July 16, 2018

Warren Delivers Remarks to New England Council

Senator Discusses Ways Congress Can Improve U.S. Business Bankruptcy System

Boston, MA - This morning, in a speech delivered to the New England Council, United States Senator Elizabeth Warren (D-Mass.) discussed the ways that Congress can improve the U.S. business bankruptcy system.  The full text of her remarks is available below. 

Remarks by Senator Elizabeth Warren
*As prepared for delivery*
July 16, 2018

Thanks so much to Marianne for that kind introduction - and to New England Council for welcoming me here today.

I'm always glad to have a chance to speak with the New England Council. Your commitment to the pursuit of public policy that promotes economic development throughout New England is vital to our commonwealth.

The New England Council has been an extraordinary player in pressing our government-both state and federal-to pursue policies that help set the conditions we need for businesses to succeed. And, boy, there's a lot to be done. Tax policy, health care, investments in infrastructure, first-rate educational opportunities from preschool to grad school. Count me in.  I'm deeply invested in every one of these issues.

These are the kinds of issues that politicians LIKE to talk about. But my topic today is something politicians don't usually like to talk about. What happens when businesses fail? 

I get it:  no one wants to think about a business failing.  Every venture begins with someone who believes they can make it work.  But a lot can go wrong.  A giant storm wipes out a critical link in a distribution chain.  The city tears up the street and sidewalk right outside the store.  The partners get into a fight-and the business is destroyed in a tug of war.  One thing-or a million things-can cause a good business run by hard workers to crash and burn. 

And here's where public policy comes in.  When that happens, when a business stumbles and falls, what should the law be?  And as you sit in this lovely room and think about your own secure businesses, you may be thinking, "OK, she's headed off into something I don't care about.  My business is doing fine."  But before you start checking your text messages and scrolling the latest headlines, let me make the pitch that anyone who cares about the conditions that help businesses succeed should care a lot about the rules that apply when businesses fail.

I'll do three quick reasons, although as a bankruptcy professor for more than 30 years, I could rattle off about a hundred.  Focus, Elizabeth, focus.

Why care about bankruptcy? 

First, it could happen to you.  All those things that can go wrong look very far off until they actually happen.  The business world is littered with companies that were thought to be invincible -- right up until the killer moment: Worldcom and accounting fraud, Blockbuster and disruptive new companies; PanAm and terrorism.  Toys 'R' Us, Payless Shoes, Radio Shack and Gymboree were all once bright stars-stars that all fell in 2017.  And every year there were the less spectacular failures that happened to a few thousand smaller businesses.

And here's where policy comes in.  What happens to your business and the chance that your business survives a serious problem depends on bankruptcy law-public policy-that was negotiated long before the particular problem arises.

Second, even if it doesn't happen to you, it can happen to someone who owes you money.  The company that bought your products-and still hasn't paid. The investment firm that handles your retirement accounts.  The delivery company whose truck smashed into your building and hurt four of your employees.  It's a long list.  Again, what happens to your business depends on bankruptcy law.

Third, every smart business thinks through risks in advance-shaping and re-shaping legal structures to account for those risks, to price those risks, and to decide which risks are tolerable and which are not. 

Those calculations have an impact on every transaction you make, from contributing money to your employees' retirement funds to deciding whether to lease or buy a major piece of equipment.  And here's the kicker, even if you aren't doing those calculations, a lot of other businesses are doing them, which gives those businesses a relative, long-term advantage.

OK, so that's my pitch.  Bankruptcy policy is a big deal.  The impacts of the policy decisions are threaded through nearly every business relationship. 

I believe in markets and in capitalism, and, as a long-time professor of bankruptcy law, I know how hard it is to deal with the problem of a failed business.  The basic realities are harsh: the fact is that, as a business fails, it isn't possible to fully compensate everyone and there is often immense suffering involved.  But those harsh realities are the very reason that a functioning bankruptcy system is critical for our economy to work.

Not every country does this the same way. In some countries, if a big business goes bankrupt, it can always count on the government to bail them out. Some countries punish a company's directors when the company fails--even when the directors have done nothing wrong. But in the US, we don't want massive taxpayer bailouts and we don't want to scare people away from taking reasonable risks. We want functioning markets.

That's why, in the United States, our business bankruptcy system should be guided by some key principles of how to make the best of it when a company fails. And much of my academic work has been about how to improve the bankruptcy system to better live up to these principles. 

First principle: Make the pie as big as possible.  Bankruptcy law should be designed to preserve as much value as possible.  That's the reason that bankruptcy policy tilts toward keeping a failing business open-to preserve going-concern value-so that there's more money available for the creditors. 

Part of the preserve-the-pie philosophy is to look at everything together and get it all fixed at one time. When a business fails, every owner, every investor, every creditor, every employee, every pensioner, every buyer, every seller, every victim of a company's faulty products is potentially affected.  So bankruptcy policy must resolve every debt owed by the bankrupt company at the same time-not strangle the business over time by dragging out disputes and burdening the future business with an unknown package of debts.

Bankruptcy is about coming up with the fairest outcome possible in a totally unfair situation. And, this is really important, we do the best we can, we do it once - and then it's done. A business goes into bankruptcy, settles the disputes, pays whatever is possible, then gets out of the bankruptcy. 

That may sound simple, but sometimes it is mind-numbingly complex.  Think about the possibility of future victims-people who will climb the ladders already sold and discover the defects only later when they fall and break a leg, or people who breathed silica dust and won't find out about the cancer percolating in their lungs until years after the company that caused the problem filed bankruptcy.

Resolving all claims at one time can be hard, because including future victims can mean less pie for current victims, or employees, or investors. But I believe that addressing all of those claims at once in bankruptcy is better than either leaving future victims with nothing or sinking a business that is about to emerge from bankruptcy - and destroying value for the other creditors.  

And that leads to the second principle:  Divide the pie as fairly as possible.   

The tilt in bankruptcy law that favors keeping businesses open-under new ownership and management, but still open-follows this principle of fair division. Failing businesses are often the lifeblood of their communities. The vibrancy of neighborhoods, towns, and cities may depend on the continuing operation of a business. Employees, retirees, property values, customers, and suppliers will all suffer losses if the business is liquidated-hence the push toward reorganization. And let me just point out one more time that this sounds simple, but in practice is devilishly complex. Many of these considerations conflict with the legitimate interests of other creditors.

Another factor for fair division is the ability of different participants to bear the costs of the downfall of the company. For example, employees are less able than commercial creditors to spread the risks of a company's bankruptcy-so their outstanding paychecks are covered first.

Fair division of the pie also means every creditor goes to court on the same day to face the same set of rules.  No carve outs for some people to sue later; no carve outs for some problems to get resolved later. It also means, to the greatest extent possible, treating creditors who are similar in a similar manner.

For example, we try to treat all unsecured creditors, those without collateral, together. This prevents some of them from getting an extra piece of pie because they are related to the business owner or because they can threaten lawsuits all over the country. It means no one gets to jump the line.  Bankruptcy needs everyone to line up at the same time in the same place so they can each get a fair share - no more, no less.

And here is where the first and second principles are intertwined.  When all the creditors must resolve their disputes in a single setting, not only is the pie divided fairly-the pie is also kept as big as possible. A company that is reorganized through a single bankruptcy proceeding saves on costs and is far stronger than a company subjected to an ad-hoc, strung out, disorganized process that will inevitably burn money through lawyers' fees and give bigger, savvier, more powerful creditors an unfair advantage. And if a bankrupt company is restructured and re-launched, the new company will be more valuable-and have more value to distribute to its creditors-if it has a fresh start and isn't burdened by the old company's failings. Without this principle, restructured companies are at risk of death by a thousand cuts; they can never move forward.

Third principle: The people who took the risks and who make the profits if the business succeeds should also be the people who pay the price if the business fails. Owners should be responsible for the losses that come from betting and losing. For me, this is the heart of capitalism-take a chance and scoop up the profits for winning, but be equally willing to absorb the losses for losing.  This, by the way, is also why I'm such a strong skeptic of taxpayer bailouts and why I fight the too-big-to-fail businesses. If investors know that somebody else will pay off their failed bets, then those investors will take crazy risks and markets don't work. As we now know, too-big-to-fail puts our entire economy at risk.

And one final principle: strictly police efforts to game the system. For example, if someone knows that a company is likely to go bankrupt, they might make contracts with the company so they can suck out value immediately prior to it going under. That would leave people who aren't in the know out in the cold. 

Our bankruptcy system must balance these many principles. And part of what is so difficult is that these principles don't always point in the same direction. The core challenge of bankruptcy is that the failure of a business creates suffering for everyone involved.

And it doesn't just pit banks against workers. It pits employees against retirees, current victims against future victims, small suppliers against secured lenders, and it can make enemies out of those who are otherwise allies. In that context, bankruptcy law is about making the best of a terrible situation and making painful choices to apportion suffering as fairly as possible-always with an eye toward the future. Someone is always unhappy, so you can see why elected officials hate talking about it.

And now, let's get down to the really tough part-not policy, but the politics of the policy.

I've devoted a large part of my life to understanding how we get bankruptcy rules right. I've done that for one simple reason: no matter the rules, markets will always leave us with winners and losers. Bankruptcy law is how we deal with the losers.

And how we set those rules matters - a lot. Because like every other economic rule, if we get it right, our economy will grow, our companies will succeed, and our families and communities will thrive. And if we get it wrong, bankruptcy will stop being a fair and efficient system for resolving economic failure and become just one more rigged game that those with power can use to serve their interests while quite literally leaving everyone else to pay the bill. 

Once a bankruptcy is filed, everyone looks out for themselves, even when their own interests are at odds with maintaining the integrity of a fair bankruptcy system. That is their right, and sometimes their claims are pretty sympathetic - a victim of a company's bad behavior, for example, who pops up after the bankruptcy and wants the right to collect a bigger share than everyone else got in the original bankruptcy proceeding. Other times, those efforts aren't at all sympathetic - a secured creditor, for example, who wants to be able to repossess his equipment when the company goes bankrupt, even if it will result in the immediate collapse of the company, torpedo hundreds of jobs, and destroy a community.

No matter how sympathetic the situation, it is the job of bankruptcy judges to do their level best to uphold the principles of bankruptcy in order to maintain a system that is as fair as possible. But there's a catch -Congress sets the ground rules of the game. And that's where big problems start to crop up. 

Powerful creditors know the politics.  They know that Congress sets the rules that will determine how much they can recover in bankruptcy.  And since some powerful creditors are repeat players-like big banks, for example-they figured out that it makes sense to work together to try to rig those rules to serve their own interests, even when it means undermining core bankruptcy principles. 

I got a bitter taste of politics in the 1990s, struggling with exactly this problem.  I was a full-time professor, but I was also appointed to the National Bankruptcy Review Commission.  Our job was to make recommendations to update the bankruptcy laws. We spent two years producing a detailed, bipartisan report to Congress.  And then I watched as banks, credit card companies and debt collectors persuaded Congress to ignore those recommendations and write a bill that would benefit themselves by squeezing working people and failing companies harder than ever.

I spent a decade fighting to stop that bill from becoming law. Eventually, I lost. And today, big banks, credit card companies and student loan companies are doing great, while millions of Americans and small businesses that no longer have strong bankruptcy protections are struggling.

Then, a few years after I lost that fight, I watched as Congress rushed to bail out giant banks whose risk-taking had tanked our economy, a bailout with virtually no strings attached.  Congress shoveled money to huge financial institutions with none of the protections built into the bankruptcy system and nothing that would limit the incentives for big banks to act recklessly again in the future and come back to Congress demanding another bailout.

Those experiences helped forge my understanding of how businesses and Congress interact. There are a lot of powerful businesses that pay lip service to capitalism, but that don't really believe in competitive markets--well, they believe in competition and market discipline for everyone else, just not for themselves.

It was during the Bankruptcy Wars and again during the Great Bank Bailouts of 2008 that I watched some of this up close - big banks in particular -- that had no problem blowing up the rules that keep our economy growing, the rules that keep our companies thriving, keep our workers employed and provide real market discipline - no problem blowing all of that up so long as they improved their own short-term financial interests. Big banks that deployed armies of lawyers and lobbyists to convince America's elected representatives to pass policies that aren't supported by the majority of the American people and that don't benefit the majority of the American people. And many elected officials just went along with it.

Now that I have the honor of serving in Congress, I've continued the fight to make our financial system in general, and our bankruptcy system in particular, work for everyone, and not just for those with deep pockets.

On the consumer side, for several years, I've fought to pass the Medical Bankruptcy Fairness Act, a proposal that would make it easier for individuals going through bankruptcy as a result of a health catastrophe to stay on their feet.

I've worked with Senator Durbin to help young people crushed by student loans get some help.

When it comes to corporate bankruptcies, I've fought to improve outcomes for employees and retirees when companies go bust. In 2013, Senator Rockefeller of West Virginia and I tried to try to limit the ability of companies going through bankruptcy to put their health care, benefits, and retirement obligations at the back of the bankruptcy line. But that proposal was a threat to some pretty powerful corporations, and we couldn't get it passed. Even so, I haven't given up on making the system treat workers better.

Most recently, I introduced a bipartisan bill with Senator John Cornyn, a Republican from Texas, to crack down on the problem of corporate bankruptcy 'forum shopping'. When it comes time to file bankruptcy, a big company-like Enron-can use a loophole in the law to scamper away from its true home state-Texas in that case.  A recent study found that of the 159 biggest bankruptcies between 2007 and 2013, the bankruptcies that affect the most employees, the most retirees, the most local businesses-that almost 70% of those biggest bankruptcies forum shopped - and 80% filed in only two places: Delaware and the Southern District of New York.

Why did the Boston Herald file bankruptcy in Delaware?  Its workers are here. Its reporters are here. Its retirees are here.  Its suppliers are here. And last time I looked, we have a bankruptcy court right here in Boston - a court whose judges are excellent.  So why Delaware?

Of course, Delaware lawyers love this loophole.  Bankruptcy has become big business, and when Senator Cornyn and I introduced our bill, it took only a few days for Delaware's governor and the entire Congressional delegation to strongly oppose it.

Sure, they have a story.  Lawyers and politicians in Delaware and the Southern District of New York will tell you that they attract the bulk of these cases because their courts have developed "specialized expertise" in dealing with big business bankruptcies. And that's true - if by "specialized expertise" you mean more favorable legal precedents that happen to line up with the interests of corporate management.

But Congress established bankruptcy courts and bankruptcy judges in every jurisdiction in the United States on purpose, to make sure that the tough decisions about how to handle the fallout from a company's failure are made as close as possible to the employees, retirees, creditors, and small businesses that are affected. And that's exactly why companies run away from home-to put as much distance as they can between themselves and their communities and to raise the cost and to limit the ability of employees, retirees, and local suppliers to follow them halfway across the country.

There's a lot that Senator Cornyn and I don't agree on. But as Texas's Attorney General, he faced his own Boston Herald situation on an even bigger scale. He watched as Enron ran away from its 7,500 employees in Houston and hustle to New York to file bankruptcy. He saw how employees and creditors and shareholders were left holding the bag.

Back when he was Attorney General, we talked about what could be done.  When he came to the Senate in the early 2000s, he started working on trying to fix the problem. And nearly that entire time, I've tried to help. It's been an uphill battle - but I'm still fighting to level this playing field. And we could use your help on this.

I appreciate your sticking with me through a challenging subject, and I hope it's been useful. 

Most of all, I hope this was a helpful reminder of why your commitment to think through policy issues from a broad business perspective - not just narrow parochial ones - can be so important. 

There's an undeniable tilt in the system.  Every legislative proposal that challenges the financial interests of a tight group of America's biggest corporations or financial companies will face an uphill climb. And who is on the other side?  Not many people line up to hire an army of lobbyists to defend the hundreds of millions of beneficiaries of a well-functioning market.

But the mechanisms of a well-functioning market are as important to business success as infrastructure and a well-educated workforce.  If Congress wants our economy to start working for everyone again, then it is critical to stop writing rules that benefit only those with power and leaving everyone else to pound sand. Good bankruptcy rules are a critical part of a well-functioning market. And they are worth fighting for.

Thank you.