(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Bill Would Allow Bankruptcy Trustee to Pursue Executive Compensation

A bill pending in the Senate would allow bankruptcy trustees to recover bonuses, loans, non-qualified deferred compensation and other "extraordinary" or "excessive" compensation made within a year before a bankruptcy filing. The measure would extend this period to four years in cases of those guilty of securities or accounting violations. This measure, S.2901, the Corporate Accountability in Bankruptcy Act, sponsored by Sen. Chuck Grassley, is similar to a measure he tried but failed to attach to the recently-enacted Sarbanes-Oxley Act.

Sen. Grassley stated that this legislation is needed because the courts have not been clear about whether bonuses and other excessive compensation can be covered under bankruptcy law. Currently, Section 547 of the Bankruptcy Code allows for bankruptcy trustees to recover assets transferred to insiders within one year prior to the bankruptcy filing. He added, however, that the code is not clear about whether bonuses and other executive compensation is covered, and he further notes that case law is unclear.

Section 548 of the Bankruptcy Code allows trustees to go after assets that were transferred within a year, if fraud was involved or if the debtor received less than what is a reasonable equivalent in value for what was transferred. Again, Sen. Grassley noted that the Bankruptcy Code is unclear about whether this Section covers the compensation of company officials involved in securities or accounting fraud, when it was their conduct, and not their compensation, that led to the company's bankruptcy filing. He also noted that the case law in this area is unclear.

S.2901 would amend Section 547 of the Code to specifically allow a trustee to recover loans, bonuses, non-qualified deferred compensation, and any other excessive or extraordinary compensation, as determined by the court, made to an insider, officer, or director of the company within one year of a bankruptcy filing. Section 548 would be amended to allow a four-year window in the case of company officials guilty of securities or accounting fraud. According to Sen. Grassley, the four-year window for fraud conforms with the period that most states have adopted. This measure was referred to the Senate Judiciary Committee, which has jurisdiction over bankruptcy measures.