By Jessica Ljustina (Harvard Law School)
Since March, executives of 18 large companies received over $135 million total in bonuses prior to their companies filing under Chapter 11, while “[t]hose same companies laid off tens of thousands of workers,” according to a Washington Post report. These recent examples are illustrative of gaps left by the last major reform targeting bankruptcy bonuses. Further reforms have been introduced in Congress every few years since 2005. Referencing inequality and perceived abuses in the context of COVID-19, the House Judiciary Committee advanced the current House bill to the full chamber on September 29, 2020, marking the proposed legislation’s furthest progress thus far.
H.R. 7370, the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 (PERBB) would present significant changes to the Bankruptcy Code aimed at protecting workers. The bill would expand from existing regulation of insider retention bonuses to include a broader set of payments to insiders, senior executive officers, the 20 highest compensated employees who are not insiders or senior executives, department and division managers, and any consultants providing services to the debtor.
Through expanding the scope of executive compensation subject to restrictions, PERBB may more effectively reduce management bonuses paid in bankruptcy. However, the House version of PERBB fails to address bonus payments prior to filing for bankruptcy, a key issue identified at the outset of the post. The related Senate bill has an additional provision which would designate any transfer made to management “made in anticipation of bankruptcy” as a §547 preference avoidable by the trustee.
The full post, including a summary of proposed changes to the Code, is available here.
The full text of the House bill can be accessed here. A redline of relevant 11 U.S.C. provisions reflecting amendments proposed in H.R. 7370 is available here. The full text of Senate bill can be accessed here.
For related Roundtable posts, see Jared Ellias, Regulating Bankruptcy Bonuses; James H. M. Sprayregen, Christopher T. Greco, and Neal Paul Donnelly (Kirkland & Ellis), Recent Lessons on Management Compensation at Various States of the Chapter 11.