this hearing of the committee on the judiciary subcommittee and on commercial in administrative law will now comes 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 g m announced that it was closing four truck and s u v plants in north america chrysler reported a twenty five percent drop in sales from last month as compared to may of airline industry with fuel costs almost tripling since two thousand also is cutting costs and trying to raise revenue in addition to increasing fares some airlines are now charging for checked baggage and seat selection and others are limiting 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 airlines sky both airlines frontier airlines and 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 eleven 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 constructed two oversight hearings on how american workers and retirees are fairing in chapter eleven bankruptcy cases our first hearing reveals a series of cases where chief executive officers of businesses in chapter eleven 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 eleven is becoming a place where the rich are getting richer while the poor are getting poorer then in september we heard how chapter eleven is being used by some businesses to bust unions and deprive retirees namely as a matter one of the most common threats that occur when a company is having hard times in their negotiating collective bargaining terms for a a company chapter eleven to extract drastic pay cuts and benefit reductions from workers and retirees or take away their bonuses and stock options as if they're being congratulating being congratulated for driving the company out of business the automobile industry is replete with examples if judge william pryor of the district of columbia court of appeal after his appellate clerkship mr yori joined the law firm of pirro and moore and where he represented labor unions mr miller has spent most of his career as a labor litigator representing a and other unions and federal court handling cases and most of the united states court of appeal is also represented in other unions in arbitration proceedings before the national mediation board and in collective bargaining negotiation welcome to our panel our third witness is michael bernstein mr bernstein is a partner at arnold and porter l l p 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 litigation throughout the united states has been involved in large bankruptcy cases including u s airways t real estate finance mining manufacturing technology retail airline healthcare and pharmaceutical has coauthored 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 and bankruptcy welcome to our panel our final witness is karen friedman is that c miss friedman is a policy director of 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 twenty years of experience in retirement policy  communications and regularly represents the perspective of consumers in congressional hearings speeches and interviews with the media and friedman has written articles for the washington post the new york times 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 forty five experts  varying points 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're going to ask that you limit your testimony today to five minutes you will note that we have a lighting system which we sometimes remember to turn on and sometimes you will get a green light when your time begins after four minutes you will see a yellow would warn you you have a minute remaining in your testimony and when your time has expired you will see the red light if you are caught 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 witness has presented her or his testimony subcommittee members will be permitted to ask questions subject to the five minute limit with that i am going to invite mr carty to please proceed with  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 pension health care and other valid 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 thirty six fifty two 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 eleven thirteen process when debtors seek to modify labor agreements section eleven thirteen 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 use 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 eleven thirteen 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 to 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 eleven thirteen is completely dominated by the debtor's perspective even though congress designed section eleven thirteen to incorporate labor policies and protect workers and reaching decisions under section eleven thirteen the bill would remedy these defects through amendments that would rein in overbroad over aggressive 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 had 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 eleven fourteen which is intended to limited debtors ability to to eliminate those obligations but debtors have been aggressively targeting retirees 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 eleven fourteen process altogether by claiming that non bankruptcy law allows it to make unilateral changes in these benefits without involving retirees at all the bill would stop this practice by requiring  use the section eleven fourteen 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 debtors 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 and bankruptcy despite congress effort to crack down on these schemes the new section five a c three under new section five a c three bankruptcy continues to be a safe haven for executive pay even as debtors cut pay and benefits for rank and file workers section five a c three has been sworn to 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 non bankruptcy compensation but have become successful strategies for avoiding the five a c three standards the bill would close the loopholes and impose consequences on debtors who implemented executive pay and hanson schemes while at the same time using bankruptcy to cut pay and benefits bill would also sorry my time is expired i would just like to say in closing that the bill would remedy many harsh labor union representing fifty five thousand pilots who fly for forty airlines in the united states and canada the proposed legislation before the subcommittee is urgently needed to restore balance and fairness the eleven thirteen process and 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 of the pressure put upon workers under eleven thirteen has prevented the parties from reaching superior negotiated solution solutions contrary to the statutes 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 multimillion 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 the poor your negotiated solutions pilots and employees of united u s airways northwest delta comair and the sabah have already seen their long term wages and working conditions will very likely be more airline bankruptcies in the coming year and the bill before you is therefore more relevant important than it ever has been here are some examples of why the legislation is urgently needed files that united had their defined benefit pension plan terminated and were locked into a seven year concessionary agreement pilots of both united and northwest suffered wage cuts of approximately forty percent and had key working conditions reduced or eliminated at the same time the c e o s of both carriers were rewarded with huge salary increases bonuses and stock options worth many millions of dollars a profitable hawaiian airlines used section eleven thirteen to rest employee concessions to improve its competitive position and profitability this was after the pilots had previously made in the recent past preposition concessions to avoid the eleven thirteen filing common use eleven thirteen process because the operation was simply 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 with comair bankruptcy judge in fact ignored evidence that the company's demands for a twenty two percent pay cut would qualify junior pilots for federal welfare and food stamp assistance he simply dismissed it on the basis that it wasn't relevant to the economics however the most extreme example of the one sided nature of the process of the current process is in the second circuit's northwest airlines decision that decision allows management to reject impunity binding collective bargaining agreements 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 what you dish will permission and eleven thirteen ignoring the supreme court's view and build a scale that rejection in bankruptcy is a breach of the northwest court's holding represents a radical departure from existing law and leaves wrong employees with no recourse for bankruptcy for each claim while they remain under the threat of contempt if they cease to work under the impose conditions unlike all other creditors who with rejected agreements who are allowed to refuse to perform under those circumstances this decision will have lasting consequences if companies will file eleven thirteen partitions in new york therefore the standards of the second circuit will set effectively govern most of the eleven thirteen 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 north of already 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 to strike in response to management imposition of unilateral terms under section eleven thirteen 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 eleven thirteen express bears down upon by making it clear that a rejection is a breach of contract and that such a rejection  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 a manager will be forced to act responsibly and fairly in bankruptcy towards employees a negotiated central solutions only of it's faced with the real possibility of a response a strike in some manner chairwoman a while to recognize that substance substantial economic sacrifices may be necessary and we've led the effort to save airlines many airlines the courts have moved the eleven thirteen process far from where it was intended to be a nine hundred eighty four the bill is proper restored of legislation that is urgently needed to fix the misinterpretation and abuse of the eleven thirteen process has taken place over the last seven years the congress must act to protect employees from unfair 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 eleven of the bankruptcy code is intended to enable financial trouble businesses to reach sure there are obligations and operations for that they're able to emerge as a 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 thirty six fifty two would modify many provisions of the bankruptcy code some of these modifications are difficult to reconcile with the fundamental goal of chapter eleven and would be likely to impair the ability of chapter eleven 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 eleven reorganization 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 retire a costs in order to remain viable it would do so in several ways first it would raise the already very stringent standards for obtaining eleven thirteen or eleven fourteen relief second it would affect of lee preclude labor cost modifications where a debtor is paying incentive based compensation to management even if such management compensation is only 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 two year period which makes it much more likely that the company would have to file bankruptcy again two years down the road it would also prohibit creditors and other interested parties from even participating in the eleven thirteen hearing so the court would be precluded from even hearing their views notwithstanding the fact that the outcome of the preceding may have a profound impact on their recoveries if these provisions are implemented it is almost certain that some chapter eleven debtors who truly need to modify burdensome and above market labor costs would be unable to do so such companies are unable to 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 week with haitian third several of the proposed modifications make it materially more difficult for chapter eleven debtors to attract and retain management employees managers with the skill necessary to navigate a company successfully through the chapter eleven process are in great demand and tend to have many opportunities available to them indeed competitors of a chapter eleven that are 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 that better must be able to pay market competitive wages and benefits to its management employees including in many cases incentive based compensation the two thousand five 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 eleven 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 our early employees while there may be a superficial appeal to this wink it fails to take into account the economic reality that there are different labor markets for different types of inputs fourth certain of the proposed provisions would substitute in flexible one size fits all rules for the judicial discretion that exists under existing law for example the bill would tax any asset sale that results in the terminations of retiree benefits at a flat rate of twenty thousand dollars per employee regardless of the magnitude of the transaction with the magnitude of retiree benefits that are being lost and regardless of any other facts and circumstances it would also limit of eleven thirteen relief in all cases to two years of cost savings regardless of the actual cost savings that would be necessary to attract attract investment capital or to emerge as a viable company and 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 each industry in each chapter eleven cases different organization goal of chapter eleven 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  stock in a defined contribution plan and isolation new priority claims may not seem particularly problematic however in evaluating the extent to which such priority should be created is worthwhile to consider two factors first priority claims must be paid in full in order for a debtor to reorganize under a chapter eleven plan thus the creation of new priority claims will make it more difficult for companies to reorganize second to 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 employees claims it's important to keep in mind that by doing so you're 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 debtors product in conclusion thirty years ago in an act of the bankruptcy code congress observed that the goal of chapter eleven was to promote reorganization because it was the best way to maximize value for creditors and preserve jobs over thirty years of chapter eleven history this is proven to be true if h thirty six fifty two is an act 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 work with this will be damaging to all stakeholders including employees ranking member canada members of the subcommittee thank you for the opportunity to buy today i'm karen friedman the policy director of the pension rights center and we're 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's more important than ever to provide strong safeguards for american families i'm going to focus my comments today on the important pension protections in the protecting employees and retirees and business bankruptcy bill h r three six five two the bill provide critical retirement protections to employees and retirees when their companies go bankrupt while companies once used bankruptcy proceeding 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 on fairly eliminate long standing pension obligations to their workers and retirees united airlines is a case study of how a giant corporation use 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 p b g c 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 merged profitable from bankruptcy but the losers the hardworking middle class flight attendants the mechanics the ticket agents the pilots and other airline employees whose pensions were reduced by two billion dollars collectively this corporate strategy is the subject of pran 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  c was created as a backstop to protect workers pensions when it comes it 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 are retirees and terminated plans will indeed get all the benefits owed to them and this is a great part of the people to see but there are limits on how much the pvc can guarantee the agency does not ensure all the benefits workers are promised for instance does not guarantee certain subsidize early retirement benefits or benefit improvements made within five years of a plan's terminations these are benefits that were earned in exchange for other compensation in addition shut down benefits  not are now only partially guaranteed h r three six five two recognizes that many individuals are left without recourse when the p b g c pay sonali partial benefits the bill would enable active workers or retirees whose benefits are not fully insured by the p p c to file a claim in bankruptcy court for the full amount they earned under current law individual workers or retirees are precluded from making such a claim for the difference between what the 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  of their own employer a please experience in essence a retroactive pay cut losing benefits they earned and can never ever get back h r three six five two also includes provisions to ensure that executives cannot enrich themselves while employees suffer benefit cuts in bankruptcy the bill provides for them employer terminates a plan the executive compensation arrangements have to be terminated as well the a provision would put an end to such unfair situation paid himself over twenty five million dollars in executive comp after the company's rapturing finally the bill provides important protections to employees and four one 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 three six five to provide individuals with a new priority claim in bankruptcy court when the value of their company's stock in a four one k plummets because of corporate misdeeds or fraud enron is the most notorious example of such corporate abuse any of that story is well known thousands of thousands of workers lost their retirement money because they were misled by an enron executive and you know what wh better to have a claim for their money but while the enron collapse may have occurred six years ago its lessons are still valid in similar situations could happen today and closing we thank the subcommittee for holding this hearing on this to our first round of questioning and i believe our chairman who has another hearing mostly so i'm going to allow him the opportunity to question first  where your homework i want you to read all of your fellow panelists a statement and then report back to me and chris cannon and we'll give you  and part of your final grade but we'll kind of test you out on this because you're not representing your company or your client this is this is you talking to us and so we want to we want to try to sort our way through this in a reasonable way i mean workers are getting screwed big time massively we've got  fifty one sponsors of this more than a 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'll have three witnesses against the bill and one witness for it and see how it comes out then it may be different may not be but look let's let's get down to this thing what would what would you  congress in enacting eleven thirteen sought to encourage negotiated solutions so that was a stated objective and it's in fact what's happened although we all hear about the very few cases that some of my other witnesses here have mentioned that result in with a geisha and there are very very few cases that result in litigation compared to the enormous number that are resolved so what congress ought to do by drafting a bill that gave some leverage to kompany and bankruptcy and considerable leverage to unions as well is to give each side the incentive to bargain and it's worked exactly as it should now i understand that the representatives of labor unions would like more leverage and they say negotiations are very difficult for us in the company runs over us and makes threats and if you had a bunch of managers here of chapter eleven debtors they would tell you that the union has a lot of leverage in the union always threatens to strike and the statute as it exists sets such a high standard that it's very difficult to satisfy so everybody would like more average and everybody would like a better bargaining position but congress really achieved what  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 eleven cases are significant and very difficult the question in these cases is whether it's better to implement the necessary cuts so that the company can survive and emerge from bankruptcy or whether it's 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'll just shut down the company and all the creditors get nothing and all the union employees lose their jobs and i think it's because survival of the company you so important that the unions have recognized this and then the overwhelming majority of cases to work together with management to come up with a solution negotiated solutions are preferable i think that that's a hallmark of labor negotiations generally and certainly of the bankruptcy process but i think the problem with that i have with the witnesses answer is that  even though there may be negotiated solutions eventually in many cases the first debtors in chapter eleven are simply using the litigation process as a lever to get there is not the situation where there are so few court cases that you know we can count them on 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 litigation over contract rejection when really what congress intended in eleven thirteen 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's distracting it's expensive and the union very quickly gets the idea that the 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 i would say that we mergers i mean there's definitely you know increased pressures on almost all the employees when you're in a scrunching situation when two groups are going to put together into a smaller group there's going to be pressures applied and there's no question that the merger situation in addition to all of this that we're talking about in terms of bankruptcy is just going to raise the pressure on employees further as a whole you know 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 in the bankruptcy sphere that we're talking about right here is what the second circuit did in that case you know regardless of what mr bernstein said that is going to be the the theory of that case is going to be too powerfully attractive to managements to resist at this point they're going to use it to jam things down the employee's throats they don't have a right to get damages when their contracts are cut in half and they don't have the right to respond to even say hey if you if you break my binding agreement if you breach my agreed which the court says you don't breach any more i'm going to strike you they say you can't do that either so if you're put in that situation as an employee and as a manager what you think the managers are going to do they're going to run they're going to steamroll these guys and they're doing it and they're going to do more of it so i just want everyone to realize that regardless of how this is played out before going forward it's going to get a whole whole lot worse because these employers are all going to come to new york almost anybody can file a an eleven thirteen and in manhattan and they're all going to go there and they're all going to take advantage of that case and they're going to steamroll the employees so we were going to be highlights of the problem that we're talking about here 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 incentives that they were promised if they could keep their record on the on time departures at a certain percentage there was an incentive program that some c e o s at the top had thought would really motivate the folks to get the planes clean them stocked and ready to go for the for their for their departure time 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 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're seeing here with bankruptcy we're seeing chapter eleven bankruptcy and c e o s who when there is pain when there have to be it's 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's the people who are on the front line  groundwork that make sure that these businesses continue to run and so i'm very pleased that you're all here and i understand there are differences of opinions but i think what i'm saying is things are skewed in one side's favor and i think what we're trying to get out is how do we balance that the playing field my first question is for mr crotty section eight of this bill would limit the effect of the labor groups concession to no more than two years and i'm interested in knowing why that limitation is necessary well i think we heard i think we've heard already about the united situation i guess i will use that as an example but it is  no means the only example what happens is that in an eleven thirteen negotiation the proposals that the proposals that can be made by the debt are are supposed to be limited by  economic proposals that are you know supposed to be clearly necessary but duration the duration of the of the length of time the agreement is going to be in fact in effect is always something that is it is part of these negotiations and u nited for example was very successful in this effort and got seven year contracts almost unheard of these were negotiations that occurred very early on in the case no one of the plea for saw you know how the 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 of that in a villa in something like eleven billion dollars and in labor cost savings  it did very well it did so well in fact that it was able to make a special dividend payment to shareholders of two hundred thirty million dollars just earlier this year we've already heard about the executive pay awarded to  chilton and others so the workers are seeing that the company was doing very well asked the company to begin talks early on its seven 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 is pre paid part of its term loan to 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 so left to to live under these under these harsh contracts so yes to clarify so when companies who initially file bankruptcy return to profitability like united there's no renegotiation of these shares concessionary there 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're doing much better than we thought we will like our shareholders we will give you an extra bonus or we will  we will snap back your wages but the whole snap back issue becomes a real lightning rod in these in these bankruptcy negotiations because workers rightly believe that if a company actually does better than anticipated they should share in in the gains in fact the anecdotes that you that you told goes right really to the heart of this issue because precisely the reason that the reason 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 that you witnessed they are the vital lifeblood of the businesses recovery so the bill in limiting this is the with the limitation that's  that's 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 read from bankruptcy so this is a this is an effort to say in that case you were only going to take but so much few minutes and look at the course of these issues let me say first of all this is big which is not a partisan issue it is a philosophical issue there is a control issue of state control issues versus a market control issue but it's not a partisan issue and it's it is called the issues that mistreatment you raise about pensions are complicated issues of which a small he says that is before us and to solve those problems i think we need a broader forum  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  outrageous profits to be made or compensation to be made if you become a a a business leader and therefore we hope that more people move into that deal than the down the cost of leadership because because the amounts that are made are actually really outrageous but they are outrageous was a defined benefit it was a defined contribution pension plan and therefore the employees were all thrilled because they took pensions that were more significant than their defined benefits would have been but after after coming through process so the uncertainty of bankruptcy clearly adds to the to the value proposition the 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 those things in mind it seems to me that what we need to be looking forward here is not sort of the way that we could draft a section called ian your mind in your mind that would get closer to where we each we all want to go without creating this destabilising of what i think has been historically a fairly good balance i might was disgusted by the process and figured that we'd just have a bunch of leeches that bankruptcy process but in the last thirty years i've been amazed at how we've taken it from a really awful system that very few people understood to a system that actually worked to preserve many companies and many many jobs so in that context are there some narrow things we could do with the language for us that would help us balance without and the courts 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 onil that really does track with what some degree of specificity what has happened what happened very soon after the the enactment of eleven fourteen 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 court 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 the courts ok 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 eleven thirteen and i have just been completely distorted beyond recognition must operate first you must have a good chunk of time to do the bargaining so that when we 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 is there are certain changes that are in here now that are really geared towards process they're really geared towards giving the parties that time to function in a serious way to figure out what is wrong and what would be the labor groups fair share the second piece of this that eleven thirteen was designed to do that the courts have simply been terrible at at figuring out how to apply is what is the labor groups fair share so here again while i understand that there are more words and more provisions and some might consider this of the current iteration to be of of the of the  with 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 ok here is what we mean when we say that labor's share must be proportionate so i'm afraid that by starting to tweak the language and so forth we would just be back to the situation that spectacularly failed with section eleven thirteen which time a critical factor in many of these big refuse well i'm very glad that you asked that question actually in fact the one of the concerns in drafting eleven thirteen originally was that chapter eleven practice was much new in the modern chapter eleven practice was much newer then the code had been revamped in seventy eight it really wasn't that much time for companies to be operating under the new rules and there was still companies who were waiting too long before getting too close to the brink of liquidation before filing bankruptcy cases and that was one of the things that the seventy eight code tried very hard to correct because obviously if a company can go into chapter eleven sooner there are better chances to save the business now in one thousand two thousand and eight particularly with the more recent round of cases involving entire industries or what seems would seem like entire industries they need all of the time to take and get frankly because really bankruptcy for them can only solve but so much bankruptcy can't bring the fuel prices down bankruptcy can't deal with you know with the trade situation that caused the blood of the a drop and still prices can't deal with changing demands for o e m cars it can do certain things but these problems are so complicated that  now in two thousand aid as opposed to in one nine hundred eighty four companies actually do need a fair amount of time delphi corp for example started its eleven thirteen 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 existences there is an emergency relief provision that provision is used even in the large cases in fact to provide stopgap measures so that 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 do want to note that congress in the two thousand and five amendments has said to all stakeholders the debtor only has eighteen 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's going to work some of the gentleman has expired but i th well certainly at least at united in northwest which are you know recent examples we had both pilot groups lost about forty percent of their pay the united pilots lost their pensions and so they went to the p v c and they basically will get it most about a third of what they were expecting to get that and this is the same time mr tilden got his forty percent bonus and in the tens of millions of dollars worth of stock options and benefits so the pilots are certainly looking at this saying you know we've lost forty percent of our pay we've lost two thirds of our retirement the c e o gets forty percent more pay and he gets twenty million some odd million dollars worth of a golden parachute i mean the reaction to these from these people is what you'd expect it's total outrage and i thought i was in their shoes i'd be more outraged i don't i understand you know that there are market forces that issue here but why we're here is to try to put some kind of brake on this so people will get a fair break and have an opportunity to have a living standard that they've built up you know pilots built this up over twenty thirty years and these people are basically being a number of them are seriously actually being knocked out of the middle class today respect to bargaining and have some  airways in fact they've had multiple eleven thirteen rounds as the united and they made some significant wage cuts to try to save their or their pension plan their defined benefit plan and then they ended up losing it in the end the very last round that they had so i'm sure they felt that way  they were very angry about it because again you know the pension 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 struggling on a small social security check and that's been removed from lots and lots of pilots not just pilots but all sorts of other employees too but you know you think of pilots as all highly paid people well they're not pilots that start flying for the future carriers that make twenty three twenty two thousand dollars a year and a number of these people had to take wage cuts to for example comair and some of the carriers we've had and as i indicated in my testimony some of them in fact not back down to the level of having  qualifying their families who qualify for welfare and food stamps so you know we have to decide the market's great we have to decide whether there's a loser role to try to tame the excesses of the market so that people have a chance not to be  destitute basically and that's that's really what we're talking about in this legislation that the system has gotten so far out of whack where if a management can come in and basically say we're free to cut your pay in half we're free to take your pension but you can't strike in response and you can't come percent incorrect and under the norsworthy act of 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 eleven thirteen that's what eleven thirteen was designed for in eighty four the congress looked at bill disco the bill disco decision and said that looks pretty one sided we've got to fix it so you put the eleven thirteen procedures in effect as the vet said perhaps they weren't as specific as they could have been or should have been we're trying to deal with that but now the second circuit comes along and basically says well going forward in eleven thirteen employees won't have the right to strike which they've really been a question that what someone tears up the agreement saying you've got to come to work that you have the right to respond by saying i'm not going to work because you just tore up my agreement but now the second circuit says no that's ok you have to go to work and when they tore up your agreement you don't get any breach damages for them breaching your agreement it wasn't really a breach the court bailed you out with an abrogation so going to let that go bottom line is management has no incentive to negotiate now in light of that decision because they can say they can't do anything they can't threaten a strike and they can't even come in and come after us to try to get compensation for us breaching their labor agreement so why should we do anything other than tell you this is what you're going to say we don't have to honor this collective bargaining agreement and by the way you still have to come to work you can't go on strike and by the way you don't get damages for us not upholding our end of the collective you think that there's leverage the but let me provide a little background and context about the northwest airlines case which i suppose i would imagine our firm represented the airline because the full story hasn't come out so northwest had negotiation 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 it then and i'm leaving out some of the details then made a deal with the flight attendants union as well  members of the flight attendants union then rejected their own unions deal so there was briefing and litigation filed with respect to that one union everybody else made a deal to fight it has also made a deal but twice actually their own membership rejected their agreement the union actually in its own brief referred to its own members as recalcitrant employees because they wouldn't accept a negotiated solution it was clear i think it's fair to say to everybody in that case that if the flight attendants union had struck the airline it would have destroyed the company and it's in that context that the strike was in joint where the airline made a deal with all of that with respect to the flight attendants it met an extraordinarily high standard of showing that the modifications that it implemented were essential for the airline to survive and reorganize that they had made a good fair and equitable proposal and that the union had wrongfully refused the proposal those were all the findings that were made ok and let me put the question do you think that there are instances in which it policy question that you asked personal bankruptcy court that the way to achieve balance here is that the bankruptcy court should be able to enjoy a strike wiped out entirely i'm sorry that happened to middle managers or a whole class of middle managers pensions wiped out completely are you aware of where that's happened i can't think of a case of offhand although there are pay cut or something like that i would just suggest that it's 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 is and he has a risk of working for a chapter eleven better and so forth will get a job somewhere else so for every employer group from the blue line worker to the accountant to the clerical employee you need to pay that employee as close as the company can to a competitive wage and then you have to look at the aggregate and make sure that it's not beyond the ability of the company to survive but i think i understand where you're coming from i'm not sure that financing new investment new equity financing and so forth 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 two year period nobody is going to put hundreds of millions of dollars into a company based on cost structure that's only going to exist for the next two years without the slightest notion of what's going to happen after the next two years so a company in order to reorganize and in order to attract capital is going to have to make a business plan that includes its cost structure one part of which is the labor cost structure over a much longer period of time than two years in order to be able to reorganize up under under some circumstances it may well be necessary to have a seven year cost structure including a seven year labor cost structure in order to attract the new capital that's necessary in order to reorganize a company these new outside investors who put money into chapter eleven have a lot of choices what to do with their money and unlike the creditors who are already stuck in that case they have no obligation to this company they have a choice whether they want to make an investment or not and they're only going to make an investment if the company works like it has a reasonable prospect of being profitable and not only for a two year period 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 more on this committee and what we do  on this committee is part of all of congress is create an environment in which a robust economy emerges less regulation less interference more market control we think we've proved that out over a very long time in american history when that happens  everybody in the system and eloquently pointed out that you can't pay labor union members less than market because people will leave but we really want is a robust market where people have lots of options for jobs the reason that middle managers tend not to get the kind of read just benefits we talked about earlier is because there are a lot more of those people and it's easier to fill those jobs it's hard to fill the senior jobs so what we need to do is have a kind of robust market and to create the legal context to hear it in which we have continuity of businesses that get in trouble but a robust economy so that other companies can emerge much of the discussion we had today to really troubled industry the airline industry and the auto industry and we've had some minor discussion of some other companies like enron but basically what we what we have in those two cases are troubled industries and they're troubled for reasons that are way beyond bankruptcy and yet we're looking at those cases though they could tell us something about how the whole market could work recognizing that these are huge dislocations are happening in the airline industry and in the auto industry we as a congress need to step back and say what do we do so that we in this case with with bankruptcy reform we need to be very very thoughtful because companies plan long in the future and capital has many many choices one of the one of the really disturbing things about our oil imports and the money we're spending on  oil coming to america is that appreciation the american dollar and in the process the benefit that countries that have the euro and other other currencies are benefiting and and drawing capital away from what we'd be doing here if we're 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 and with th prospectively to the threat of bankruptcy at least to try to exact concessions from their labor force ms freeman why are more and more companies seeking to shut their pension obligations in chapter thirteen well let me just step back a moment say that more and more companies are trying to shed their pension obligations in general and i wanted to respond to mr cannon's before you said this seems to be a new universe of management issue the pension rights under hears thousands of white collar employees throughout the country right now whose pensions are also being cut back and i'd like to say that there's going to be a pension revolution among as i like to say among green pants wearing izod wearing  been pressure on companies to shed pension obligations and is in this book which i would highly recommend called pension dumping my friend hawthorne who is a new york times reporter formerly reporter with institutional investor you know she points out that in some situations you have companies that don't want to necessarily terminate the plan and and what she calls vulture investors are forcing them to do so but more you know in the olden days if you  on the judge saying hey we're not going to give financing to this company unless these billions of dollars of pension obligations are lemonade the reality is that both companies and employees used to look at pension obligations as being sacrosanct  that and it's not just that employers are providing these pensions workers give up wages so that employers could be putting money into these defined benefit plans so with the expectation of getting a certain benefit it's only been in the last ten years or so that we've seen this restructuring mania were suddenly companies have recognized that they can walk into a bankruptcy court dump their pension liabilities onto the pension benefit guaranty corporation basically so basically you see get stuck with this huge bill they the people you see and want to also say in its defense you know does the best job possible congress has authorized them to pay certain benefits and some of them are not paid out so there's a maximum benefit because of that workers that either their pensions go beyond that maximum and there's other benefit levels that i talk about in my statement are not insured you know basically the  who gets hurt in a situation the creditors get paid off the employers can emerge at least the short term from bankruptcy as a profitable company but who's getting hurt in this it's the workers the workers who have no other chance of getting these benefits now and and you know i think a good point to make in this also is when creditors lend money to a ration they know there's risks involved but when employees in good faith take a job  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 and they've been loyal to the company they expect loyalty in return they're not expecting that one day because a company wants to restructure and they're going to be able to really don't go into the bankruptcy court and just be able to dump these liabilities so it's really unfair to workers which is why i think that the bill that we're discussing today you know has reasonable provisions to allow an individual to go back to have a claim in bankruptcy court and it's then 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 these years so i have a chance of getting back what the difference between what the pvc provides and what i earned and i think that that's that's a highly reasonable provision but again you know as i said before there's there was also a quote in this from david walker who is the former government accountability office office  executive director who said there used to be a stain on bankruptcy and it's just not there anymore so you know we've got to go back to respecting workers and we've got to go back to say that if people are giving themselves the companies you know they should get what they expect and i just want because this post is that i have a lot that i want to say so i'm just have saved two more things which is you know we also have to just 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 for one k plans are good supplemental sort income they were never meant to to be the whole enchilada and in fact  if specially and in the context of bankruptcy a defined benefit plan has the back up of the people g c so even in the worst situation people will get something but in enron we have this corporate abuse that could happen again by the way you know we're looking at all companies to be able to restructure and we understand that there's pressures on companies i think where the pension rights are would come down and this is to say aren't there any other places that a company can cut costs besides getting rid vulture capitalism the fact is if you're in trouble in bankruptcy then you gotta pay a higher rate and the people that want to take on that kind of risk you want to do it what i want is an environment where you minimize the risk of the regulatory risk courts discretionary risk so that more capital come in and we do see that cost in there were reduced the opprobrium the terms of the term vulture but the other point is that it was company goes out of business then there is no pension fund if it liquidates whatever assets benefit guaranty corporation takes over that company it will have a claim against the company to make sure that the pvc pays a certain number of that of a certain level of benefits that have been authorized by congress to do so when there is additional money the p p c will go after that money in some situations it's not very often the people you see as able to collect enough money to pay everybody all their benchers are much better off with a company coming out of bankruptcy if that company can come out of bankruptcy it'll lots of situations they're not 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 situations after a company terminates its plan it's going to just set up a four one k plan they have less time to build but i will just tell you that in the long term i think that it's pretty clear that for one case where people have control over that for one are going to be happier with enron and you had people that didn't the whole pension fund was was a company stock so that if you had individuals with the ability to choose their own risk profile on typically we would be better off i believe  knowing that in all deference that i'd like to come out and talking more about this but just so that you know right now half of all for one k accounts have about twenty seven thousand dollars in them and even for people between forty five and sixty five the median account balance is about sixty thousand dollars so i think in going back to my white collar employees i think that that on most people that we deal with i actually think that for one case are pretty poor substitute for defined  dramatically i would have some very the in many cases for when kids work very well but it's a revolution if i were young and starting a career i would probably be very illustrates some of the some of the problems that we've been talking about today i do have to opening statements that are going to ask unanimous consent to insert into the record one with the chairman's opening statement and one was from sutton who is a member of the full judiciary committee and so without objection those will be entered into the record and i thank all of the witnesses for their powerful testimony today without objection members will have five legislative days to submit any additional written questions which we are going to forward to the witnesses and ask that you answer them as promptly as you can so that they can also be made a part of the record and without objection the record will remain open for five legislative