Much has been written on The Warren Reports about bankruptcy legislation that has been passed under the guise of curbing purported abuse by consumers. As stories of unkept pension promises are splashed across the daily newspapers, one sadly realizes that the most disturbing abuses of the bankruptcy system have been left unaddressed and that the reforms that truly matter to middle class Americans have not yet been made.

Journalist Mark Reutter is an expert on corporate abuse of bankruptcy law. I asked him whether he would be willing to share his views on the flaws of Chapter 11 with The Warren Reports. He kindly submitted the thoughtful text below for our consideration.

In his October editorial editorial, Mr. Reutter used the Delphi bankruptcy hearings to illustrate his view that federal bankruptcy court, which was "once shunned by respectable companies and ignored by Wall Street...has become the venue of choice for sophisticated financiers and corporate managers seeking to pull apart labor contracts and roll back health and welfare programs at troubled companies." It was after reading that editorial that I first contacted Mr. Reutter. He recently responded with these insights:

"Remember, when a company files under Chapter 11, it is legally protected from creditors as it devises a plan to restructure its capital structure and rehabilitate its operations. The idea is that an otherwise viable company, faced with terrible bad luck or an unexpected external event, is given breathing space by the law to start anew. But what has happened is that some companies and investors are using bankruptcy procedures to slash jobs, wages, and benefits and dumping underfunded corporate pensions into the lap of the federal Pension Benefit Guaranty Corp.

"This trend began in 2001 in the steel industry, then jumped to the airline industry – where today, three of the seven major carriers are in Chapter 11 – and is now spreading to the auto-parts industry. The bankruptcy filing of auto-parts maker Delphi Corp. [on October 8, 2005] is the latest example...

"[While Chapter 11 is a product of the New Deal,]the Bankruptcy Reform Act of 1978 was the watershed event. It expanded management’s right to file an exclusive plan for Chapter 11 reorganization with no practical input from other stakeholders. Creditors and employees were essentially frozen out of the process.

"On the other hand, corporate lawyers and top accounting firms set up thriving bankruptcy and restructuring practices. They were delighted to advise management on how to 'mop up' all sorts of pre-bankruptcy claims and problems as part of the reorganization plan. Chapter 11 proceedings became highly complex and drawn out, and the fees for advice – $100-$200 million in a major case – were conveniently charged back to the bankrupt company’s estate...

"Meanwhile, fair-minded people might think [that employee pensions should be considered as future benefits rather than the past debts from which bankrupt companies can be protected], but bankruptcy case law doesn’t think so. Today, a company can use the court reorganization process not only to circumvent collective bargaining, but to sidestep environmental consent decrees and force the Pension Benefit Guarantee Corp. to take over underfunded company pensions. The PBGC, for example, was forced to cover $4.3 billion in net losses from Beth Steel. And the United Airlines bankruptcy left it with about $6-$7 billion to cover...

"Congress should hold hearings on the misuse of Chapter 11 bankruptcy to void employee contracts and retiree obligations, while lining the pockets of a few insiders. But both political parties don’t want to talk about it. In Maryland, where Bethlehem Steel used to be the largest private employer, the two Democratic Senators – Paul Sarbanes and Barbara Mikulski – have ducked the issue as vigorously as has Republican Gov. Bob Ehrlich, whose prior day job was representing the communities surrounding the Beth Steel mill in Congress.

"In my book 'Making Steel,' I refer to this phenomenon as a 'bipartisan show of silence.' This silence is hurting people. In Maryland alone, 20,000 retired steelworkers and widows lost substantial employer-based health benefits as a result of Beth’s Chapter 11 proceeding. Many of them are sick. Many of them suffer from heart disease. Some are on respirators. They are now forced to pay $10,000-$20,000 a year in premiums and co-payments for private health insurance, or to rely on Medicare, or are simply left to die from lack of medical attention...

"Regarding infrastructure, any move in that direction is beneficial. There is this shortsighted mindset among mainstream 'talking heads' that we needn’t care about such unsexy subjects as infrastructure and industry. China is spending hundreds of billions of dollars on new railroad lines and highways. Steelmaking capacity has been greatly enlarged and modernized. While China builds up her basic industries, we bankrupt ours."

(Mr. Reutter issued an original variation of the above statements in a November interview with Executive Intelligence Review. He thoroughly updated that transcript and provided it to us to post here. The complete version is available here.)