Pan Am Case Spotlights Bankruptcy Questions
In the past few weeks, employees of Pan American World Airways have received several thick, wordy, legalistic packages from lawyers in bankruptcy court. They explain in agonizing and lawyerly detail the impact of the bankruptcy proceeding on the employee group. And our bet is that most of the employees don’t wade through the entire package.
All sorts of folks other than employees are also affected when a company goes belly up, even if the bankruptcy is merely a reorganization under Chapter 11 of the U.S. Bankruptcy Code. For example, if a major retailer owes you a refund when it files for bankruptcy, you become a creditor in court.
We thought it would be useful, especially in a recession with corporate bankruptcies soaring, to review the effect of large business bankruptcies on ordinary citizens. Such items as wages, pension rights, health insurance, airline tickets and minor debts can be affected. David Stern, a Santa Monica lawyer who emphasizes bankruptcy in his private practice, helped us with the analysis.
* Wages. The law grants employees third priority for wages and salaries less than $2,000 earned within 90 days of the bankruptcy. “Most ordinary folks who are never owed more than two to three weeks of wages and benefits . . . are probably well-covered,” says Stern. “I cannot recall a significant Chapter 11 case in which employee wages were more than temporarily disrupted for a day or two. In smaller cases, particularly the little machine-shop type case, employees do suffer.”
* Health claims. If a health insurance company goes bust, you may lose the benefit of insurance for the future. This is particularly vexing for individuals with existing medical problems because it may be difficult to get new insurance. Federal legislation may allow you to maintain existing insurance for a period of time.
* Pension rights. The U.S. Supreme Court recently ruled that a company cannot use Chapter 11 to dump its pension plan and reorganize around it.
* Customer deposits. There are not major problems in this area. “Individuals, not corporations or partnerships, have a sixth priority claim to a maximum of $900 for deposits on goods purchased or leased for family or household purposes, but not for business purposes,” says Stern. “As a practical matter, no retailer of any size can afford not to recognize all customer deposits.”
* Airline tickets. Tickets issued through travel agents are protected from dishonor, and there is legislation pending to extend similar protection to insolvent airlines.
* Banks and stockbrokers. The Federal Deposit Insurance Corp. protects deposits in banks up to $100,000, so most individuals will not be hurt by a bank failure. Stockbrokers are also regulated by federal law. “In general, the protection is so significant (comparable to that provided by the FDIC) that customers are unaffected by stockbroker insolvencies,” Stern says.
A few pointers. Don’t go to sleep even though the bankruptcy proceeding takes time. As a creditor or employee, you should get notice of important hearings. The notices come from the bankruptcy trustee. They can be intimidating, but try to read them carefully.
You are required to pay any debts you owe the bankrupt company. The bankruptcy does not discharge your obligation to pay. Ordinarily, you will receive a demand for payment from the trustee.
Remember, bankruptcy proceedings in court are open to the public, so you can attend if you are concerned.
Personal bankruptcies are an entirely different subject, which we may discuss in another column. You might be interested in the latest release last week of Nolo Press’ “How to File for Bankruptcy.” It’s a useful self-help workbook.
Klein is an attorney and president of The Times Valley and Ventura County Editions. Brown is professor of law emeritus at USC and chairman of the board for the National Center for Preventive Law. They cannot answer mail personally but will respond in this column to questions of general interest about law. Do not telephone. Write to Jeffrey S. Klein, The Times, 9211 Oakdale Ave. , Chatsworth, Calif. 91311.
