provisions in this amendment to protect employees of bankrupt companies.

First, my amendment would address fraudulent transfers made by corporate insiders, all those huge payouts and loans and bonuses and transactions that went to these corporate executives as the company was headed to bankruptcy, these are payouts that exceed anyone's sense of what is reasonable compensation. Under my amendment, those payouts will have to be scrutinized by the bankruptcy court.

Think about that for a minute. These executives were being rewarded with millions, sometimes hundreds of millions of dollars out of corporations headed for bankruptcy.

Most of the time, you are rewarded with a bonus for a good job. They are being rewarded as their company is heading into debt and eventually disbanding. So they know what is going on. They are grabbing the money before they hit bankruptcy court. The money they grab out of the corporation is at the expense of people who loaned money to the corporation, especially at the expense of their workers and retirees. They end up taking the money that otherwise would have gone into the pension funds and putting it in their own pockets.

My amendment gives the bankruptcy court the tools to investigate and treat these fishy, self-serving deals Ken Lay and Jeff Skilling and Andrew Fastow and others at Enron cut for themselves. It gives the judge the power to review questionable insider transfers. That is only reasonable.

It includes a fair and workable formula for what the court can determine might be excessive.

It also extends the period of time a bankruptcy court can go back and recapture the assets of these executives, a 4-year reachback instead of the 1 year allowed under current law and the 2 years proposed in this bill.

As I described in the Enron example, some of the most outrageous transactions by the Enron executives took place 3 or 4 years before the company filed bankruptcy, so this bill would not even touch them. This bill lets those corporate insiders end up in their mansions with hundreds of millions of dollars squirreled away at the expense of the retirees who lost their pensions and their health care. By recapturing these assets, this provision would make more money available for employees and retirees and act as a deterrent to future corporate executives seeking the same sort of sweetheart deal.

But this is not all about Enron. Let me give you other examples in the headlines today.

WorldCom CEO Bernie Ebbers. He took $366 million in personal loans and his contract called for a $1.5 million yearly pension. Not bad. Mr. Ebbers ought to be proud. His skills and talents as CEO took his company, WorldCom, into the record books as the largest bankruptcy in the history of the United States. While he is grabbing all of the money out of the corporation, it is sinking like a rock.

John Jenkins, the former president of Global Crossing. He took more than $1 million in pension benefits--something called ``transitional assistance,'' consulting fees, and other benefits, as his company was spiraling downward.

Let us take a look at Kmart and its CEO, Chuck Conaway. As Kmart was falling apart, eventually becoming the largest American retailer to file bankruptcy, Mr. Conaway received a $9 million golden parachute. About one-half of it was a severance package. But his former employer decided to give him a little break as he left this bankrupt corporation. A $5 million loan was forgiven. Talk about a Blue Light Special at Kmart, this one takes the cake.

John Rigas of Adelphia Communications took about $1 million per month from the company while he and others used it as their personal piggy bank. According to the indictment from the U.S. Attorney, the Rigas family used company loans to buy Adelphia shares and engage in insider transactions between Adelphia and other companies controlled by the Rigas family. Here is one example of how they fared. Rigas and his sons used $2.3 billion in off-balance-sheet loans from the company to build themselves a private 18-hole golf course at the cost of $13 million. Not bad for a cable guy. He raided his corporation for $2.3 billion at the expense of shareholders and retirees.

What does this bill do to that kind of corporate bandit? Nothing. This bill focuses on the employees who lost their jobs. This bill focuses on the retirees who lost their health care and their pension. This bill makes it tough for them.

This is inspired by our feeling that we need more morality and justice in our bankruptcy courts. But wouldn't you start at the top? Wouldn't you start with the biggest thieves in the business--the people who broke a record when it comes to bankruptcy and raiding these corporations?

These insiders knew what they were doing. They saw their companies going down, and they grabbed everything they could get their hands on. They canceled their workers' pension plans and benefits.

My amendment says we would go back 4 years before the bankruptcy to recover that money and put it in the hands of creditors, employees, and retirees.

The second part of my amendment directly helps employees of these companies with some relief in bankruptcy court. This gives them a place in line as creditors that they currently don't have.

The amendment gives them a priority unsecured claim in bankruptcy for the value of company stock which was held for their benefit in an employee pension plan, unless the plan beneficiary had the option to invest the assets in some other way.

Under current law, these retirees who ended up with the short end of the stick in these retirement plans have nowhere to turn. They are not even in line in priority for these claims. My amendment would fix that.

The amendment determines the value of these claims to be measured by the market value of the stock at the time it was contributed to the plan.

In other words, the employee who was not at fault in the collapse of his employer corporation ought to have a fair claim for the fair value of his contribution to his pension plan as it was valued when he made that contribution. That's only fair.

My amendment is simple, yet necessary. I urge my colleagues to support it.

In conclusion, I am proud of the support of the groups behind this amendment--the U.S. Public Interest Research Group, the National Consumer Law Center, Consumers Union, Consumer Federation of America, Consumer Action, AFL-CIO, United Auto Workers, United Steel Workers of America, and the American Federation of Teachers.

I ask unanimous consent to have their letters of support printed in the RECORD.

There being no objection, the material was ordered to be printed in the RECORD, as follows:

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Mr. DURBIN. Mr. President, these groups and their members know what happened with these companies.

I am troubled by the fact that the Senate has spent this entire week talking about bankruptcy abuse and making it tough for families trying to pay medical bills, making this process more difficult for the guardsmen and reservists who were activated to go overseas to serve our country only to lose their business at home and face bankruptcy when they return.

There is nothing in this bill to help them. There is nothing in this bill to help them with medical bills.

Senator Kennedy was here on the floor yesterday. He had an extreme suggestion, a radical idea. Senator Kennedy said, if you lose everything because of medical bills, we are going to protect your little home--$150,000 worth of your home--so that when it is all said and done, as sick as you may be, you will at least have a home. But that proposal was rejected. I am not sure of the vote on that amendment, 58-39, somewhere in that range but a partisan vote. Everyone on this side--virtually everyone--voted against it.

According to that vote, we can't help those people. They have to face the reality. They have to face up to the fact they won't have a home to go to when it is all over.

But what about the mansions these CEOs go to, the millions of dollars they have drained out of these corporations for their own personal benefit to buy mansions, to buy golf courses, to create a lifestyle with $30,000 shower curtains? Are we going to hold them accountable for raiding these corporations and driving them into bankruptcy? The answer is no. Not a word in this bill holds them accountable.

I urge my colleagues. If you can work up a rage over the possibility that someone with medical bills that are overwhelming goes to bankruptcy court seeking relief from their debts, can you work up a little bit of discomfort over these CEOs and bandits of the major corporations? Can you bring yourselves to say maybe we will hold them accountable, too, for their misconduct?

It would be a new day in this Senate, a grand departure from the debate as it has gone down at this point. We have never come close to this yet. I haven't heard a word yet from the other side--not a word on this floor by the supporters of this bankruptcy bill about these corporate bankruptcies and what they have done to hundreds of thousands, if not millions, of unsuspecting investors, workers, and retirees.

The Durbin amendment will give my colleagues a chance to do something about it.

I urge my colleagues to support it.

I yield the floor.

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Mr. DURBIN. Mr. President, pursuant to unanimous consent, on the next amendment you should keep in mind Kenneth Lay who, on the road to bankruptcy, took $200 million out of Enron. Bernie Ebbers took $366 million in personal loans out of WorldCom, and John Rigas took $2.3 billion in loans for a golf course--driving the companies into bankruptcy at the expense of the stockholders, employees, and retirees. This amendment reaches back and brings that money to the people who need it. It also gives a claim in bankruptcy for the pension rights that are extinguished in bankruptcy. I ask for Members' support.

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