Protecting Pension Assets in Bankruptcy

Senate Committee on Health, Education, Labor & Pensions, April 13, 2000

Sen. James Jeffords (R-Vt.)
Chairman, Senate Committee on Health, Education, Labor & Pensions

In the near future, the House and Senate may vote on a final version of H.R. 833, the Bankruptcy Reform Act of 2000. The Senate-passed bill (S. 625) contains a provision, §303(c), that causes me great concern. The provision would permit boilerplate language to be inserted into credit card applications, requiring individuals to sign over their pensions in bankruptcy.

I fear than many individuals will sign away their pensions unknowingly. Even for knowledgeable consumers, the cost of applying for a credit card should not be one's retirement security.

To prevent this very thing from happening, anti-alienation protections were written into ERISA in 1974 and similar protections were put into the Internal Revenue Code back in 1938. I strongly oppose any change in bankruptcy law that could put pensions at risk.

This all comes on the heels of a similar idea considered last year in the Judiciary Committee. That proposal would have placed a cap on the amount of pension assets protected in bankruptcy. After I discussed that provision with Senator (Orrin) Hatch, the provision was dropped from consideration. The provision that now appears in the Senate-passed bill is even worse.

Prof. Bruce A. Markell
University of Nevada-Las Vegas School of Law

Section 522(d)(10)(E) now allows that...payments may be exempted only to the extent necessary for the support of the debtor and the debtor's dependents. As a consequence, some cases hold that a debtor may exclude funds from a pension plan held to be property of the estate only when the debtor and his or her dependents require the funds to subsist. If the debtor's current income is sufficient, the courts are reluctant to allow any exemption under this provision if the debtor will have an opportunity to re-establish a retirement fund and meet current expenses.

Permitting waivers of exemptions in pension assets sets in motion a tension between the past and the future. Pension assets typically provide for support during old age, and allowing a debtor effectively to transfer those assets to creditors on debts incurred while young in essence allows borrowing or stealing from the future.

The possibility of inadvertent waivers leading...is not fanciful. Section 303(c) does not, as other provisions of the Bankruptcy Code do, provide any procedural protections to ensure that any waiver is voluntary and intentional. There is no requirement that the waiver be written, or that it be tested by an administrative or judicial tribunal. This is in stark contrast to the protections given with respect to liabilities reaffirmed by the debtor.

Section 303(c) is bad bankruptcy policy. It would create an exception in bankruptcy for exempt retirement assets that does not exist for any other type of exempt asset. Further, by permitting this exception to apply in cases of "waiver", when there are no procedural safeguards on the granting of such a waiver, it effectively allows relatively easy relinquishment of rights to retirement assets. Given the numbers of older Americans who need to file bankruptcy, and the job and medical reasons that impel them to file, §303(c) can be seen as a pernicious trading of the future for the past, with adverse consequences to all but the creditors involved.

James S. Ray
AFL-CIO

A secondary, but still important, policy consideration underlying ERISA's anti-alienation rules is the effect of benefit diversions to third parties on a pension plan itself. Congress was mindful that, particularly in the case of multi-employer plans, costs of administration translate into lower benefits for covered workers and their families.

Section 303(c) would upset the ERISA protection for plans as well. Plans would be enveloped in administrative activities and in litigation over creditors' claims. Confronted by a creditor's claim, the plan's officials would have a fiduciary duty to investigate the claim's validity and, perhaps, resist enforcement of the claim (through litigation or otherwise) to protect the participant's benefits.

The Scope of the Government's Exception to the Automatic Stay for Regulatory Actions

House Subcommittee on Commercial & Administrative Law, April 11, 2000

Christopher J. Wright
Federal Communications Commission

As you know, the FCC is involved in a number of bankruptcy proceedings involving companies that bid for "C-block" licenses to provide wireless telecommunications service. The licenses were awarded by the FCC by means of auctions, and the licenses state plainly on their face that they cancel automatically if payment is not made in full and on time. The key issue in those cases is whether the FCC is property viewed as a "creditor" or a "regulator." The C-block licensees have argued that the FCC is properly viewed as merely another creditor. Accordingly, they have asked bankruptcy courts to permit them to retain their licenses at amounts less than they bid and even though they failed to make payments that were due. We were, of course, very pleased that the Second Circuit, the only court of appeals to have addressed the issue, recently ruled very forcefully that we were properly viewed as a regulator, and held that the bankruptcy court lacked authority to permit NextWave to retain its licenses without satisfying the full and timely payment requirements. (See FCC v. NextWave Personal Communications Inc., 200 F.3d 43 (2d Cir. 1999)).

The Second Circuit correctly understood that the bankruptcy court had erred by failing to appreciate that the FCC is not a mere creditor. The promise to pay the amount bid at auction on the terms set by the FCC has independent regulatory significance. Our method of distributing licenses obviously is premised on the ability to pay what you bid: willingness to bid a large amount, even though you cannot pay it, does not identify an applicant as the person best able to put the spectrum to productive use. In addition, in every auction the winning bidder outbids someone else, and it undermines the integrity of the auction process of a high bidder that cannot pay what it bid according to the terms set nevertheless retains the license. For that reason, every Personal Communications Service (PCS) license won at auction, for which installment payments were available as an option, plainly stated that it canceled automatically if payments were not made in full and on time. If a bankruptcy court rewrites the amount owed or the terms of payment, it interferes with our core regulatory function. As the Second Circuit stated, "the FCC made full and timely payment of a winning bid a regulatory condition for obtaining and retaining a spectrum license." NextWave, 200 F3d at 52, quoting 47 C.F.R. 24.708. That court correctly held that "the bankruptcy court had no authority...to interfere with the FCC's system for allocating spectrum licenses."

The Second Circuit also recognized, and we do not dispute, that there may be situations in which we are properly viewed as a creditor rather than as a regulator. 200 F.3d at 59 n.15. Our rules provide that if you do not pay what you bid on time, you lose your license. The Second Circuit suggested that if we pursued a deficiency judgement following such a default, we might properly be viewed as a creditor. In other words, where we are seeking to collect money from the estate, we may be a creditor. But where the question is who holds spectrum licenses, we are properly viewed as a regulator.

If you amend the Bankruptcy Code, you should codify their decisions. You certainly should not overturn them.

Prof. Douglas G. Baird
University of Chicago Law School

No policy is served by giving the FCC priority when it could have, if it made economic sense, bargained for such priority in the same way as any other creditor. NextWave suggests that it might make sense to clarify the law on the question of how licenses should be treated in bankruptcy. New legislation could clarify the law to ensure that licenses are treated as "property of the estate" and that a regulator like the FCC enjoys the status of a creditor when it holds the promissory note of one of its licensees.