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Legislation introduced Thursday would strip Delaware and New York of their dominant roles in corporate bankruptcies by requiring insolvent companies to file in the judicial districts where they principally conduct business. Under the proposal that Sen. Dick Durbin, D-Ill., and Rep. William Delahunt, D-Mass., are sponsoring, simply being incorporated in a state or having an office within the judicial district would not be enough to establish jurisdiction. If this were the case now, the two largest bankruptcies in history would have been filed in Mississippi (WorldCom Inc.) and Houston (Enron Corp.) instead of Manhattan. Judge Arthur Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York is presiding over both cases. “This will kick most of the cases out of Delaware and many out of New York,” said G. Ray Warner, resident scholar at the American Bankruptcy Institute and a law professor at the University of Missouri, Kansas City. Durbin and Delahunt argue that the current system deprives employees with a major stake in the outcome of a bankruptcy from playing a role. It’s tough for Enron’s Houston-based employees to travel to New York for every hearing. The measure is just one of about a dozen bankruptcy provisions included in the Durbin-Delahunt bill, the Employee Abuse Prevention Act of 2002. The bill would also allow judges to reverse asset securitizations and recover excessive payments made to corporate insiders, permit courts to reverse fraudulent conveyances that occurred as much as four years prior to a filing, limit retention bonuses and give pension plan beneficiaries greater rights to recover lost money. “Taken as a whole, [the bill] will help undo the damage done to employees, retirees and other creditors in pending bankruptcy cases,” Delahunt said. “And just as importantly, it will encourage managers and lenders who underwrite their activities to ensure that meaningful safeguards are in place to prevent similar abuses in the future.” Capitol Hill sources said such legislation would typically have little chance of passage. But the plethora of corporate scandals has changed the rules, and they said there’s a chance the bill could get attached to pension reform legislation expected to pass when lawmakers return in September. “The iron is quite hot right now,” one source said, adding that a month ago no one expected Maryland Democrat Sen. Paul Sarbanes’ accounting reform bill to become law. Bankruptcy experts said the most significant provision is the one limiting where companies may file for bankruptcy. “The forum shopping provision would be a big change,” said Lynn M. LoPucki, a University of California at Los Angeles law professor. The provision is modeled after a recommendation by the National Bankruptcy Review Commission, which in the mid-1990s did a massive study of the nation’s bankruptcy laws. The commission’s report formed the basis for a consumer bankruptcy reform bill that is expected to pass next month. The advantage of the provision is that judges in Delaware and New York feel pressure not to make rulings adverse to large corporate filers for fear their district will lose future business, LoPucki said. He noted that the bankruptcy practices in Delaware and New York are worth as much as $1 billion annually in fees for lawyers and other professionals. Yet he said forcing companies to file where they do business could result in cases being decided by judges with little experience in complex bankruptcies. “We are on the horns of a fairly ugly dilemma,” he said. Others were more skeptical. ABI’s Warner said dispersing cases would result in less consistency in judgments and procedures. “There is a predictability that would be lost if the big cases were spread across the country,” he said. The bill also attacks securitizations, which have become a favorite way to raise funding. Under these arrangements, a company sells an asset such as its account receivables to a new entity. This new entity then pledges the receivables as collateral for a loan, which it uses to pay the company for the assets. Banks prefer this structure to a straight loan backed by receivables. This is because the new entity, rather than the company, holds the collateral. So if the company becomes insolvent, the collateral doesn’t become part the bankruptcy estate. The bill would eliminate that protection by permitting judges to deem asset securitizations to be loans, which means the collateral would be included in the bankruptcy estate. The bill also adopts a uniform four-year window for fraudulent conveyance claims. Most states already allow bankruptcy judges to undo fraudulent conveyances going back four years, though a handful have shorter windows. The lawmakers proposed a series of provisions attacking excessive executive compensation. The bill would permit judges to reverse payments to insiders that were more than 10 times larger than payments to nonmanagement employees. It bars retention payments unless certain conditions are met. The court must conclude that such compensation is essential in light of an employee getting a legitimate offer from another company. Or that the employee’s services are vital to the company’s survival. In any case, the payment couldn’t be more than 10 times larger than similar payments made to non-management employees. Also outlawed: severance payments to corporate insiders unless they’re part of a program available to all employees. And the bill attempts to protect employees. Unpaid pension claims would receive priority ahead of secured creditors. Warner said this provision is an effort to use lenders to force companies to satisfy pension obligations. Lenders likely would require corporations to establish escrow accounts for pension payments, much like mortgage lenders do for real estate taxes. The priority claim for unpaid wages would rise to $13,500, from $4,650, under the proposal. The bill also calls for the bankruptcy court to investigate modifications to retiree benefits made within 180 days of filing. Such modifications could be reversed if they were done in contemplation of a filing. Copyright �2002 TDD, LLC. All rights reserved.

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