general assets: (a) funds paid by customers toward the purchase price of a commodity (exclusive of separately-stated fees and charges) and (b) any property or contracts (and accrued profits thereon) obtained by using such funds, such as physical commodities and/or futures contracts obtained to cover the LTM's obligations to the customer and investments in those government obligations permitted by section 4d (2) of the CE Act. The Advisory Committee has indicated that it believes that any such segregation program rests on the premise that the funds, property and contracts to be segregated are and should be treated as those of the customer, essentially in the same manner as futures contract "margin" funds of customers are treated under section 4d (2) of the CE Act and the regulations thereunder. As stated above, section 217 provides that a leverage transaction "shall be regulated in accordance with the provisions of" the CE Act if a given leverage transaction is determined by the CFTC to be a futures contract within the meaning of the CE Act. If such a determination were made, an LTM would be required to register under the CE Act as a futures commission merchant and customer funds received by this LTM-FCM would be subject to the segregation requirements established by section 4d (2) of that Act and the regulations thereunder. In such a case, of course, the CFTC's recommendations with respect to the amendment of the Bankruptcy Act as they relate to futures commission merchants and clearing houses would apply. It is likely, however, that the CFTC will determine that one or more forms of leverage transactions, as they are presently traded or those which may be traded in the future, are not futures contracts. In such event the CFTC will adopt appropriate regulations governing these transactions and will undoubtedly impose segregation requirements on LTM's consistent with the Congressional mandate of section 217 to prevent fraud and manipulation and preserve the financial solvency of the transactions. Whether segregation will be required of all funds paid by customers toward the purchase price of the commodity and/or any property obtained by using such funds, such as futures contract obtained by the LTM to cover its obligations, is a determination which the CFTC will make after it has completed its evaluation of the Advisory Committee report. As in the case of commodity option transactions and futures transactions, however, the CFTC believes that the Bankruptcy Act must be amended to recognize the effect of any segregation requirements which are imposed in a leverage transaction, particularly since these will be solely regulatory in nature and not specifically provided for by the CE Act or the CFTC Act. As in the case of customers in futures contracts and commodity option transactions, the CFTC believes that commodity customers in leverage transactions must have their rights, as reflected in the CE Act, the CFTC Act and the CFTC's regulations, specifically recognized in the event the persons with whom they deal who are regulated by the CFTC suffer a bankruptcy. CFTC RECOMMENDATIONS Based on the foregoing, the CFTC recommends that the Congress amend the Bankruptcy Act to provide as follows: Where the bankrupt is any person who, in accordance with regulations adopted by the CFTC, is required to segregate from its assets, any money, securities or other property received from its customers in any transactions subject to regulation under section 217 of the CFTC Act, or any profits or contractual or other rights in whatever form accruing to such customers in such transaction: 1. To the extent provided in such regulations, such money, securities and other property and such profits and contractual and other rights, shall constitute a single and separate fund. Such customers shall constitute a single and separate class of creditors entitled to share ratably in such fund on the basis of their net equities as of the date of bankruptcy. 2. The CFTC shall have the power, by rule, regulation or order, to specify how the net equities of any customer shall be determined, the method by which the business of the bankrupt shall be conducted after the date of bankruptcy and the manner in which property may be specifically identified as belonging to a particular customer and returned to such customer in accordance with a ratable distribution. 3. The CFTC shall receive prompt notice of the filing of the petition in bankruptcy and shall receive copies of any filings in the bankruptcy proceeding. On its application, the CFTC shall be admitted as a party, to the extent it deems appropriate, in the bankruptcy proceeding. BANKRUPTCY ACT REVISION MONDAY, APRIL 12, 1976 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CIVIL AND CONSTITUTIONAL RIGHTS OF THE COMMITTEE ON THE JUDICIARY, Washington, D.C. The subcommittee met, pursuant to notice, at 9:41 a.m., in room 2226, Rayburn House Office Building, Hon. Don Edwards [chairman of the subcommittee] presiding. Present: Representatives Edwards and Butler. Also present: Alan A. Parker, counsel; Richard B. Levin, assistant counsel; and Kenneth N. Klee, associate counsel. Mr. EDWARDS. The subcommittee will come to order. Today the subcommittee will hear from witnesses about miscellaneous provisions relating to business bankruptcy. First we will hear from Mr. Max Zimny, general counsel of the International Ladies' Garment Workers Union, AFL-CIO. He is accompanied by Mr. Jeffrey Gibbs of the Industrial Union Department of the AFL-CIO; Mr. Stanley Wisniewski, research director of the Service Employees International Union, AFL-CIO; and Mr. A. E. Lawson of the United Steelworkers' Union, AFL-CIO. All of your prepared statements will be included in the record. We also welcome Evelyn Dubrow, who has been a longtime friend of ours and has represented the International well here in Washington for a number of years. We welcome you. Mr. Zimny, do you want to proceed first? [The prepared statement of Max Zimny is as follows:] STATEMENT OF MAX ZIMNY, GENERAL COUNSEL, INTERNATIONAL LADIES Garment WORKERS UNION, AFL-CIO My name is Max Zimny. I am general counsel of the International Ladies Garment Workers Union (ILGWU). This morning, I speak for the ILGWU, the AFL-CIO, the United Auto Workers, and the Amalgamated Clothing Workers of America. I am authorized to state that these other unions fully support the position of the ILGWU regarding revisions in the bankruptcy law hereafter set forth. The major focus of the ILGWU and our sister unions is with the treatment of employee wages and fringe benefits in H.R. 31 and H.R. 32. Wage earners are entitled to fair treatment as secured or preferred creditors for take home pay as well as for benefit plans which cover health, welfare, pension and other needs of workers and their families. The direct wage preferment is some 50 years old and outdated both in amount and time span. There is no preferment whatsoever for that portion of the wage package devoted to health, welfare, pensions and other worker benefits. Accordingly, we come before you today for your help in correcting these serious legal, economic and sociological deficiencies. We urge that take home wages be treated as a secured claim or, at the very least, the amount and period of this wage priority be realistically enlarged. We also urge with equal force that the priority presently set forth in H.R. 31 and H.R. 32 for employee benefit plans be improved by broadening the description of employee benefit plans which come within it and by expansion of the amount of the fund delinquency subject to the priority. Finally, to assure that the workplace remains tranquil and productive during the uncertain course of the bankruptcy proceeding in which the enterprise continues to operate, we propose that the trustee in bankruptcy be deprived of the power to reject a labor contract, as he can a commercial contract, because the labor contract governs the day-to-day interplay between labor and management in the plant as distinguished from the commercial transaction. The labor contract is as much a part of the worker and the workplace as tools or the workbench. Plant stability is critical for survival of the estate. Hence, the labor contract is worlds apart from the commercial transaction between debtor and creditor which a trustee is empowered to reject to preserve the estate. Benefit plans have assumed immense importance in sustaining the needs of the worker and his or her family. As the cost of living has increased and as the cost of doctors, dentists, medication, lawyers and the like have shot upward, the wage earner has become more and more dependent upon benefit plans to fulfill critical daily needs. Suffice it to say that the steadily rising cost of living and the consistent failure of wages to match the rising inflation have greatly magnified the problem. Providing special protection for direct take home wages without providing equal protection for indirect wages paid to employee benefit plans is an economic and legal anachronism, to say the least. Yet that is the present state of the Bankruptcy Law. It must be fully corrected. In apparel and other industries in which small marginal producers occupy a central role, business failures normally occur at an alarming rate. In the apparel trades, for example, in better times, about 17% of the firms fail each year. In today's economy, I judge the rate to be even higher. Though a total failure to pay take home wages may not be tolerated for very long, a partial payment is often tolerated for a much longer period to try to preserve the enterprise. Greater leeway is afforded the failure to pay benefit fund contributions because, in the nature of things, such a failure has a less immediate effect upon workers because benefit funds may have an accumulation of assets which postpones the impact of the deliquency. Moreover, neither workers, their unions, nor fund administrators feel comfortable riding close-herd on the very troubled employer. The tendency is not to block a reasonable effort for the survival of the enterprise and the jobs-especially in an ailing economy. Thus, while economic life slowly trickles away, delinquencies of workers' wages and benefit fund contributions continue to mount. Workers and their families must be protected by debtor and creditor laws or they become unwitting casualities of responsible efforts to salvage their jobs and the failing enterprise. The degree of harm must not be minimized. It runs into millions of dollars. A substantial portion of the wage deliquency represents benefit fund contributions of firms in federal bankruptcy proceedings; and because of the federal law's failure to accord priority treatment to benefit fund contributions, this large sum of money is virtually unrecoverable. Normal losses increased substantially in the recession year of 1974 and 1975. These losses to health, welfare, pension, severance and other employee benefit funds are directly attributable to the failure of the federal bankruptcy law to accord a wage priority to benefit fund contributions. The losses would be even greater if the insolvency laws of states like New York did not provide priority treatment for fund contributions. It is clear, indeed, that a considerable amount of money is lost each year by funds providing critically important employee benefits to workers and their families. A bankruptcy statute appeared in the laws of the United States in the year 1800. Subsequently, in the Bankruptcy Act of 1841, a provision was first enacted granting priority for unpaid wages. At that time, the wage priority granted was for an amount not exceeding $25.00 to any person who performed labor as an employee in the service of a bankrupt; it also required that this sum shall have been earned within the six-month period next preceding the bankruptcy.' Thereafter, by successive amendments, the wages subject to priority were gradually raised. In 1926, the maximum amount of the wage priority was raised to $600. With the passage of the Chandler Act in 1938, wages were granted a priority ahead of all other claims except those representing the actual costs of preserving the bankrupt's estate.' Congress has also periodically changed the defi 1 Bankruptcy Act of 1800, c. 19, 2 Stat. 19 repealed by Act of December 19, 1803, c. 6, 2 Stat. 248. 2 Act of August 19, 1841, c. 9. 5 Stat. 440. Act of March 27, 1926, c. 406, 44 Stat. 662. nition of the class of employees whose wages enjoy priority, and its usual practice has been to extend the coverage. During this entire period covering more than 125 years, Congress has from time to time reenacted, revised or amended the wage priority provision of the Bankruptcy Act but it has never seen fit to define the term "wages." The usual explanation for the fact that no such definition was included is that the word "wages" is a plain, simple word meaning "the agreed compensation for services rendered." (In re Gurewitz, 121 Fed. 982, 983 (2nd Cir. 1903).) In a series of decisions, the courts had uniformly held various types of remuneration to be "wages" within the meaning of the Act. Thus, vacation pay was held to be wages in Division of Labor Law Enforcement v. Sampsell, 172 F. 2d 400 (CA-9); In re Public Ledger, Inc., 161 F. 2d 762 (CA-3); In re Will-Low Cafeterias, Inc., 111 F. 2d 429 (CA-2); In re Kinney Aluminum Co., 78 F. Supp. 565 (S.C. Cal.). Severance pay was also held to be wages in Kavanas v. Mead, 171 F. 2d 195 (CA-4); In re Public Ledger, Inc., supra; In re Elliot Wholesale Grocery Co., 98 F. Supp. 1017 (S.D. Cal.), aff'd sub nom, McCloskey v. Division of Labor Law Enforcement, 200 F. 2d 402 (CA-9). Similarly, a back pay award of the National Labor Relations Board was also held to be "wages" within the meaning of the Act in National Labor Relations Board v. Killoran, 122 F. 2d 609 (CA-8), cert. denied 314 U.S. 696; Nathanson v. National Labor Relations Board, 344 U.S. 25. As long as the courts interpreted "wages" to include all benefits received by an employee in exchange for services rendered, Congress appeared satisfied and no statutory effort to further define the term was undertaken. This seemingly expansive approach was brought to an abrupt halt in the 1959 decision of the United States Supreme Court in United States v. Embassy Restaurant, Inc., 359 U.S. 29, which held that money due employee benefit funds does not fall within the definition of wages entitled to priority under the Bankruptcy Law. In Embassy, the Court held that contributions due from a bankrupt employer to a union welfare fund under a collective bargaining agreement are not entitled to priority under § 64(a) (2) of the Bankruptcy Act as "wages... due to workmen." (At p. 31) Mr. Justice Clark, writing for a six member majority, noted the importance of benefit funds to employees, their purpose being to "maintain life insurance, weekly sick benefits, hospital and surgical benefits and other advantages for members of the locals." (At p. 30) Nevertheless, the Court felt constrained to deny a priority to employee benefit funds because of the narrow compass of the definition of wages under the historical circumstances attending enactment of the Bankruptcy Act. It noted that wages were first entitled to a preferred status long before welfare funds played any part in labor negotiations (at p. 31), and that although Congress had amended the Act, it had never seen fit to give benefit fund contributions priority status, even though the purpose of the wage priority was to "provide the workman with a protective cushion against economic displacement caused by his employer's bankruptcy." (At p. 33) Said the Court: "... It is therefore evident that not all types of obligations due employees from their employers are regarded by Congress as being within the concept of wages, even though having some relation to employment." (At p. 32) The Court concluded: "... [u]nder the Bankruptcy Act . . . not all claims 'justly due' have priority. They must be within a class, such as 'wages. . . due to workmen.' The claims here are not. If this class is to be so enlarged, it must be done by the Congress." (At p. 35) In 1968, the Embassy decision was cast in concrete by another decision of the Supreme Court. Embassy had held that welfare fund payments are not entitled to priority. In Joint Industry Board of the Electrical Industry v. United States, 391 U.S. 224, the Court held that a contribution to a workers' annuity plan-a clear form of deferred payment of wages- are not entitled to priority as "wages ... due to workmen." Finding that Embassy was controlling, the Court again felt constrained to refrain from tampering with the Congressional intent expressed in the Bankructpy Act. Writing for a six member majority, Mr. Justice White reaffirmed the Embassy holding that the Bankructpy Act was not designed to 5 Act of March 2, 1867, c. 176, 14 Stat. 517. Act of July 1, 1968, c. 541, 30 Stat. 544. Act of June 15, 1906. c. 3333, 34 Stat. 267. Act of May 27, 1926, c. 406, 44 Stat. 662. 11 U.S.C. 104 (Supp. V, 1952). accord priority to anything other than direct take home pay. The Court again announced that the solution to the problems lies with Congress: "[i]f there is still any question as to whether claims for unpaid contributions to provide deferred benefits to employees should share the assets of bankrupts with general creditors or should be entitled to the limited priority granted wages due to workmen, any new resolution of that question should come from Congress." (At p. 229) Despite the moving dissents in both Embassy and Joint Board urging that payments to benefit funds are indeed "wages... due to workmen," the Bankruptcy Act's wage priority provision remain substantially the same today as it was in 1841. Yet the cost of living and the state of the nation have assumed radically different proportions. Today, the importance of safeguarding plan contributions is greater than ever before. The depressed economy makes the case for according benefit fund contributions priority in federal bankruptcy proceedings more compelling than ever before. Federal law must be brought into tune with national needs. We would do H.R. 31 and 32 an injustice if we did not state that we welcome the inclusion of Section 4-405(a)(3) and (a) (4) in the Bills, as fas as they go. These provisions of Section 4-405 are a major step forward in preserving for workers what is rightfully theirs. However, working men and women have waited a long time for more adequate protection of their wages and benefits in federal bankruptcy proceedings. H.R. 31 and 32 present an usually good opportunity to finally rectify long-standing injustices. Halfway measures must be avoided and full protection must finally be granted. It is in this spirit that the ILGWU and its sister unions remain critical of H.R. 31 and 32. Let us turn first to Paragraph (a)(3): the direct wage priority. Wages should be treated first of all as a secured claim, just as in many states where lienor rights are accorded wage claimants. At the very least, the amount and period of wage priority under Paragraph (a)(3) should be increased. In 1841, the period of wage priority was six months. However, over the years, as Congress increased the amount of the wage priority, it concomitantly decreased the period of the priority; a three month period was established in 1926. The three month period has not been changed in 50 years. It must be changed now. There are cases, I am sure, where employees of very large employers would not tolerate a wage delinquency for very long. But such employers rarely go into bankruptcy and their particular problems are of comparatively limited concern. However, in those sectors of the economy where smaller enterprises prevail, workers are willing to defer at least part payment of wages to save their jobs. In such cases, wages may be owed for more than three months, and the amount owed can mount substantially. Moreover, it is not infrequently the case that the wages owed accumulate during the substantial period of time during which an employer teeters near and at the edge of bankruptcy while continuing operations, until finally it fails after many months of marginal operation. The measuring period specified by Paragraph (a) (3) must be worded to embrace this event by adding the word "substantial" before the phrase "cessation of the debtor's business" so that the time period for measuring the wage priority begins prior to "the substantial cessation of the debtor's business." We ask that the period for the wage priority be increased to six (6) months "before either the date of the petition or the substantial cessation of the debtor's business, whichever is earlier." The amount of wage priority must also be increased to bring it up-to-date. In 1926, the Bankruptcy Act limited the amount of wages entitled to priority to $600. It does not require an economic pundit to acknowledge that since 1926 the average wage paid to an employee in the United States has increased very substantially. Furthermore, today it would require many, many times $600 to buy what $600 would buy in 1926. The $1200 figure provided in Paragraph (a) (3) is therefore plainly insufficient. At the modest figure of $6.00 an hour for a 40 hour week or $240 per week, the $1200 figure is consumed in five weeks. This hourly rate is below the rate paid to many employees and their period of wage priority is reduced correspondingly. We therefore urge this Committee to substantially increase the amount of the wage priority in the bills. We suggest $3000 or more. We turn now to Paragraph (a)(4). This Paragraph is defective in a number of respects. First, its description of employee benefit plans is too narrow. As See Embassy Restaurant, Inc., 359 U.S. 29, 37-38; and Joint Industry Board, 391 U.S. 224, 230. |