H.R. 1575: H.R. 1575 - To authorize the Attorney General to petition the courts to avoid fraudulent transfers of excessive compensation made by entities that have received extraordinary Federal financial assistance on or after September 1, 2008

H.R. 1575

H.R. 1575 - To authorize the Attorney General to petition the courts to avoid fraudulent transfers of excessive compensation made by entities that have received extraordinary Federal financial assistance on or after September 1, 2008

Sponsor
Rep. John Conyers Jr.

Date
April 1, 2009 (111th Congress, 1st Session)

Staff Contact
Communications

Floor Situation

H.R. 1575 is expected to be considered on the House floor on Wednesday, April 1, 2009, under a motion to suspend the rules, requiring a two-thirds majority vote for passage. This legislation was introduced by John Conyers (D-MI) on March 17, 2009.

Bill Summary

H.R. 1575 would establish a bankruptcy law regarding "excessive" compensation payments that applies to entities that had received more than $10 billion from the U.S. government since September 1, 2008. Under the law, the Attorney General (AG) would be authorized to retroactively recover any "excessive payments" of compensation made to an employee by an entity that was otherwise insolvent without the government funds and to limit such payments in the future.

The bill would allow the AG to review any employment contract made by a recipient entity and any compensation payment made on or after September 1, 2008. The AG would be authorized to commence a civil action in an appropriate U.S. District Court to avoid or recover compensation from an employee of an entity that had taken more than $10 billion government assistance.

The provision would only apply to recipients of government money that would have been insolvent at the time when the compensation was paid to an employee without government money.

The legislation would give the AG the authority to issue a subpoena requiring attendance and testimony of witnesses and the production of evidence in cases regarding the circumstances of compensation made by an entity that received government assistance on or after September 1, 2008.

 

Background

The American International Group (AIG) is one of the largest insurance and financial services companies in the world.  Headquartered in New York, AIG employs more than 115,000 people and operates in more than 130 countries worldwide.  In September 2008, AIG's Standard and Poor's credit rating was lowered, due, in part, to AIG's sizable investments in the debt securities known credit default swaps.  With stocks tumbling and confidence that the company could survive waning, on September 16, 2008, the Federal Reserve Bank of New York, under the leadership of now-Treasury Secretary Timothy Geithner, agreed to provide AIG with $85 billion.

On September 16, 2008, the Federal Reserve Bank of New York, under the leadership of now-Treasury Secretary Timothy Geithner, agreed to provide AIG with $85 billion.  Over the next few months, Congress established the Troubled Asset Relief Program (TARP) to purchase toxic assets from financial institutions, and quickly pledged an additional $37.8 billion to AIG.  As the mission of TARP changed to provide direct capital infusions, AIG continued to collect taxpayer assistance.  To date, AIG has received or been pledged $173 billion in taxpayer funds.  The federal government now controls roughly 80% of AIG stock. 

On Thursday, March 19, 2009, the House passed H.R. 1586 to impose an additional tax on bonuses received from certain TARP recipients, by a vote of 328-93.  That legislation was passed in response to an announcement by AIG that it had paid $165 million in contractually obligated retention bonuses-some as large as $6 million-to 73 AIG Financial Products Group employees.  H.R. 1586 would apply the 90% tax to only the portion of a bonus that, in combination with other income, increases an employee's adjusted gross income to a level above $250,000 ($125,000 for married couples filing individually) in the taxable year when the bonus was received.  Therefore, employees with adjusted gross incomes of less than $250,000 (including bonuses) would not be impacted. 

Unlike H.R. 1586, the underlying legislation would utilize the Constitution's Bankruptcy Clause and federal courts to authorize the Attorney General to stop future payments, or recover past payments, of any "excessive" compensation paid to any employee of an entity that received more than $10 billion from the government since September 1, 2008-not just bonus compensation.  H.R. 1575 would also allow the AG to pursue the compensation payments of any entity that received more than $10 billion in assistance from the government since September 1, 2008, not just recipients of funds from the Troubled Asset Relief Program (TARP).

According to dissenting views contained in House Report 110-050, Republican Members of the Judiciary Committee raised concerns regarding the bill's use of the Constitution's Bankruptcy Clause (Article 1, Section 8, clause 4).  According to Republican Members of the Committee, the legislation assumes that without government assistance these institutions would have become insolvent and filed for bankruptcy, at which time any bonuses paid to employees could have been abrogated.  Therefore bonus contracts between these companies and employees should be subject to abrogation even if the entity is not currently in bankruptcy proceedings.  According to the dissenting views:

"The notion that the federal government can provide financial assistance to a company to keep it from becoming insolvent and filing for bankruptcy, then claim that it can treat the company outside of bankruptcy as if it had become insolvent and filed in bankruptcy, just to avoid takings claims that might be brought against its interference with contracts--under which contracts the Congress essentially pre-authorized payment--is highly questionable and presents an unprecedented (or, at least, the majority has offered no precedent) use of the Bankruptcy Clause. Certainly, it is not a concept that we should rush to embrace, or should expect with confidence that the courts will affirm."

Members may also be concerned that this legislation-like the 90% tax on bonus compensation that stalled in the Senate-represents a hasty, broad, and poorly vetted attempt by the Democrat Majority to cover its tracks for allowing the AIG bonuses to occur in the first place.  Following debate on H.R. 1, the so-called "stimulus" bill, the Democrat conference committee stripped a Senate-passed provision which would have prevented the $165 million in AIG bonuses.  The conference committee removed an amendment sponsored by Senators Olympia Snowe (R-ME) and Ron Wyden (D-OR) that would have forced any TARP recipient to repay any bonus paid in excess of $100,000, or face a 35% excise tax on any TARP funds that were not immediately paid back to the Treasury.   In fact, the $165 million in AIG bonuses were made possible by a provision in the "stimulus" added by Sen. Chris Dodd (D-CT), which stated that executive compensation limits would not apply to "any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009."

Because of these and other concerns, Ranking Member Smith (R-TX), and other Republican Members of the Judiciary Committee, oppose H.R. 1575.

 

Cost

According to CBO, any cost under the legislation would be borne by the courts considering the compensation cases. CBO estimates that "few cases would be pursued under the bill," and therefore, "any associated costs would be negligible."