Corporate Wefare

Are you a manager of a large corporation?

Have your company's products injured tens of thousands of consumers? Do their claims threaten the financial well-being of the company?

Or have you mismanaged the company so badly that you want to cancel those large union contracts that you agreed to last year?

Don't worry. You are in the United States, home of the free market, where, if you make the right moves and are a careful and efficient corporate manager, you will succeed and become wealthy and powerful. And, if you make the wrong moves, injure and kill people, and destroy the company's financial stability, you will most likely remain wealthy and powerful. You will not be allowed to fail.

Just sign a piece of paper and enter the protective cocoon of bankruptcy court--corporate welfare central.

As recently as 70 years ago, farmers or small business people could be put in jail for not paying their debts. But debtors' prison eventually came to be seen as bad for economic risk- taking, and the states began to abolish them in 1921.

Congress passed the federal bankruptcy laws to strike a balance between the debtor's need for a fresh start and the debtor's obligation to pay debts.

But, as Lawrence Kallen points out in his just-published book, Corporate Welfare, more recent federal bankruptcy legislation, passed in October 1979, tilts the balance in favor of large corporations and against their creditors, who are often victims of corporate crime and violence.

According to Kallen, a seasoned Chicago bankruptcy lawyer, the new bankruptcy laws, aided by corporate bootlicking bankruptcy judges, have provided large corporations such as Wickes, Continental Airlines, Manville, A.H. Robins and Texaco with a new and powerful way to pick the pockets of their suppliers and lenders, elude responsibilities to those whom they injured and killed and bust their unions, all at very little risk to the jobs of top company executives. And, under the current bankruptcy code, even corporations which are not insolvent can file a petition for bankruptcy.

During the years following the passage of the new Bankruptcy Reform Act, there was an explosion of filings under Chapter 11 of the Act (the section dealing with business reorganizations). The number of filings shot up from 7,403 in 1980 to 11,370 in 1981 to 22,057 in 1982.

While declaring bankruptcy had historically carried with it some heavy baggage--shame, stigma, loss of goodwill and markets--in the 1980s executives began to feel that the public would not censure them for seeking restructuring under Chapter 11. Kallen believes that the 1979 law removed "a basic underpinning of the free enterprise system--the risk of financial loss and the natural elimination of 'losers.'"

According to Kallen, "capitalism had lost its sanctions because of the rewards offered in the new bankruptcy code."

And the rewards offered were generous. Most important, according to Kallen, was a change that allowed corporate managers to enter the protection of bankruptcy court without any independent court supervision. Prior to 1979, the courts appointed independent trustees to oversee public companies which filed for bankruptcy, taking control of the business away from its executives. "The people who run big corporations obviously don't like to see other people filling their chairs," Kallen observes.

So, before 1979, corporations stayed away from bankruptcy court. But now, corporate managers can gain relief from creditors and still remain in control of their own operations, with little effective judicial oversight.

In the 1970s, big companies went to Congress for relief from their financial hard times. While Chrysler, Penn Central and Lockheed all received bailouts from Congress, the spectacle of the largest U.S. companies arriving on Capitol Hill with their tin cups extended was an embarrassing moment for big business.

Bankruptcy court now provides similar financial relief without the embarrassing public exposure. Did the powers who pushed for the 1979 bankruptcy changes have this in mind?

"There is no direct proof of that," Kallen told Multinational Monitor. "A group of very well-known and respected bankruptcy lawyers and professors did much of the drafting of the legislation. The idea was to make bankruptcy more accessible to large corporations and to make it easier to organize."

"Since the passage of the law, big companies have gone to bankruptcy court instead of to Congress for bailouts. Whether Congress intended that, I'm not sure. But one thing is for sure--they haven't seen fit to change the law since that time to prevent these easy bankruptcy bailouts."

The best parts of Kallen's book are the chapters profiling individual corporations which wreaked havoc on their customers or workers and then ran to bankruptcy court for cover.

Kallen details, for example, the case of Manville, the successor to Johns Manville, the giant asbestos producer. Asbestos, once considered a magic mineral, turned out to be a killer to workers and others exposed to it. By 1982, Manville was facing 16,000 injured asbestos workers or surviving family members who were seeking compensation. Manville estimated its liability at $1.9 billion. The company managers decided to seek Chapter 11 protection.

Attorneys representing injured asbestos victims argued that the bankruptcy filing should be thrown out because the company was solvent and that the company was acting in "bad faith." But these arguments were swept aside by Judge Burton Lifland and special legal representative Leon Silverman.

After three years of wrangling, Manville agreed to pay $2.5 billion into a trust fund for victims, an amount the victims' attorneys said was scandalously low and inadequate.

Kallen thinks that bankruptcy saved the company. He writes: "Although its tour of duty in bankruptcy court was longer than it had expected, [Manville] managed to shed all health and property claims against it through the payment of, and the promise to pay, sums apparently well within its financial means. No action whatsoever was taken to determine the personal culpability of any officers of the company for the injury and deaths of thousands of people, it being considered by Leon Silverman too minor and distracting a matter with which to be concerned. Exempt from all asbestos suits, [Manville] is once more a strong and healthy megacorporation, well situated for future profitability."

Similarly, A.H. Robins, the maker of the dangerous Dalkon Shield intrauterine device (IUD), used the bankruptcy courts, and a friendly judge in the company's hometown of Richmond, Virginia, to dig itself out from under a pile of claims by women injured by the IUD. Kallen has nothing but bad things to say about that judge, Robert R. Merhige.

Kallen finds that the Robins bankruptcy case is the ultimate example of how a company that injures others can escape punishment and compensation expenses by consolidating thousands of claims from around the country into "the courtroom of the friendliest possible judge in the friendliest possible city."

Merhige and E. Claiborne Robins, Sr., the company founder, were neighbors. Overlooking the damage inflicted on women around the world by the Dalkon Shield, Merhige said he considered Robins to be "a fine man." The judge met with Robins shortly before the filing of the bankruptcy. Merhige denied any impropriety, but Kallen concludes that he proved to be "very helpful" in limiting the company's liability.

Kallen is one of those rare insiders who knows what is going on, is not beholden to the corporate power structure and writes well. The result is a brilliant expose with revelations of corporate power-brokering throughout. (Kallen writes, for example, that thanks to special legislation, Robins and other companies which create a pool to pay for mass injuries can deduct all funding as a business expense in the year that the money is set aside. They need not wait years until the funds are actually paid out to claimants. Kallen calls this "the taxpayers' unwitting contribution to the welfare of mass toxic tortfeasors.")

Kallen believes that Congress should amend the law so that no megacorporation (say with $100 million or more in assets) could file for Chapter 11 bankruptcy. This would prevent big corporations from using Chapter 11 as a tool for top management to make someone else pay for its follies.

With such an amendment, "you'd find the big companies solving their problems without the aid of the federal courts," Kallen told the Monitor. "They would have to pay more to their creditors, but they would not go out of business or close their doors. They could restructure, but it would not put the power and the prestige of the federal courts on the side of these corporations."