• Sections
• Rise of Chapter 11 Reorganizations
• How a Chapter 11 Bankruptcy Works
• Pensions and Chapter 11: United Airlines' Story
• Prospects for Reform?
•  
• Related Link
• United Airlines' Corporate Restructuring
  This site was set up by the law firm that handled United Airlines' move through bankruptcy and restructuring. It includes primary documents on the process. One section lists the first-day orders (written not by the bankruptcy judge but by United and its lawyers, hand in hand with United's bankers.)
  
  Go to the bottom of the list to find two orders pertaining to United's DIP financing (the banks and other financial lenders referred to below); one loan to United came from a bank syndicate referred to as "Club DIP" and another from Bank One.

Those Interviewed

Bradley Belt is the outgoing head of the Pension Benefit Guaranty Corporation (PBGC), the federally owned corporation which insures private-sector pensions. Read his full interview here.

Bill Brandt is president and CEO of Development Specialists, Inc., a corporate turnaround firm based in Chicago.

Greg Davidowitch is the president of the Association of Flight Attendants-CWA (AFA) United Master Executive Council. Davidowitch represented United Airlines' flight attendants during United's Chapter 11 bankruptcy.

Hugh Ray is a partner and head of the national bankruptcy practice at Andrews Kurth LLP, a Houston-based law firm.

Bill Repko, formerly of JPMorgan, is a banker who worked in bankruptcy lending for 25 years, including lending to United Airlines during its Chapter 11 case.

James Sprayregen is a partner and head of the restructuring practice at Kirkland & Ellis LLP. He was the lead bankruptcy attorney representing United Airlines.

Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School. She specializes in contract and bankruptcy law, both personal and corporate. Read her full interview here.

RISE OF CHAPTER 11 REORGANIZATIONS

James Sprayregen
Bankruptcy attorney for United Airlines

In 1978, Congress made a wholesale revision of the U.S. Bankruptcy Code. It was actually the first wholesale revision since 1898. ... The three things the 1978 code did [were] leave management in place if there was a filing; [pay] professionals at the market rates; and create the debtor-in-possession [DIP] lending market, which meant that companies could borrow money when they were in bankruptcy. Those three factors were a sea change from what was going on pre-1978 and ended up with the effect of encouraging companies that were in a lot of trouble to access the bankruptcy system to address their problems. ... I would say that Chapter 11 has become somewhat of a more accepted strategic tool, ... and as a result, there is more use of Chapter 11 now than probably 20 years ago. ...

What do you mean by a strategic tool?

Well, as to not just, say, liquidate a company or sell off its assets or find a way to shut it down, but to truly figure out a way to fix the company and reorganize it and address its problems through the bankruptcy process. ...

... [T]he Chapter 11 business, it's just part and parcel of the American economy. I call it the efficient workings of American capitalism. It just happens to be at one of the lowest rungs of the ladder. ... We have a very dynamic economy, and even companies that are not in trouble ... are forever restructuring, and if they're not and they keep doing whatever it is that has made them successful, they are probably heading towards trouble. There's no question that it's much more part of the mainstream economy and accepted that companies restructure every day of the week, and more and more of them do it through Chapter 11. ...

Elizabeth Warren
Professor, Harvard Law School

[The 1978 law] was designed to ... let a corporation that had gotten into financial trouble reorganize itself. A big part of the selling point on this bankruptcy law was it will preserve jobs. ... Go back and read the legislative history: lots of words about employees, about retirees. ... "We need to save those jobs, and we need to make sure that the employees and retirees are going to be taken care of." ...

... In reality, there are lots of corporations that have figured out that there are loopholes in this bill. ... What those loopholes permit companies to do is make promises to a few sophisticated creditors to lock up all the assets of the business so that if the company ultimately fails, there won't be any sharing of the pain. The sophisticated guys will walk out with everything, and the employees and pensioners will be left with nothing. ...

No one wants to go bankrupt. There is no CEO who wakes up one morning and says, "This could be the day that we get to file for Chapter 11." That's not where we are. The Chapter 11 has become an effective tool for reorganizing a business, for transitioning a business from those poky, old-fashioned promises of the 1950s and '60s and '70s into that lean, mean fighting machine of 2006. ... Bankruptcy is less a culture and more a tool. It's more a device. It's more like a knife on the surgeon's table. Bankruptcy is the official, federal, formal way to take legal promises and just slice them off. ...

Bill Repko
Formerly of JPMorgan, banker in United bankruptcy

The Bankruptcy Code was revised in 1978, ... but the restructuring community was really unsure of how the large companies would react to a bankruptcy. And of course there is a taint to it, or there was a taint to it. It's one of the most painful and public admissions of failure that a management can admit to, filing Chapter 11.

In those days it was not only not a last resort; it was almost not considered. But obviously over time, people's understanding of bankruptcy and the markets matured. ... I don't think any professionals would elect a Chapter 11 unless there really was no alternative. ... It's expensive; it disenfranchises whole classes of creditors and equity security holders. But when confronted with a series of irresolvable problems, it's now recognized to be an acceptable tool, one that can resolve those differences. ...

James Sprayregen
United Airlines bankruptcy attorney

Twenty years ago, most of the big law firms were not involved in the bankruptcy business; the practice was for the most part small boutique firms. ... These days, every large law firm in the country has some sort of bankruptcy practice. ... We have around 100 lawyers who do nothing but this, and there's, as I said, two or three or four other firms that are in that range. But the practice has really moved to be a mainstream part of most big law firms these days. ...

Elizabeth Warren
Professor, Harvard Law School

If you look back at the biggest law firms in America in 1978, when the bankruptcy law was passed, not a single one had a bankruptcy department; in fact, most of them didn't have a single partner that worked on bankruptcy. ... Today you can't find a major law firm in the United States that doesn't have a principal profit center in bankruptcy work, important partners doing important work for the firm and ... sending out important bills on behalf of the firm. ...

[But] the fees paid in Chapter 11 bankruptcies are only a very small tip of the iceberg. The real industry that's been born is the turnaround industry, the reorganization industry. In fact, the number of actual Chapter 11 cases continues to shrink, because now everyone understands how to negotiate in the shadow of the law. The turnaround specialists come in, ... and they say: "Here is the deal. We can file this company for bankruptcy, but here's how it's going to come out: The banks are going to [do] fine, and the employees and retirees are going to end up with nothing. We are willing to offer you a little better than nothing. Take it or leave it."

 

HOW A CHAPTER 11 BANKRUPTCY WORKS

Hugh Ray
Bankruptcy attorney

What's a DIP lender?

DIP is a acronym for debtor-in-possession lender. A debtor in possession is what a Chapter 11 company is, and ... they have to have a loan to give them the available credit lines to run their business. The banks and financial institutions that make these loans are called DIP lenders, and DIP lending is very lucrative. It's very good business. More and more lenders are coming to it; more and more lenders like it. It's a specialized loan. It has a very low default rate because it stands first in line [to get paid], and the DIP lender has a great deal of control over what happens in a case. The DIP lender looks at budgets that are prepared by management; the DIP lender has a veto on many of these budgets normally; and the DIP lender decides who gets paid what during the course of the proceeding in [the] normal course of events.

So are you saying in effect that the banks are kind of running things, driving things in a bankruptcy process?

In the major cases, the big ones, ... the DIP lenders, the financial institution lenders, have the greatest sway, and the way things are practiced today, they are the ones who determine the biggest share of the outcomes. ...

James Sprayregen
Bankruptcy attorney for United Airlines

One of the fallacies of the [United bankruptcy] case was that the banks forced us to do a number of the things that we did throughout the case, particularly adjusting pensions, retiree medical collective bargaining agreement arrangements. ... The banks are willing to lend money, but only if they can get the money back, and so they evaluate whatever terms it will take for them to be comfortable. They'll get their money back. But the idea that the banks were running the show or driving it, to me that was always a large fallacy. ...

Greg Davidowitch
President of United Airlines Association of Flight Attendants-CWA (AFA) United Master Executive Council

What was attempted to be represented to us as it relates to the power and the role of the DIP lenders and the other financers [in the United case], was to use them as a heavy during the course of the bankruptcy and the associated negotiations. Ultimately, I believe, the banks and the financiers were agnostic as to where the cost savings were actually achieved, as long as the company was able to repay the loan that they were providing to them. ...

... As a matter of fact, during the course of one of the extensions to the DIP financing, it had been represented to the employees and publicly that the banks, the DIP lenders, were not going to allow United Airlines to use the financing provided by them to fund their pensions. And it wasn't until a discussion in the courtroom ... [that it was] ever really cleared up that that was not a requirement nor a dictate of the [DIP] financing for United Airlines. ...

Elizabeth Warren
Professor, Harvard Law School

The law is clear on this, that when a company files for bankruptcy, you just have to read [the statute], and you'll know who is going to get paid and [in] what order of priority. It's not rocket science. ...

The text of the law clearly gives a priority to the banks and the other creditors who protect themselves by contract. They come ahead of all of the employees and all the pensioners. It's been there since 1978; it is in the law today. If Congress wanted to change it, they could change it with the stroke of a pen, but that is what the statute says. ... What has changed over time is how much the banks are seizing in terms of the assets, ... so that by the end of the day, there is less and less and less left over for the employees and for the retirees. ...

Bill Repko
Formerly of JPMorgan, banker in United bankruptcy

The term is super priority. [The DIP lenders have] a super-priority claim. Without getting too technical, the way I look at it, the framers of the Bankruptcy Code recognized that people who were going to lend money to bankrupt companies were embarking upon a very risky enterprise, so they created a series of safeguards, one of which moved the bankruptcy loan to the head of the queue to get repaid. That's called the super priority.

So is it a high-risk loan, or is it relatively low risk?

It's a high-risk loan in terms of the crisis that the company has encountered. There are awful lots of questions that remain unanswered about management's ability to operate the business, about the customer's willingness to buy the product, your ability to manufacture it and make a profit. So there are more risks than normal, but the protections afforded the DIP loan are quite significant.

Bill Brandt
Turnaround specialist

Bankruptcy provides predictability. If I go to the bankruptcy court, I can show you under the various forms and strictures and provisions of the Bankruptcy Code what you're going to get if I file. ... Once you have set the predictability of the standards of the Bankruptcy Code down, they are fairly immutable, and it's fairly easy for everybody at the table to understand what they get and the alternative.

Are you saying there's a script to bankruptcy? Everybody knows the outcome as they go in?

The script is the Bankruptcy Code. It does provide a mathematical certainty of what you are likely to get, what your rights and revenue will be based on the mathematics of the situation.

Hugh Ray
Bankruptcy attorney

What are first-day orders, and why are they important?

If you look in the Bankruptcy Code, you won't see anything about first-day orders; it's something that's developed. The first-day-order practice is probably the biggest single thing that turned around the practice of bankruptcy to where it is now. They started getting popular in the mid-90s.

First-day orders are a stack of orders that are taken into the judge the very day the [bankruptcy] case is filed. ... The judge will routinely sign most of these because they allow the debtor, the company, to continue in its normal course of business without any interruption. ... In addition, the court will approve a series of arrangements that have been worked out in advance that are called the DIP loan, the debtor-in-possession loan. ... These are the loan documents that allow the company to have access to capital and continue to operate. ...

Many judges will not approve these types of relationships; ... many judges will. And since the banks and the financial institutions that make DIP loans and the debtors decide where cases are going to be filed, they won't file them unless they feel fairly confident that they can get their type of arrangements approved.

Are you saying the banks and the management pick the judges to be friendly to them? They go judge shopping?

... That's correct. There is no question about that. If you look at the history of the places that the cases are not filed, you will see that they are not filed in places where judges won't approve that type of arrangement; they are avoided.

What is illustrative in the first-day orders ... in the United bankruptcy?

One thing that's of interest is the fact that the counsel for the unsecured creditors' committee, which is the counterweight to the DIP lenders -- in other words, they represent everybody but the banks and management -- their lawyers will be paid out of what's called the carveout. ... The banks have a lien on everything, and as a condition of being paid, [the unsecured creditors' counsel] have to agree not to in any way contest or do anything contrary to the ... banks' interest.

So the people who have an interest contrary to what the banks have are being paid by the banks and can't fight the banks?

That's correct, if they want to get paid.

James Sprayregen
United Airlines bankruptcy attorney

[The United bankruptcy] is a very expensive process, though, isn't it? I mean, 38 months. People have said to us that the professional costs [in United] run something like $400 million. Is that right?

Probably in the neighborhood of that, yes. ... There's no question that the transaction costs of bankruptcy are, in absolute dollars, not low. ... The cost of the bankruptcy, round figures were probably about $10 million a month. But I think when you step back again to say, 100,000 feet, this company has now cut $7 billion a year in costs. ... If you want to look at the professional costs of a bankruptcy as a very large, complex, difficult transaction, I would submit that that's actually a very good return on that investment. I wouldn't call it cheap, but to accomplish what has been accomplished, that's in the range of what happens in restructurings, even in healthy companies, in corporate America.

Hugh Ray
Bankruptcy attorney

It's expensive to operate in Chapter 11, and it's not something that you should desire to do. ... Everything costs more in Chapter 11 because it's done in court and under court scrutiny. It's not done in a boardroom, where you don't need all of these layers and layers of professionals and accountants and bookkeepers, and everything has to be scrutinized. There are just so many more players involved in a case like this. Everybody has got their professional, and everybody is on the parapets at the first sign of trouble. ...

When you look at the United Airlines documents, what kind of fees is the [DIP lender] picking up?

What I saw for these DIP lenders was $26 million in DIP fees. ... They're just consent fees, administrative fees, commitment fees, all in addition to the attorneys' fees, the interest rate that they've got. ... In the United case, [there were] around $26 million that I could see from the records; there were probably others that were paid to the DIP lenders.

Bill Brandt
Turnaround specialist

If you were selling your house today and you paid a 6 percent commission, you might grumble about it, but you're used to doing that. Frankly, the cost to manage a bankruptcy like United or a bankruptcy like LTV [Steel] or the others [is] probably 3 or 4 percent of its assets. Equate it with a real estate commission. I don't generally have a lot of problem with the fees in bankruptcy, because any other transaction would cost about the same.

 

PENSIONS AND CHAPTER 11: UNITED AIRLINES' STORY

Greg Davidowitch
President of United Airlines Association of Flight Attendants-CWA (AFA) United Master Executive Council

Bankruptcy is terrible for the employee. It's an absolutely horrific experience for the people who worked hard to build a company, and ... as a result of some poor management decisions, we find ourselves in a set of circumstances [in which] we are under attack essentially. That's what bankruptcy means to an employee. It means being forced to negotiate changes to your working conditions, to your terms of employment with a gun to your head. ...

The losers in United's bankruptcy are those employees who have dedicated themselves and who have built United Airlines into a great company. They've lost retirement benefits, retiree health care benefits. The people that have also lost are the 10,000 fewer flight attendants who are no longer employed by United Airlines as a result of this radical downsizing. The losers in this bankruptcy are the incumbent employees, who are working harder for so much less today, people being forced to make real life-changing decisions, people selling their homes. People are genuinely concerned about what they are going to do when they get older.

James Sprayregen
United Airlines bankruptcy attorney

We have a national issue: Companies file for bankruptcy because they can't live up to promises they've made. There are many, many companies, especially ones in heavy manufacturing and old industry in the United States, who have made many promises that they can't keep. It's particularly prevalent in steel, airlines and auto. ...

And the promises you have in mind are?

Promises to all of your stakeholders, trade creditors, banks, bond holders, employees, retirees. Health insurance issues, legacy liability issues are huge in the three industries I've mentioned. ... Industry these days is competitive on a global basis, not on a U.S.-only basis, and that's very difficult for American society, because our competition [is in] lots of countries that have less benefits and less wages and less pensions and greater productivity. We need to figure out a way to address the fact that we need to compete globally and not just on a U.S.-only basis.

So is restructuring essentially going to mean that we're going to have to dramatically revamp old wage agreements, old promises to labor in terms of pensions, health care, other benefits?

Yes. I believe that there is restructuring coming in American industry in both healthy and unhealthy companies to take into account the fact that companies have made a lot of promises to their employees and retirees that they are simply either not going to have enough money to live up to, or even if they do, it's going to put them in an uncompetitive position that will, if not addressed, lead ultimately to the downfall of a number of healthy companies. ...

Greg Davidowitch
President of United Airlines Association of Flight Attendants-CWA (AFA) United Master Executive Council

Companies today, specifically United Airlines, [are] shifting those responsibilities from themselves onto the individuals, in line with the policies that are being established by Congress and the current administration. ...

We [at United] were confronting a very real economic challenge as a result of the events of Sept. 11 and perhaps a once-in-a-lifetime opportunity for management to take advantage of the environment to abandon their corporate social responsibilities and shift them onto the individual workers ... by ultimately terminating its pension plan and reducing its retiree health benefits.

James Sprayregen
United Airlines bankruptcy attorney

The pensions are something that had been promised to United employees for multiple decades; it had been in the collective bargaining agreements forever. ... So it may have been intellectually obvious [that the pensions would be terminated], but coming up with a process by which to handle adjusting expectations so people would buy into that need to address the pension issue without it becoming a situation where we would lose what we call the hearts and minds of the employees, such that we could win the battle of dealing with pensions and [not] lose the war of not having a company to deal with, was a real challenge and an art. ...

Is there a danger of strikes if you push too hard, too fast?

... Process is very important. Education of people, providing information, development of a business plan, development of consensus, getting buy-in from people -- that's all a very time-consuming process, but very important. If you try and jam something through and run over people without giving it time to sink in and percolate and [without giving them time] to think up what other alternatives there are and make suggestions, even if they're unworkable -- if you just say, "I know what I need to do, and I'm going to go do it," it's not good process in a bankruptcy case.

Greg Davidowitch
President of United Airlines Association of Flight Attendants-CWA (AFA) United Master Executive Council

Ultimately what we concluded was that management had a very deliberate course of action set out from the beginning of the bankruptcy, which was to roll out demands for concessions over a period of time in an escalating way in order to bring the employees along without creating a spark that would have led to real labor unrest.

A strike?

A strike. They did this in such a manner as to prevent any sort of acute response from the employees. ... It took an enormous amount of time, and it took a very long period of time in order to bring each respective constituency along the way to build, if you will, a fatigue among the employees, to build a fatigue among the creditors in order to achieve what may have been their goal from the very beginning, which was to effectively reorganize this company on the back of its employees. ...

Elizabeth Warren
Professor, Harvard Law School

Why does a company like United Airlines take three and a half years, then, to do that, and some other companies take 11 months?

The reason ... can be twofold. They can either have outdistancing fights -- "No, I didn't make that promise"; "Yes, you did. The promise was this big" -- that's part of it, but the other is they want to continue to operate in the future. ... The company has to reshape itself so that tomorrow's banks will come in and lend money and so that the employees will still come back tomorrow and go to work.

A lot of the time and energy and careful negotiations that take place in Chapter 11 are not about the past. That money is gone. That order of priority is spelled out in the Bankruptcy Code. What it really comes down to is how much can we take away from the employees before they finally say, "Fine, you take it, but I'm not working here anymore"? And no one else will come to work for them either.

There's a reality check in it, but the reality check is, in effect, when a company like United turns to its employees and says: "Look, you can either have a job and no pension, or you can have no job and no pension. What do you want to work out in there?" That's the kind of negotiation that's been going on at United Airlines. ... That's what corporate reorganization in America has become: "How much less can I give you and still keep you here?"

Bill Brandt
Turnaround specialist

I'm not a great fan of the United bankruptcy. Sometimes near the tail end of the system, when reform is probably necessary, certain cases epitomize greed run amok, and that's one that does. ...

Let me give you one word as an opposition: American, another airline. They have a pension plan. They went through tough times. They were bigger than United; [their] conditions were pretty much similar. They sat down, they rolled up their sleeves, and instead of trying to make their senior management wealthy, ... they kept their pension plans, and they kept their employees. That is not to say that there hasn't been a lot of pain distributed to both the employees of American Airlines, their suppliers and other people who relied on them, but the entity got what it got done and didn't have to do what United did.

Some people almost talk of it a tsunami of bankruptcies: [a] wave running through the steel industry, [a] wave running through the airline industry, maybe a wave approaching the auto industry. If this goes on, what happens to that industrial middle class that built up over the last several decades?

I think, for a variety of reasons, ... the middle class [that] has been built up since the '50s and '60s is in decline at this point, regardless of what the politicians or the economists say. The middle class is under pressure it hasn't felt for years. This is what they call the entrepreneurial society, which means, "Go out and figure out how to do it for yourself, ... whether it's your 401(k) or your investment." I hear [Robert] "Steve" Miller at Delphi say that: Train your kids for the information economy; we don't need unskilled labor anymore.

In a country of 300 million people, ... we are always going to have a wide division of labor and division of talents and resources. We always need to find for the people that need the work the most the kind of jobs that allow them to have a family, kids, a house and raise their kids in the American way. They fought our wars; they litter our cemeteries as veterans. Now [to] just say, "You aren't smart enough, so your jobs are going to China, but we don't care," that's not an adequate answer in society for my money, whether it's in or out of the bankruptcy process.

And can we allow companies just to walk away from their promise that they made over time? I mean, these people counted on this for decades, and they got hit at a time when there was nothing they could do to fix it.

It's worse than that. Congress has just recently changed the bankruptcy laws again to make it more difficult to file individual bankruptcy. You have taken a bunch of people who have worked late into their life, near the term of expecting to retire, and ... you have taken away the security blanket. You have made them scramble for economic well-being, and now you have told them, ... "By the way, if you weren't nimble enough, you can't even file bankruptcy, or ... we're going to make it difficult for you." Strangest situation I've seen in the years I've been doing this.

 

PROSPECTS FOR REFORM?

Bradley Belt
Departing Executive Director, Pension Benefit Guaranty Corporation

[PBGC is] the backstop for pension promises made by private-sector employers. In some respects, we are similar to the FDIC, the Federal Deposit Insurance Corporation, for the banking system. Anytime you go into a bank, you see that sticker, "Deposits insured by the FDIC." We're the guaranty entity for pension promises that private-sector employers make to their workers and retirees.

When do you become engaged? What triggers your action?

... When does the insurance coverage kick in? That happens when a pension plan is terminated, and there are not sufficient assets in the pension plan to cover the benefits that the company has promised to its workers and retirees. In that case, PBGC will step in to make up the difference, subject to limits established by Congress and law. That is, not all the benefits that have been promised may be guarantied. ...

The typical way in which companies terminate their pension plans in underfunded status is through the distress termination process in bankruptcy. ... When a company fails to make contributions to its pension plan, if they're not bankrupt, PBGC is able to step in and enforce a lien for the amount of missed contributions. However, when the company is in bankruptcy, there are automatic stay provisions that kick in. ... That is, when a company fails to meet its contributions in bankruptcy, there is no meaningful consequence.

Do the employees and does your agency, PBGC, have a seat at the table in the bankruptcy proceedings?

We do. We are often the largest creditor, albeit an unsecured creditor. We are typically on ... the official committee of unsecured creditors. We tend to be very actively engaged in these matters. ... [But] we are at the bottom of the totem pole. ... We come behind all the secured creditors. ... The secured creditors get the lion's share. ... It's after they've divided up the pie that the general unsecured creditors, of which PBGC is one, get whatever remains. Our recovery typically is in the order of 5 to 7 cents on the dollar, whereas you may get 90 cents on the dollar for the largest, the most secured creditors. ...

... It's the way the Bankruptcy Code allocates priorities right now. That's how Congress has set up the system. That's how our capital markets function. There are consequences to changing that. ... The question is, would credit [for distressed companies] dry up if you had a different set of rules? ...

Bill Brandt
Turnaround specialist

Let me ask you a broader question about the PBGC: ... Do we have perverse incentives here? If you put together the bankruptcy law and you put together the PBGC, ... you've got a government backstop. You've got pressure on companies that are in financial distress. They want to get rid of debt, they want to get rid of costs, and here you've got a reserve waiting in the wings. Is this a toxic combination?

No. This is the mirror image of what FDR used to save the banks in the '30s. ... We have something called the FDIC. ... The PBGC is set up the same way. ... Does it provide an all-too-easy access in bankruptcy for people who dump pension plans? Yes. Should the PBGC be sharpened up? Should the donations or the contributions or the premiums to it be substantial? Should the PBGC be allowed to go after [United Airlines CEO] Mr. [Glenn F.] Tilton individually for making the decision and making a claim on his wealth for doing this? Absolutely. The FDIC chases bank directors all the time. ... That's the one component missing from the PBGC. We've insured the risk; we haven't figured out a way to minimize the liability. FDIC has, not the PBGC.

So the way it affects the liability at PBGC is to make the directors and officers financially responsible?

Yes. Why not? Perhaps the trustees of the union, too. All the people that made decisions all along not to fund the union obligations adequately. Perhaps when they are sitting down at the negotiating table deciding just how big the pension is going to be and how egregious are the terms, [if] someone might stop and think, ... if we get carried away and this all falls apart, we are liable, [it] might have a certain sobering and focusing effect.

Elizabeth Warren
Professor, Harvard Law School

Other countries around the world make employees and retirees first in the [bankruptcy] priority. For example, in Mexico, the bankruptcy laws say if a company wants to go bankrupt, ... obligations to employees and retirees will have a first priority. That has an effect on every negotiation that takes place with every company in Mexico. ...

Do understand that around the world, there are more countries that ... do it the way Mexico did it [rather] than ... the way the United States did it. ... Other countries have said it is important as a matter of government policy to say that the employees and retirees have to be taken care of. Banks will adjust their prices accordingly. ...

... Very often in bankruptcy, it is globalization and global competition that is cited as one of the main reasons for having to get rid of ... the pension and the health benefits of retirees. And yet you are saying that in some of the countries ... we compete with, it's exactly the opposite? ...

Indeed. What we are starting to create now is a notion in the United States that it's old-fashioned and clearly unprofitable to make good on your promises to your employees and retirees. We've switched the whole conversation over so that companies say, in effect: "Hey, look, I'm competing around the world. I need you to give up your pension rights, your health care rights, all the promises that I've made to you, because prices would be lower somewhere else in the world." But ... in many other parts of world, whatever promises you've made to the employee, even if it's a lesser promise than the kinds of promises we've made in the United States, that promise is sacred. ... Evidently not so in our country. ...

James Sprayregen
United Airlines bankruptcy attorney

You can look at some of these places [around the world] where there's nominally better treatment for labor, and I would submit that it creates a tremendous disincentive to the financial community to invest fully in a lot of these enterprises, ... because [they] don't think they can get their money back. ... It would be nice to put worker obligations on a pedestal and say they are sacrosanct and need to be honored, ... but there's no free lunch. There is no painless way to go about this.

So to those who say we ought to change the bankruptcy law to modify the priorities and give more protection to workers, particularly to retirees or the PBGC, you are saying that that would be a mistake because it might undermine the very process of bankruptcy and reorganization?

I think it's always a fair topic for a discussion what the proper priorities are in bankruptcy. It's not a legal issue; it's a sociopolitical issue. People need to understand [that] whatever those priorities are going to be, [one needs to] take into [account] what that will do to a company's ability to operate and access the capital markets. ... If you tinker with that [so] that those financial institutions aren't willing to support companies in trouble, you very well may lessen the ability of companies to reorganize for the long-term greater good of their workforce.

Hugh Ray
Bankruptcy attorney

The unfortunate problem that we have is that if you don't work the system the way it is working now, you don't have a Chapter 11 for a major company at all. ... And if you choose to go another direction, there is no other direction except a liquidation. ...

If the law were changed, is there any reason to believe that the banks still would loan? The banks have got money; their business is loaning money.

Oh, if the law were changed, the banks would play, because they played before the situation was this way, sure.

So the idea that if you change ... the balance of priorities of the law, the banks wouldn't lend, you don't buy that idea?

No, the banks would find a way to loan. They look at the economics of the situation. ... If you put the employees ahead or you picked any group -- trade creditors -- and you put them ahead, they'd find a way to work within that system. That's how they have survived for a millennium.

Bill Repko
Formerly of JPMorgan, banker in United bankruptcy

If the bankruptcy law were changed, as some people have suggested, with slightly different or maybe significantly different calibration of priorities or some kind of balance, would that in the end affect the banks and the banks' willingness to do business?

I suspect it would create a degree of uncertainty. Right now, people are quite comfortable with the Bankruptcy Code and the order of priorities. The ability to deliver capital, which is the lifeblood of a reorganization, is quite stable; businesses which are very risky can acquire large amounts of capital and see if they can fix themselves. To the extent the priorities are changed, what it ultimately would do is call into question whether the business can reorganize itself based on what those changed priorities are. That's something which ought to be considered very carefully, and I'd be personally against them.

Bill Brandt
Turnaround specialist

We've talked to some folks about changing the bankruptcy law, but people tell us that if the bankruptcy law is tinkered with and you change the order of priorities that banks won't loan any money to companies in distress.

Did they mention the part about the sky will also fall? Banks are in the business of loaning money, and they change interest rates because there is a risk of not getting the money back. Might the interest rates have to go up because it's a little more risky for the banks? Yeah. They'll find a way, though. The sky is not going to fall. Frankly, I've heard the banks tell me the sky is going to fall for a number of years now. It's still up there, and they're still loaning money, and they're doing pretty well at that game, I think. ...

So do you think we should be revising the priorities without great risk to the process of corporate reorganization?

... We have now gone too far in the pendulum swing with respect to putting this on the back of the employees and the retirees. There is a clamor. Retirees and health care benefit people are voters; United, for all of its behemoth activities, doesn't cast a ballot in a ballot box. The politicians can figure that out.

Elizabeth Warren
Professor, Harvard Law School

We are remaking industrial policy in America through the combination of the weak [pension contribution] laws and ... bankruptcy laws that strongly favor the investors over the employees and pensioners, ... and we're doing it with no debate over the appropriate role of the worker and protection for the worker. ...

For people who say this is long overdue, I say, then let's have a debate about ... whether or not, as a matter of national policy, we want to have a world in which the only people who are guaranteed any ... value that is created in an industry are ... those people who bring capital to the table, and that there is nothing left over for the people who bring labor to the table. ... Let's have that debate. Let's not hide it off in weak enforcement of [pension] laws and in Chapter 11 of the bankruptcy laws. ...