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Big banks are expected to join with bankruptcy lawyers in Delaware and New York to oppose legislation revamping the corporate bankruptcy system if lawmakers attempt to enact the measure this year. Financial institutions and attorneys charge that provisions in the Employee Abuse Prevention Act addressing asset securitizations and pension claims would trigger more corporate bankruptcies and force viable businesses to liquidate rather than reorganize. “Something of this much impact on capital should not be rushed through,” said Phil Corwin, a lobbyist who represents the financial services industry. “This is a prescription for unintended consequences.” The bill attacks asset securitizations used to keep collateral out of a bankruptcy estate. Many retailers and credit card companies create an independent entity to buy their account receivables. This entity uses a company’s account receivables as collateral for a loan, with the proceeds going to the organization. Banks prefer this structure to a direct loan because the collateral, which the company no longer owns, never becomes part of the bankruptcy estate. Bank lobbyists said the bill would cause many lenders to cut off credit to troubled companies because of the risk that the collateral would become part of the bankruptcy estate. Even healthy companies could be affected, they said, because banks will charge higher interest rates as compensation for the riskier loan. “The asset securitization interests will violently oppose this,” said Robin Phelan, a partner at Haynes and Boone in Dallas. “This is a big business, and most of the major financial institutions are involved.” Another section of the bill would give priority to pension claims resulting from violations of the Employee Retirement Income Security Act over those of secured lenders. That means the claims would be paid even if it required liquidating assets used as collateral for loans. One lobbyist said this would result in the elimination of debtor-in-possession financing, which would trigger the failure of companies that otherwise could have reorganized. It also would force lenders to cut off financing to troubled companies, which would force firms into bankruptcy that might have been able to recover without filing for debt relief. “One really needs to consider carefully what the goal is and what the impact will be on healthy companies,” said Floyd Stoner, executive director of congressional relations for the American Bankers Association. “When you change what can happen at the end, you change the thinking of those who provide financing.” Chuck Plange, an ERISA expert and Haynes and Boone partner, said the provision would be triggered if the company breached its fiduciary duty to the plan. This would occur if the company-appointed trustees fail to monitor the plan. The provision also applies if the bank hired by the company to manage the pension plan breached its fiduciary duty. This could occur if the bank invests the funds in risky assets. “The statute would seem to pick up things that would not be the company’s fault,” he said. Delaware and New York bankruptcy lawyers are opposing the bill because it would require companies to file in the judicial district where they conduct most of their business. The law currently permits companies to file in the state where they are incorporated or have an office. John Demmy, chairman of the Delaware Bar Association’s business law section, said the change makes no sense. Delaware offers a neutral forum located close to the creditors and the legal communities in New York and Washington. “The court is very sophisticated and adept at handling large Chapter 11 cases,” said Demmy, a partner at Stevens & Lee in Wilmington. Any move to eliminate Delaware’s jurisdiction would likely encounter strong opposition from Delaware’s congressional delegation, he said, including Democrat Sen. Joe Biden. None of Delaware’s three members of Congress returned calls for comment. “This is a very big business and an important one,” said Guy Lander, chairman of the New York State Bar Association’s business law section and a partner at Davies Ward Phillips & Vineberg in New York. “We have lost too much business already. It is important for us not to lose any more.” Sen. Dick Durbin, D-Ill., and Rep. Bill Delahunt, D-Mass., introduced the bankruptcy bill Thursday. They have picked up several key co-sponsors, including Sens. Ted Kennedy, D-Mass.; John F. Kerry, D-Mass.; John D. Rockefeller, D-W.V.; and Pat Leahy, D-Vt., chairman of the Senate Judiciary Committee. Durbin and Delahunt said the bill would prevent corporate insiders at bankrupt companies from using assets for bonuses and off-the-book transactions that otherwise could be used to help workers. Congressional sources said the lawmakers hope to attach the bill to pension reform legislation, which lawmakers are expected to take up in September. Phelan said some provisions make little sense or are poorly drafted. For instance, the bill prohibits retention bonuses unless the employee has a legitimate offer from another company. That could encourage employees to look for new jobs rather than try to keep the firm together, he said. The bill also seeks to recover excessive bonuses and other types of compensation paid to executives. Phelan questioned whether this was necessary, noting that excessive compensation already would be considered a fraudulent conveyance. He also noted that creditors rarely seek the return of this money because it would cost more to litigate then they could recover. “The fallacy of this stuff is that a few bucks here and there won’t be a penny’s difference,” he said. “The legislation leans more to the sledge hammer than the scalpel.” Copyright �2002 TDD, LLC. All rights reserved.

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