Bankruptcy Courts Part 4 - Fairness and Consistency Go Down the Drain

Bankruptcy Judge Robert DrainDuring my investigation series, "A Lawless Presidency", I interviewed Ohio Congressman Mike Turner (R) about the Delphi bankruptcy case. Turner said the "entire process was a miscarriage of justice." After investigating this case further, it is clear why he said that. As you will see below, what happened to the Delphi Salaried Retirees during this bankruptcy process was unfair is unquestionable. But was it a consistent application of the law? To look into that further, I spoke to Judge Robert Drain who was the presiding bankruptcy judge of the Southern District of New York Bankruptcy Court that heard the case.

As part of the Delphi bankruptcy case, the pensions of the Delphi salaried retirees were stripped away while the pensions of two union groups were preserved. Is that fair? While researching the bankruptcy process, I learned about a National Conference of Bankruptcy Judges meeting in San Diego in October, which also included another hearing of the American Bankruptcy Institute's commission on bankruptcy reform. At the conference, I found Judge Drain leading one of the discussion panels and I had the opportunity to speak with him as well as other bankruptcy judges. I asked Judge Drain how the Delphi salaried retirees lost their pensions while the union retirees did not. Drain told me there were two forces at work, the law and politics. "Legally these [union] employees had something that the salaried employees didn't," Drain explained. "They had a collective bargaining agreement. (CBA)"

"And, they had rights in that," Drain continued. "It's hard to get out from under those if you're a debtor." Now this struck me as an odd statement. It made me wonder if Judge drain was applying the laws of bankruptcy procedures consistently. After speaking to the Delphi Salaried Retirees Association (DSRA), I learned he was not. My source at the DSRA told me that initially only the United Auto Worders (UAW) union's CBA was upheld in regards to pensions. It was not until over a month had passed that the United Steel Workers Union and the International Union of Electrical Workers were added to the protection list. Two other unions with CBA's were never added to the list and also lost their pensions. The New York Times reported that officials from the Pension Benefit Guarantee Board "said there was no precedent for this."  

I found yet another example of the law being applied unequally while researching the Hostess bankruptcy case. This case was also presided over by Judge Robert Drain.

Wonder Where the Jobs WentIn the Hostess case just last month, Judge Drain ruled the company could negate the unions' CBA. An article posted on said Drain's ruling gave "corporate managers the right to unilaterally cut wages and benefits for the thousands of men and women who make the Twinkies, Wonder Bread and other baked goods that have made the company famous." Yes, he struck down the CBAs these unions had in place.

What Drain wasn't counting on was a union with backbone. BCTGM Union President Frank Hurt and his members saw they were on the short end of this attempt at "wealth redistribution" and were having no part of it. They voted 92% against the deal Drain was trying to coerce them into taking.

“Our members reviewed the analysis of this company’s business plan provided by a highly respected financial analyst retained by the company which showed the plan had little or no chance of succeeding in saving the business but would provide the investors with a windfall. Our members know that this is a company that is controlled by Wall Street private equity and hedge fund firms, whose sole objective is to maximize their own returns, not rebuild the company for the long haul,” Hurt stated.

At the NCBJ conference, I asked Drain if the Delphi CBA made the union's claims different from the salaried retirees.  Drain replied, "Unfortunately, for the salaried guys, that's right. They didn't have a CBA. On the other hand, they didn't pay union dues." But wait Judge...  The Hostess unions had a CBA as did two other Delphi unions. Why weren't they protected? Perhaps this question is best answered by Drain's explanation of the second obstacle facing the salaried Delphi retirees - POLITICS!

Judge Robert DrainDrain said, "Then there's the other aspect of this I can't comment on and that's the politics of it. That was an issue that we could never really deal with. It was the source of the money and that's the government." Drain danced around this topic very carefully but pretty much admitted what Congressman Turner explained in my earlier interview, that the government was sitting on both sides of the table in this case and was making the rules up as they went. He explained there was no other source of funds at that time.

Drain explained, "That's just the political end that we can't deal with.  But legally, once the money is there, you have to divide it up.  There was a distinction between those who had a CBA and those who did not."  But that is not what he said in the Hostess case and to the two other Delphi unions.  

It appears that Judge Drain upheld some of the unions' CBAs in the Delphi case because the government needed these unions to play ball on the political hot potato that was the General Motors bankruptcy.  President Obama campaigned about using bankruptcy courts as a method of wealth redistribution. He needed to recklessly shove the GM bankruptcy through Judge Robert Gerber's court in 44 days. Without union support, that would not happen. Absent that political pressure, Drain had no problem throwing the union employee's CBA under the Hostess Twinkie-mobile.

There are a few things we expect judges to do on the bench.  Apply the law in a fair and consistent manner. And then, stay above the political battles of the day when administering justice.  When attorneys go into a courtroom, they expect predictability. They need to be able to tell their clients how a judge will rule in certain circumstances.  

People in the "bankruptcy industry" are quite flippant about the "fox guarding the hen-house" mentality that prevails in these courts.  It is very apparent there is simply no "adult supervision" in many of these cases. Judge Drain was supposed to provide the "adult supervision" in the Delphi and Hostess bankruptcy processes.  He was supposed to be a fair and impartial jurist. He has failed in these examples.  If he cannot or will not be the "adult supervision" of these fast-paced proceedings, then on whose shoulders does that responsibility fall?

In Part 5 of this series, I will look at more detail on the Hostess case and the role Judge Drain played in the destruction of this iconic American company and thousands of jobs.

Related Content:

Chapter 11 Bankruptcy - A License to Steal? Or Redistribute Wealth?

Bankruptcy Courts Part 2 – The Fox is Guarding the Henhouse While the Farmer Sleeps

Bankruptcy Courts Part 3 - Hostess Bankruptcy: Unions, Management or Investment Bankers...Where's the Dough?

Bakers' union pension fund asks for Chapter 11 trustee in Hostess case



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