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Bankruptcy Hypocrisy Hurts Employees and Shareholders
by Charles Ganske
25 June 2003

Last March, liberal democrats opposed bankruptcy reform on the grounds that people need to be able to "make a fresh start." Why not the same willingness to allow corporate debtors, their employees, and shareholders a second chance?

Under the English 1705 Bankruptcy Act, debtors could be publicly executed, and some even had their ears nailed, while still attached, to a pillory. Since then, Anglo-American bankruptcy law has undergone dramatic liberalization, culminating in the last major U.S. reforms in 1978 that made it easier for individuals to fully discharge their debts through Chapter 7 bankruptcy. Consequently, in the past 15 years, annual personal bankruptcies have ballooned from 350,000 to 1.4 million. This creates a drain on the economy of $400 per person every year.

In March, the U.S. House passed bankruptcy reform legislation by a vote of 315 to 113. The legislation would require individuals who continue to earn at least their state's median income to pay some of their debts after bankruptcy under a court-supervised five-year plan. Plans would be judicially tailored to each debtor to require payments only after the debtor has covered his own living expenses and those of his family. Homestead exemptions would also be limited to $125,000 to crackdown on the ability of bankrupt executives to shield mansions from creditors.

Congressman Jerrold Nadler (D-N.Y.) expressed the view of the over 100 liberal House Democrats who opposed the bill, saying that it would "make it too difficult for people to make a fresh start." Fair enough. This reflects a consistently liberal position favoring individual debtors, but why not the same willingness to allow corporate debtors, their employees, and shareholders a second chance?

The National Consumer League, the Communications Workers of America, and other union and special interest groups who are lobbying against the personal bankruptcy reform bill have formally asked the General Services Administration to cut off all federal contracts with WorldCom. Also, the Senate Governmental Affairs Committee has launched an investigation into these contracts, which include a Pentagon contract to build a wireless network in Iraq.

WorldCom, which has now taken the name of its long distance division MCI, is in Chapter 11 bankruptcy. The company filed a reorganization plan on April 13, which was preliminarily approved by over 90 percent of its creditors.

The company also agreed on May 19 to pay $500 billion to shareholders in a settlement with the Securities and Exchange Commission. This is the largest compensatory award to shareholders ever paid by a non-brokerage. More importantly, the company has made significant changes by bringing a new CEO and Board of Directors, and purging the handful of individuals who misled shareholders.

The liberal groups seeking to terminate all federal contracts with MCI would scream bloody murder if someone proposed discriminating against applicants for federal jobs who have gone through personal bankruptcy. Moreover, there is no precedent for the manipulation of federal contracts to interfere with court-sanctioned reorganization, and override the choice of the company that is the lowest bidder and most qualified for federal contracts.

Finally, ending MCI's government contracts, which the company continues to faithfully perform, will devastate innocent employees and shareholders, who have already suffered enormously. The unions' true motivation in making this demand is that MCI's employees, unlike many of their competitors, are not unionized. These competitors would otherwise be awarded the $2 billion in government contracts that now go to MCI.

Contrast this attempt to manipulate federal contracts to hinder a company from successfully reorganizing with the current federal bailout of the airlines, and the historic federal bailout of Chrysler. Unlike these companies, MCI is not seeking federal hand-outs, but simply wishes to continue competing for federal contracts on the same level playing field as all other companies. While taxpayer-funded corporate bailouts are properly controversial, equal treatment should not be.

This assault on MCI is symptomatic of liberals' tendency to make unwarranted distinctions between individuals and corporations, which are simply collections of individuals. Even if the personal bankruptcy reform bill passes, expunging debts would remain far easier for individuals than corporations. Corporations must gain the approval of creditors to avoid complete liquidation, the corporate equivalent of now-abolished debtors' prisons.

Whatever the failings of individuals or corporations that lead to bankruptcy, there are almost always victims on both sides: the debtor's family or corporate shareholders and employees on one hand and creditors on the other. Thus, good bankruptcy law for both individuals and corporations promotes a return to solvency, protects creditors, and avoids creating undue incentives for declaring bankruptcy.

Rather than exact moral retribution, modern law seeks to achieve the best practical outcome for all involved. Historically, liberals deserve praise for bringing us to a point where debtors are no longer pilloried, but this is exactly why their attempt to punish MCI's employees and shareholders is ideologically bankrupt.
Charles Ganske is a Fellow at the Austin, TX-based American Freedom Center.

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