Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 -- (Senate - March 02, 2005)

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Mr. CORNYN. Mr. President, like the distinguished Senator from Utah, the former chairman of the Judiciary Committee, I agree that this is an important bill whose time has come. As he said, it is not a perfect bill, but it may be the best that we are capable of. Frankly, there is a lot more we could do to make it better.

A few weeks ago, I introduced S. 314, the Fairness in Bankruptcy Litigation Act of 2005. Today, I filed amendment 30 to the comprehensive bankruptcy litigation before us, but at this time I will not call up the amendment. This amendment would provide much needed protection for consumers, creditors, workers, pensioners, shareholders, and small businesses--in short, virtually everyone who is a stakeholder in bankruptcy litigation in this country today. It would do so by reforming the rules governing venue in bankruptcy cases to combat forum shopping, otherwise known as judge shopping, by corporate debtors.

The sad fact is that today judge shopping is endemic in our bankruptcy courts and has led to the abuses of the law, abuses that challenge our national aspiration to be a nation that believes in and actually practices equal justice under the law.

My experience in my former capacity as attorney general of my State, particularly with the Enron bankruptcy, which has gained quite a bit of notoriety, opened my eyes to a very real abuse in our current bankruptcy system and the need to end the current practice of judge shopping. After seeing how that bankruptcy played out, I do not believe that we can only be concerned with the letter of the law. We need to be concerned as well with how that law is administered, venues where those cases are litigated, and necessarily with accountability and accessibility of working men and women, the creditors, and everyone else who is affected by bankruptcy litigation.

My amendment would prevent corporate debtors from moving their bankruptcy thousands of miles away from the communities and the workers who have the most at stake, and it would prevent bankrupt corporations from effectively selecting the judge in their own cases, because picking the judge is not far off from picking the result.

I know that my distinguished colleagues from Delaware do not like this particular amendment, and they have voiced their concerns to me directly and candidly, which I appreciate, but it is principally because their State is the beneficiary of the status quo with huge percentages of all bankruptcies occurring in the United States--that is, in all 50 States--ending up in Delaware and to a lesser extent in New York.

I believe the record is clear that forum shopping hurts people in the overwhelming majority of the States and necessarily the overwhelming majority of our citizens, and that this amendment, if adopted, would serve the national interest.

This reform is good government. It is good for the economy. It is good for consumers. To those concerned, as I have heard those concerns expressed so far in this debate that we have not done enough to combat bankruptcy abuses, particularly on the part of corporate debtors, I ask them to seriously consider this amendment. This amendment would implement a major recommendation from the October 1997

National Bankruptcy Review Commission report and has earned support by prominent bankruptcy professors and practitioners nationwide. It has also gained bipartisan support from people who have seen the problems of the current system up close, including numbers of attorneys general, 24 of whom, along with the Attorneys General of Puerto Rico and the U.S. Virgin Islands, have signed a letter in support of S. 314.

I ask unanimous consent that this letter be printed in the RECORD, following my remarks.

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Mr. CORNYN. This legislation has also been endorsed by the National Association of Credit Management and the Commercial Law League of America. This amendment also protects small businesses, and that is why it has been endorsed by the National Federation of Independent Businesses. Because it protects consumers, it is supported by the Consumer Federation. This amendment would protect and restore the integrity of our civil justice system, and that is why, as I said, it is endorsed by a bipartisan coalition of our Nation's State attorneys general.

This amendment would send a message that we recognize the danger of this growing crisis which negatively affects so many consumers and workers and that we are committed to achieving fairness and truly comprehensive bankruptcy reform.

Sadly, our current bankruptcy venue law has become a target for enormous abuse. It is a problem that has been well documented by scholars in the field, most recently in a comprehensive book published earlier this year by UCLA law professor Lynn M. LoPucki, as well as by Harvard law professor Elizabeth Warren, whose name has been invoked numerous times in this debate, who served as a reporter for the National Bankruptcy Review Commission, as well as Professor Jay L. Westbrook of the University of Texas Law School.

I know that Professor LoPucki has been in contact with the office of virtually every Member of this body, including, it is reported to me, personal contact with 71 Senators. The professor has documented instances of forum shopping by corporate debtors that have harmed consumers and workers in virtually all of our States.

I had personal experience with this abuse during my service as attorney general of the State of Texas. I argued that the Enron Federal bankruptcy litigation should occur in Houston, TX.

That seemed to me to be a commonsense argument, of course, because Houston, after all, is where the majority of employees, the majority of pensioners, the majority of creditors and every other stakeholder involved in that bankruptcy was located. Of course, many of these people were victimized by this corporate scandal that occurred, unfortunately, in my State.

Yet that is not where the case ended up, not in Houston, TX, but, rather, in New York. Enron was able to exploit a key loophole in bankruptcy law to maneuver their proceedings as far away from Houston, TX, as possible. They ended up in their desired forum, and that is, as I mentioned, New York. Enron used the place of incorporation of one of its small subsidiaries in order to file their bankruptcy in New York and then used that smaller claim as a basis for shifting all of its much larger bankruptcy proceedings into that same court.

Let me make it clear. This company had 7,500 employees in Houston, but they filed for bankruptcy in New York where it had only 57 employees. This blatant kind of forum shopping, judge shopping, makes a mockery of all of our laws. The commonsense amendment which I have filed will combat such egregious forum shopping by requiring that corporate debtors file where their principal place of business is located or where their principal assets are located, rather than their State of incorporation, and forbidding parent companies from manipulating the venue by first filing through a subsidiary.

Bankruptcy venue abuse is not just bad for our legal system, it hurts America's consumers, creditors, workers, pensioners, shareholders, and small businesses alike. Under the current law, corporate debtors effectively go to the court that they themselves pick. Debtors can forum shop and pick jurisdictions that they think are more likely to rule in their favor. If debtors, in fact, get to pick the jurisdiction, then bankruptcy judges, unfortunately, according to Professor LoPucki and others, have a disturbing incentive to compete with other bankruptcy courts for major bankruptcy litigation by tilting their rulings in favor of corporate debtors and their lawyers. As a result, creditors can also be forced to litigate far away from the real world, their real world location, where costs and inconvenience associated with travel are prohibitive--in fact, leading too many of them to simply give up rather than to expensively litigate their claims in a far-off forum.

This troubling loophole serves to unfairly enable corporate debtors to evade their financial commitments; it badly disables consumers, creditors, workers, pensioners, shareholders, and small businesses from pursuing and receiving reasonable compensation from bankruptcy proceedings.

There are numerous examples. Let me mention three of the more prominent ones.

In 2001, in October, Boston-based Polaroid filed for bankruptcy in Delaware, listing assets of $1.9 billion. Polaroid's top executives claimed that the company was a ``melting ice cube'' and arranged a hasty sale for $465 million to a single debtor. This same court refused to hear testimony as to the true value of the company and closed the sale in only 70 days. The top executives went to work for the new buyer and received millions of dollars in stock. Meanwhile, disabled employees had their health care coverage canceled. The so-called melting ice cube became profitable the day after the sale became final.

In January of 2002, K-Mart filed for bankruptcy in Chicago, a venue which had reportedly been active in soliciting large corporate debtors to file there. With a workforce of 225,000, K-Mart had more employees than any company that had ever filed for bankruptcy nationwide. The judge in that case let the failed executives take tens of millions of dollars in bonuses, perks, and loan forgiveness. Bankruptcy lawyers also profited, pocketing nearly $140 million in legal fees. But some 43,000 creditors received only about 10 cents on the dollar.

The third example I would like to mention is WorldCom, known for perpetrating one of the biggest accounting frauds in the history of our country, inflating its income by $9 billion. Although based in Mississippi, WorldCom followed Enron to New York bankruptcy court where its managers received the same sort of lenient treatment that I mentioned a moment ago. No trustee was appointed. Indeed, 5 months after the case was filed, the debtors in office when the fraud occurred still constituted a majority on the board. They, in fact, chose their own successors. A top WorldCom executive used money taken from the company to build an exempt Texas homestead, and WorldCom took no action. That executive then used the homestead to buy his way out of his problems with the SEC. Meanwhile, creditors, mostly bondholders, lost $20 billion.

This is not the first time Congress has addressed this important issue. The House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on July 21, 2004, entitled ``Administration of Large Business Bankruptcy Reorganizations: Has Competition for Big Cases Corrupted the Bankruptcy System?'' Congressman Sherman of California has led efforts to champion bankruptcy venue reform in that body.

During the 107th Congress, my colleague from Illinois, Senator Durbin, introduced S. 2798, the Employee Abuse Prevention Act of 2002, joined by the Senators from Massachusetts, the Senator from Vermont, and the Senator from West Virginia, which also would have reformed bankruptcy venue law. Congressman Delahunt of Massachusetts introduced the same legislation in the House.

I believe we need to take the next logical step to respond to this important problem. The American people deserve better from our legal system when it comes to corporate bankruptcies. All bankruptcy cases deserve to be handled fairly and justly, and no corporate debtor should be allowed to escape responsibility by fleeing to a far-flung venue. It is high time we make this important and needed reform.

As I have indicated earlier, I have filed this amendment, but I have not called it up but certainly reserve the right to do so during the course of these proceedings. I have listened closely to the Senator from Utah and others, the Senator from Iowa, the chief sponsor of this legislation, who say that amendments to this bill would endanger its ultimate passage. While I certainly am sympathetic to what they have to say, I still believe these amendments ought to be decided on their merits, not based on perhaps concerns that are expressed about amendments jeopardizing a bill. In fact, I would think, indeed, in every instance the chief sponsor of the bill would ask Senators to refrain from filing any amendments, believing that their bill without amendments would have a better chance of ultimate passage. But that is not how our legislative process works.

I have, nevertheless, decided to refrain from calling up this amendment at this time. As I said, I reserve the right to do so later. I also reserve the right to ask for the yeas and nays and a vote on this amendment. But I have refrained from calling it up out of respect for the managers of this legislation, out of respect for Chairman Grassley, the chief sponsor, and out of respect for the American people, who deserve to have better than they have under the status quo and who deserve to see this bill pass.

I hope I have made clear that judge shopping when it comes to bankruptcy litigation is a cancer that needs to be cut out, corrected, and cured.

I do hope my colleagues in this body will listen, will study this particular piece of legislation, and will lend their support.

I yield the floor.

March 2, 2005.

RE: S. 314, the Fairness in Bankruptcy Litigation Act of 2005.

Hon. JOHN CORNYN,

U.S. Senate, Hart Senate Office Building, Washington, DC.

DEAR SENATOR CORNYN: We understand that the United States Senate is about to debate S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. We write to express our hope that, in doing so, the Senate will also take action on S. 314, the Fairness in Bankruptcy Litigation Act of 2005, which we support and which you introduced on February 8, 2005. After all, consistent with the title of S. 256, your legislation to reform the bankruptcy venue laws would indeed help prevent some of the worst abuses we have witnessed in bankruptcy litigation, and provide much needed protection to consumers as well as to the innumerable other parties--large and small alike--that are harmed by opportunistic forum shopping by corporate debtors: creditors, workers, pensioners, retirees, shareholders, and small businesses.

As state attorneys general, we are charged with a solemn duty to enforce the law, to protect consumers, and to combat corporate wrongdoing. It is bad enough that corporate scandals have victimized countless American citizens in recent years. What's worse, many corporations have abused the bankruptcy venue laws and engaged in unseemly forum shopping in order to avoid their financial responsibilities. All too often, corporate debtors have fled their home states to pursue relief in far away jurisdictions--and in search of judges more friendly to the corporations' interests than to the interests of those the corporations have left behind. As you noted in your remarks upon introducing the legislation, literally thousands and thousands of workers, shareholders, retirees, small businesses and countless other Americans are regularly thwarted from protecting their interests and left financially stranded as a result.

Your legislation has already received an impressive and broad range of support, and the undersigned--a bipartisan group of state attorneys general from across the country united in a commitment to protect consumers and curb abusive corporate judge-shopping--is pleased to add its strong support. Not only does S. 314 finally implement a major recommendation from the October 1997 National Bankruptcy Review Commission report, it is supported by innumerable bankruptcy law professors and practitioners nationwide; the National Federation of Independent Business; counsel for the Enron Employees Committee; Brady C. Williamson, who served as chairman of the National Bankruptcy Review Commission; and major national bankruptcy organizations like the National Association of Credit Management, the Commercial Law League of America, and the National Bankruptcy Conference.

We commend your efforts to strengthen our bankruptcy system and protect consumers, creditors, workers, pensioners, shareholders, retirees, and small businesses against unsavory forum shopping by corporate debtors. Passage of S. 314 will end this gamesmanship, help restore credibility to our nation's bankruptcy laws, and safeguard the interests of Americans from all walks of life.

We urge the United States Senate to pursue every means necessary to enact the provisions of your bill into law.

Sincerely,

Scott Nordstrand, Acting Attorney General of Alaska.

Mike Beebe, Attorney General of Arkansas.

Bill Lockyer, Attorney General of California.

John Suthers, Attorney General of Colorado.

Mark Bennett, Attorney General of Hawaii.

Lisa Madigan, Attorney General of Illinois.

Stephen Carter, Attorney General of Indiana.

Charles Foti, Jr., Attorney General of Louisiana.

J. Joseph Curran, Jr., Attorney General of Maryland.

Tom Reilly, Attorney General of Massachusetts.

Mike Cox, Attorney General of Michigan.

Mike Hatch, Attorney General of Minnesota.

Jay Nixon, Attorney General of Missouri.

Patricia Madrid, Attorney General of New Mexico.

Brian Sandoval, Attorney General of Nevada.

Wayne Stenehjem, Attorney General of North Dakota.

Hardy Myers, Attorney General of Oregon.

Roberto Sanchez-Ramos, Secretary of Justice of Puerto Rico.

Patrick Lynch, Attorney General of Rhode Island.

Lawrence Long, Attorney General of South Dakota.

Paul Summers, Attorney General of Tennessee.

Greg Abbott, Attorney General of Texas.

Mark Shurtleff, Attorney General of Utah.

Alva Swan, Attorney General of the Virgin Islands .

Rob McKenna, Attorney General of Washington.

Darrell McGraw, Attorney General of West Virginia.

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