A bankruptcy case from the 1990s called LTV Steel has amazingly enough become an issue in the U.S. Senate
race in Massachusetts.  A bankruptcy
case!  Just this week, Senator Scott
Brown’s campaign released a web ad insinuating that Elizabeth Warren, who worked on the case, somehow fought against LTV Steel’s
employees.  The ad demanded to know, “Who
is going to defend her?”  Well, given
that Warren’s participation in LTV
was to defend an arcane but important principle of bankruptcy law—that serves
to protect workers—I guess it falls
to bankruptcy academics like us to defend her. 
So I accept the invitation.  And where better to post than my Blogosphere Alma Mater?

The bankruptcy law question at issue in LTV is complex, and I will discuss it in some detail below.  But in case nobody reads beyond this
paragraph, I should quickly dispatch one patent falsehood that gave me a
double-take when I viewed the ad.  The
video suggests that Warren was somehow trying to make sure LTV’s workers did
not receive retirement benefits.  That is
objectively false: the workers’ benefits were covered by a trust fund that was fully solvent at the time of the case.  Nobody in good conscience could argue that
Warren was somehow trying to deny workers’ benefits that would be paid from an
already-funded trust.  LTV and other
companies were quarreling over how much each of them needed to contribute to that
fund, and Elizabeth Warren only got involved when a federal appellate court
issued a decision in the middle of that fight that proposed a novel (and
troubling) interpretation of the Bankruptcy Code. 

The full story should dispel the astonishing claim that Warren was
somehow a hired gun who hoped to take benefits away from retirees.  Here’s what actually happened.

Beginning in 1987, LTV Steel had a long, drawn-out bankruptcy
proceeding.  (The company emerged several
years later, but subsequently collapsed into bankruptcy again in 2000 and never
made it out the second time.)  Warren had
no involvement in either bankruptcy proceeding.  In fact, in a lengthy PBS interview, she
actually criticized the way LTV treated its employees during its bankruptcy.  [I don't know if it's online out there in the ether.]

An offshoot of LTV’s first bankruptcy was the company’s challenge
to the Coal Act, a law passed in the early 1990s that required coal companies
to fund a statutory trust for their workers’ retirement and health benefits.  This requirement was imposed even on “legacy
companies” that were no longer in the coal business.  In its initial lawsuit, well before Warren
got involved, LTV made a slew of unsuccessful arguments against the Coal Act—arguments
that Elizabeth Warren would never endorse—to try to strike it down.  Let me repeat, so there’s no distortion or spin:
Elizabeth Warren had no connection to
LTV’s bankruptcy reorganization plan in general or to LTV’s overall challenge
to the Coal Act in particular.  LTV’s
attacks failed and the Coal Act was upheld as constitutional by the U.S. Court
of Appeals for the Second Circuit.

But there was one issue that apparently interested Warren in LTV’s
bankruptcy.  The company argued that the
trust’s claims for money had been filed too late to share in LTV’s bankruptcy.
The Second Circuit rejected that argument by saying that these weren’t even “claims,”
since they were based on legal rights created after the company filed for
bankruptcy.  This head-scratcher of
“non-claim claims” caused many academics, including Warren, to say, “Huh?  What on earth does that mean?”  Well, according to the Second Circuit, because
the trust had no claims against LTV, it couldn’t have any claims discharged by the
company’s bankruptcy—which left it free to make demands from LTV after it emerged from bankruptcy.  Good news for workers, and bad news for LTV,
right?  Wrong.  Warren and other academics immediately saw
the problem.

That problem was the Second Circuit’s conclusion that the trust
(and therefore the retirees who would draw from the trust) had no bankruptcy claim
against LTV because it had no rights against LTV on the petition date; those
rights only came later when Congress passed the Coal Act.  In other words, because workers had no rights at all against the company
on the day it went bankrupt, they
couldn’t partake in the bankruptcy, period.  This worried Warren.  It meant that retirees, workers, and victims in
future cases would be prevented from asserting any claims if Congress gave them
a right to compensation but the company had already managed to file for bankruptcy.  The workers would have to sit on the
sidelines until after the bankruptcy was over.

In LTV, this turned out
to be no big deal.  LTV was one of the
lucky companies that emerged from
bankruptcy, so workers were then able to file claims against the new
company.  Hurrah!  But Warren knew (as all bankruptcy professors
do) that many companies do not emerge from bankruptcy; they simply liquidate
and die.  So the Second Circuit’s holding
meant that in cases where the company liquidates and dies, workers will never get any compensation whatsoever
under new congressional schemes.  That’s
probably not a worry for big bank creditors, who tend to get paid out no matter
what.  But it’s certainly a problem for
workers, retirees, or victims who are counting on payments from the company.  Bankruptcy is often these people’s last
chance to get any money owed to them.

Warren thought that was a terrible way to interpret the Bankruptcy
Code, and she asked the Supreme Court, on LTV Steel’s behalf, to review the
Second Circuit decision.  Indeed, the Second
Circuit’s LTV decision has been a
controversial precedent.  It does not
surprise me at all that Elizabeth Warren, tireless champion of workers and the
little guy, found this ruling horrifying, even if there were well-intentioned
reasons for the Second Circuit’s decision on the facts of the LTV case.

Alas, the Supreme Court took a pass, as it does with over 95% of cases it is asked to review.  And that was it.  The Second Circuit case became much debated
in bankruptcy circles as a weird decision, and many subsequent courts have to
various degrees disagreed or distinguished its definition of “claim.”  LTV and Warren went their separate ways, and Warren
returned to vociferous criticism of LTV’s terrible bankruptcy tactics.  Clips of that criticism, by the way, appear
out of context in the new web ad—in what seems to me an awkward attempt to
suggest to viewers that she was actually endorsing LTV’s conduct during its
bankruptcy.  I assume the distortion is
apparent to anyone who watches the full PBS interview, knows of Warren’s
sustained and public campaign to reform the bankruptcy laws, or really has ever
listened to her talk about bankruptcy and related issues (which probably
doesn’t include most people who will see the web ad—which I’m guessing is
probably the point, sigh).

That took me quite a while to explain—and even then with far too much reductionism
for my comfort level.  Maybe I should
produce my own web ad—I would happily approve its content!—but I somehow
suspect it will not get the same interest as the misleading jaw-dropper I saw
today from Sen. Brown’s campaign (which he approved).  But at least mine has the virtue of being
true.

(Academic’s disclosure: A few years ago, I co-authored a bankruptcy law
piece with Elizabeth Warren and several other bankruptcy professors, some of whom blog here; I
have also donated money to a group called “Academics for Elizabeth Warren” or
something like that about a year ago.  BTW, lest
you harbor the paranoia that all tenured academics are frothing lefties who inexorably skew Democratic, I consider
myself an independent and indeed voted Republican in Michigan’s last gubernatorial
election.  So there.)