When Sen. Edward Kennedy (D-MA) got 503(c) into the new bankruptcy bill, I am sure he thought he was protecting rank-and-file employees from the perceived ravages of excessive corporate executive compensation. And maybe he was. But as someone who doesn’t think KERPs are inherently evil, I was struck by Floyd Norris’ insightful reporting in today’s New York Times — which I just saw Co-Blogger Lawless has posted a link to — regarding the denial of the Dana executive compensation package under 503(c). I will not repeat Professor Lawless’s thoughtful comments, but I will add another, which may buttress his, that troubled me with the ruling. I don’t mind purposive statutory interpretation, but one must acknowledge that it can sometimes open a can of worms. And one of the worms that has crawled out in this case is the well placed criticism that Dana’s exec comp package doesn’t look all that different from Calpine’s, which recently got the judicial OK. At pains to distinguish Calpine, Judge Lifland noted that the creditors there logrolled with the plan, whereas with Dana, they did not. (For that matter, neither did Dana’s shareholders, employees, nor even the US Trustee.) But was that the basis of distinction that Congress truly wanted, if we are searching for legislative purpose — whether the creditors said it quacked too much like a KERP? Was according creditors another veto right in the debtor’s magement affairs what Sen. Kennedy had in mind when pushing 503(c)? I am doubtful.
Author: John Pottow
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Tort Liability in Consumer Credit Article
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Those in attendance at Charles Tabb’s excellent symposium on BAPCPA this past spring in Chicago will recall a discussion we had on this topic prompted by my article, which is also being published in the Illinois Law Review, on this very theme — "Reckless Lending: Time for a New Lender Liability?"
Here is a link to the symposium web page, although I do not know whether they have the articles available for downloading yet: Illinois Law Review. My article explores the various policy arugments in favor of — and some non-trivial ones against — creditor liability in this area. It’s an idea which traces a pedigree back to the inimitable Vern Countryman. Those who can’t wait to read the article may be interested to know at the outset that because the idea has so many complicated ramifications, I also propose a "gentler" version than outright tort liability. That is of an affirmative defense to a collection proceeding, but no independent cause of action for consequential damages.
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The Debt Collection Market
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The Boston Globe’s excellent analysis into the actual workings of the debt collection world brings up at least two points worth policy reflection.
First, it should not be surprising that as consumer debt explodes, so too does consumer debt default. That means ancillary markets, such as those for debt collection services, will also explode. (If people start driving more cars, then there will be more mechanics, not to mention more lawyers bringing tort lawsuits.) The question, therefore, is do we want to regulate this emerging market? After reading the Globe’s series, how can anyone seriously interested in civil society not answer yes? Indeed, we do have
federal regulation on debt collection, such as the fair debt collection practices act, so the real question is do we want to make enforcement meaningful and back it up with necessary funding? The Massachusetts experiences shows what happens when, in the necessary and commendable effort to balance deficits, states cut back on court services and the Attorney General’s oversight capacity. (One almost pities the assistant-magistrates’ crushing debtload and perhaps sees some explanation to their routinized treatment of grinding debtors through a legal mill.) So the first call to order is to meaningfully police this debt collection market. We need to revisit the constable oversight system, just as we need to enforce legal requirements on creditors using the courts to help collect their debts (such as seriously sanctioning those who ignore bankruptcy laws and holding plaintiffs to their required standards of proof in court).The second point is even more troubling. This is not just about the need to regulate a market as prospectively sound policy, but about the development of a market that is fundamentally dysfunctional. The problem is that what should be, ideally, a way to deliver state services (the public execution of debt) competitively (by farming out to delegated constables) has turned into a profitable business for collectors that is utterly divorced from the amount of the underlying debts. Making $600 on hooking a car (not the tow company, this is the constable, for his official oversight "time") is a quick way to make a buck by feeding off a legal system. And, moreover, it is one that creates the sorts of incentives that result in the story of the lady whose car was re-hooked three times, or the constable who doublecharged for one tow on the theory that he was "entitled" to a separate fee for each creditor’s judgment he was enforcing (2 creditors warranted 2 oversight fees in his mind for the 1 tow). This should give us broad, worrisome pause about what happens when well meaning local politicans see a quick fix to budget shortfalls by outsourcing public work to private entities (which is what the constables essentially are, their glorified appointment by public officials notwithstanding). The Globe’s pieces serve as a sobering lesson of how privatizing sheriff’s levies has worked out so far in the Bay State: great for the private constables, not so great for the debtors in the system, and ambiguous for the initial creditors.
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Pension Legislation
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Congress is putting the final touches on a pension reform bill as the House-Senate Conference is ironing its final differences. This bill deals with some relatively arcane but nontheless vital issues,
especially for workers with traditional defined-benefit pension plans.When companies make pension promises to workers, they are in effect binding themeselves to pay future debts. How do we know these promises aren’t pie in the sky that the companies will never be able to pay? Because the government requires companies to "fund" these future pension obligations. It does so by making a bunch of actuarial calculations on what these future promises will cost, and how many assets the companies will need to cover them. When companies don’t have enough assets to cover these liabilities, as set forth in the pension regulators’ formula, their pension plans are deemed "underfunded."
In the big pension reform of the 1980s, Congress gave companies with underfunded pension plans 30 years to make catch-up payments, and even then they only had to reach a target of assets sufficient to cover 90% of pension liabilities.
The new bill clamps down (at least somewhat). For example, it would require fully funding underfunded pensions within 7 years (the airlines have squalked they’ll fold with that requirement, so will probably get a carve-out exception). And by "fully funded," they mean it this time: 100% coverage, not just 90%.
Good news for future pensioners (i.e., current workers, i.e., most of us), right? Not necessarily. One of the clear results of Congress’s sensible clamp down on underfunded pensions is that other companies will do just what the airlines are doing in bankruptcy: discontinue defined-benefit pension plans for their workers. When we account honestly for how expensive these plans really are to American businesses, the unfortunate price for our commendable transparency is the unhappy realization that many companies simply can’t afford the promises they’re making (or, more precisely, the promises that were made some time ago). Whether they were dishonest in making those promises back then, grossly optimistic, or just incompetent is, sadly, now water under the bridge. Whatever the reason, as the true costs of defined-benfit pension plans set in — and are drawn into the light by the new pension bill which makes them harder to hide — companies will simply get out of defined-benefit plans altogether and move to defined-contribution plans (the fancy name for 401(k)s). We’ve seen this happening already with historical data gathered by the Survey of Consumer Finance. So instead of shouldering the huge risk of uncertain future health care costs and longevity increases of a baby-boom population, businesses will pass that risk along to their workers. If the workers make poor investment decisions and lose all their future pension money, they’ll always have the final, ultimate defined-benefit plan of all: social security. At least for now. (That’s an underfunded pension plan that Congress has
so far avoided.)