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Elizabeth Warren & LTV Steel

posted by John Pottow

A bankruptcy case from the 1990s called LTV Steel has amazingly enough become an issue in the U.S. Senate race in Massachusetts.  A bankruptcy case!  Just this week, Senator Scott Brown’s campaign released a web ad insinuating that Elizabeth Warren, who worked on the case, somehow fought against LTV Steel’s employees.  The ad demanded to know, “Who is going to defend her?”  Well, given that Warren’s participation in LTV was to defend an arcane but important principle of bankruptcy law—that serves to protect workers—I guess it falls to bankruptcy academics like us to defend her.  So I accept the invitation.  And where better to post than my Blogosphere Alma Mater?

The bankruptcy law question at issue in LTV is complex, and I will discuss it in some detail below.  But in case nobody reads beyond this paragraph, I should quickly dispatch one patent falsehood that gave me a double-take when I viewed the ad.  The video suggests that Warren was somehow trying to make sure LTV’s workers did not receive retirement benefits.  That is objectively false: the workers’ benefits were covered by a trust fund that was fully solvent at the time of the case.  Nobody in good conscience could argue that Warren was somehow trying to deny workers’ benefits that would be paid from an already-funded trust.  LTV and other companies were quarreling over how much each of them needed to contribute to that fund, and Elizabeth Warren only got involved when a federal appellate court issued a decision in the middle of that fight that proposed a novel (and troubling) interpretation of the Bankruptcy Code. 

The full story should dispel the astonishing claim that Warren was somehow a hired gun who hoped to take benefits away from retirees.  Here’s what actually happened.

Beginning in 1987, LTV Steel had a long, drawn-out bankruptcy proceeding.  (The company emerged several years later, but subsequently collapsed into bankruptcy again in 2000 and never made it out the second time.)  Warren had no involvement in either bankruptcy proceeding.  In fact, in a lengthy PBS interview, she actually criticized the way LTV treated its employees during its bankruptcy.  [I don't know if it's online out there in the ether.]

An offshoot of LTV’s first bankruptcy was the company’s challenge to the Coal Act, a law passed in the early 1990s that required coal companies to fund a statutory trust for their workers’ retirement and health benefits.  This requirement was imposed even on “legacy companies” that were no longer in the coal business.  In its initial lawsuit, well before Warren got involved, LTV made a slew of unsuccessful arguments against the Coal Act—arguments that Elizabeth Warren would never endorse—to try to strike it down.  Let me repeat, so there’s no distortion or spin: Elizabeth Warren had no connection to LTV’s bankruptcy reorganization plan in general or to LTV’s overall challenge to the Coal Act in particular.  LTV’s attacks failed and the Coal Act was upheld as constitutional by the U.S. Court of Appeals for the Second Circuit.

But there was one issue that apparently interested Warren in LTV’s bankruptcy.  The company argued that the trust’s claims for money had been filed too late to share in LTV’s bankruptcy. The Second Circuit rejected that argument by saying that these weren’t even “claims,” since they were based on legal rights created after the company filed for bankruptcy.  This head-scratcher of “non-claim claims” caused many academics, including Warren, to say, “Huh?  What on earth does that mean?”  Well, according to the Second Circuit, because the trust had no claims against LTV, it couldn’t have any claims discharged by the company’s bankruptcy—which left it free to make demands from LTV after it emerged from bankruptcy.  Good news for workers, and bad news for LTV, right?  Wrong.  Warren and other academics immediately saw the problem.

That problem was the Second Circuit’s conclusion that the trust (and therefore the retirees who would draw from the trust) had no bankruptcy claim against LTV because it had no rights against LTV on the petition date; those rights only came later when Congress passed the Coal Act.  In other words, because workers had no rights at all against the company on the day it went bankrupt, they couldn’t partake in the bankruptcy, period.  This worried Warren.  It meant that retirees, workers, and victims in future cases would be prevented from asserting any claims if Congress gave them a right to compensation but the company had already managed to file for bankruptcy.  The workers would have to sit on the sidelines until after the bankruptcy was over.

In LTV, this turned out to be no big deal.  LTV was one of the lucky companies that emerged from bankruptcy, so workers were then able to file claims against the new company.  Hurrah!  But Warren knew (as all bankruptcy professors do) that many companies do not emerge from bankruptcy; they simply liquidate and die.  So the Second Circuit’s holding meant that in cases where the company liquidates and dies, workers will never get any compensation whatsoever under new congressional schemes.  That’s probably not a worry for big bank creditors, who tend to get paid out no matter what.  But it’s certainly a problem for workers, retirees, or victims who are counting on payments from the company.  Bankruptcy is often these people’s last chance to get any money owed to them.

Warren thought that was a terrible way to interpret the Bankruptcy Code, and she asked the Supreme Court, on LTV Steel’s behalf, to review the Second Circuit decision.  Indeed, the Second Circuit’s LTV decision has been a controversial precedent.  It does not surprise me at all that Elizabeth Warren, tireless champion of workers and the little guy, found this ruling horrifying, even if there were well-intentioned reasons for the Second Circuit’s decision on the facts of the LTV case.

Alas, the Supreme Court took a pass, as it does with over 95% of cases it is asked to review.  And that was it.  The Second Circuit case became much debated in bankruptcy circles as a weird decision, and many subsequent courts have to various degrees disagreed or distinguished its definition of “claim.”  LTV and Warren went their separate ways, and Warren returned to vociferous criticism of LTV’s terrible bankruptcy tactics.  Clips of that criticism, by the way, appear out of context in the new web ad—in what seems to me an awkward attempt to suggest to viewers that she was actually endorsing LTV’s conduct during its bankruptcy.  I assume the distortion is apparent to anyone who watches the full PBS interview, knows of Warren’s sustained and public campaign to reform the bankruptcy laws, or really has ever listened to her talk about bankruptcy and related issues (which probably doesn’t include most people who will see the web ad—which I’m guessing is probably the point, sigh).

That took me quite a while to explain—and even then with far too much reductionism for my comfort level.  Maybe I should produce my own web ad—I would happily approve its content!—but I somehow suspect it will not get the same interest as the misleading jaw-dropper I saw today from Sen. Brown’s campaign (which he approved).  But at least mine has the virtue of being true.

(Academic’s disclosure: A few years ago, I co-authored a bankruptcy law piece with Elizabeth Warren and several other bankruptcy professors, some of whom blog here; I have also donated money to a group called “Academics for Elizabeth Warren” or something like that about a year ago.  BTW, lest you harbor the paranoia that all tenured academics are frothing lefties who inexorably skew Democratic, I consider myself an independent and indeed voted Republican in Michigan’s last gubernatorial election.  So there.)


hopelesslys muddled explanation
throw it out and start over, if you have any desire whatsoever to appeal to non lawyers.
sorry to be harsh, but I'm giving you good honest advice.

Made sense to me, I think.
As I understand it, the court argued that the workers' trust did not have the legal standing to challenge the company prior to the bankruptcy (since the Coal Act had not yet taken effect due to a court challenge).

This allowed the workers' trust to file claims with the company once it emerged from bankruptcy, since they hadn't "used up" their claims on LTV's funds. i.e. their prior claims were legally nonexistant. However, this argument would have been problematic if LTV had not emerged from bankruptcy.

That is, at least, how my brain translated the legalese.

"In other words, because workers had no rights at all against the company on the day it went bankrupt, they couldn’t partake in the bankruptcy, period."

How are you coming to that conclusion? Seems to that if this situation ever came to pass - company is undergoing bankruptcy, Congress gives workers a new claim against said company - then the workers would be post-petition creditors. And, correct if I'm wrong here - but post-petition creditors DO participate in bankruptcies, often with privileged status.

Tax debt incurred post petition is paid out of the bankruptcy estate. "Administrative expenses" incurred post petition are paid out of the bankruptcy estate.

E.M., good question. The answer gets even more complex, so I didn't go into it in my main post. The answer is they are only post-petition claims if they are incurred by the estate. But the enactment of a new statute conferring *rights* related to pre-petition *conduct* (as here) would not be claims incurred by the estate, like post-petition taxes, etc. They would be (in my opinion) pre-petition claims, due to the link to the prior conduct.

Some of the top 10 execs took away millions in the final settlement- shameful

Well, I applaud all efforts to eliminate "guilt by association" from intelligent civic discourse.

However, I think back to Adam Levitin's post on Scott Brown, who horrors, worked on real estate closings, which apparently was unethical for lawyers to do during a housing bubble, according to the professor. That was a similar example of the kind of "guilt by association" attack that ought to be opposed ny anyone with a commitment to an intellectual life.

Also, let's face it, Elizabeth Warren's entire populist appeal, like all populist appeals, is rooted in "guilt by association". So it's kind of like the pot calling the kettle black when the tactic gets turned on her. And in some ways this is more honest, because at least it gives a specific instance, compared to vague, McCarthy-like references to "the people who broke our economy". I'll never forget her rejoinder in a TV interview to someone who quoted her a criticism of one of her arguments for the CFPB: "That's what you expect him to say - he works for the banks!" That was the entire response she offered. I guess it was not a day for heavy lifting intellectually. But it was the day I knew she'd run for office.

While I applaud your perspective, I do hope you'll bring it to the other side of the aisle as well.

mt, thanks for the comment, and I will indeed try to bring it to both sides (although, quite frankly, it'd have to be a pretty bankruptcy- related issue for me to get excited about -- I confess to not following the race super-closely).

I *thought* the Brown/real estate issue was that his campaign was being coy about giving details on just what he did -- making analysis of the sort both you and I would like to see happen impossible?? But that was from vaguely recalling a news snippet from some time back, so this is likely an outdated reaction. As for Warren's (and Brown's) campaign tactics, atmospherics, etc., I leave all that for those with a greater stomach for the political arena; as a happy academic, I wouldn't venture into such a realm with a tenured foot pole! (Sorry, couldn't resist.)

Thanks for the summarized as well as detailed explanation. No, I'm not a lawyer, but slowly could get through the larger explanation. I'm an independent canvassing for Elizabeth and needed to understand the situation.

So the Second Circuit Court judge's opinion, as processed by my decidedly non-legal mind, was:

The Coal Act was passed in 1992, and would have required LTV to pay into a benefit trust for workers. However, the law was passed _after_ LTV had filed for bankruptcy, and the trust's demand for payment was therefore _not_ a bankruptcy claim at all, and was not a part of the bankruptcy case in any way.

This interpretation is good if the company emerges from bankruptcy (full payment can be demanded), and extremely bad if they don't (no payment at all is made).

Warren's involvement was to ask the Supreme Court to designate benefit trusts like those set up by the Coal Act as claimants, so they can be a part of the bankruptcy process. This is because, if they are made to wait until the bankruptcy is complete, there may be no company, and therefore no money, left at all, and no way for deserving parties to get paid.

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