[House Report 111-50]
[From the U.S. Government Publishing Office]
111th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 111-50
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END GOVERNMENT REIMBURSEMENT OF EXCESSIVE EXECUTIVE DISBURSEMENTS (END
GREED) ACT
_______
March 24, 2009.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Conyers, from the Committee on the Judiciary, submitted the
following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany H.R. 1575]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the bill
(H.R. 1575) to authorize the Attorney General to limit or
recover excessive compensation paid or payable by entities that
have received Federal financial assistance on or after
September 1, 2008, having considered the same, reports
favorably thereon without amendment and recommends that the
bill do pass.
CONTENTS
Page
Purpose and Summary.............................................. 2
Background and Need for the Legislation.......................... 2
Hearings......................................................... 8
Committee Consideration.......................................... 8
Committee Votes.................................................. 8
Committee Oversight Findings..................................... 9
New Budget Authority and Tax Expenditures........................ 9
Congressional Budget Office Cost Estimate........................ 9
Performance Goals and Objectives................................. 10
Constitutional Authority Statement............................... 10
Advisory on Earmarks............................................. 10
Section-by-Section Analysis...................................... 11
Additional Views................................................. 12
Purpose and Summary
In the wake of widespread financial instability and the
failures of multiple large financial institutions, the United
States government has implemented programs beginning in 2008 to
provide billions of dollars in assistance to financial
entities. News reports have revealed that some of the very same
companies that received government funds, rewarded executives
with bonus payments that for some companies reached hundreds of
millions, even billions, of dollars.\1\
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\1\See, e.g., Louise Story, $2.5 Billion in Merrill Bonuses Would
Elude Tax, N.Y. Times, Mar. 20, 2009; Dawn Kopecki, Frank Asks
Regulator to Pull Fannie, Freddie Bonuses, Bloomberg, Mar. 20, 2009;
Dennis Cho & Brady Dennis, Bailout King AIG Still to Pay Millions in
Bonuses, Wash. Post, Mar. 15, 2009, at A01.
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H.R. 1575 statutorily authorizes the United States Attorney
General to recover a portion of these funds on behalf of
companies that have received more than $10 billion in Federal
financial assistance since September 1, 2008. The legislation
has two key components. First, it creates a Federal fraudulent
transfer statute that will authorize the Attorney General to
bring suit to recover prior excessive payments by the company
to employees. This permits the Government, standing in the
shoes of a creditor, to show that there were excessive
compensation payments having no relationship to fair value, and
to recover those payments for the company. Second, it
authorizes the Attorney General to bring suit to limit future
payments to company executives to ten times the average of non-
management wages, just as would have been the case if the
company had been forced into bankruptcy. In addition, the bill
authorizes the Attorney General to issue a subpoena to obtain
pertinent information from these companies about employee bonus
and compensation payments.
Background and Need for the Legislation
BACKGROUND
In August 2007, financial instability became widely
apparent in the credit markets. Although initially thought to
be limited to subprime mortgages, this instability spread
throughout our Nation's financial system by 2008, causing
several large financial institutions to fail and potentially
leading to a global-wide freeze in the credit market.
At first, the Government intervened to address these
failures on a case-by-case basis.\2\ When such efforts failed
to stem the credit crisis, Congress passed several bills that
were enacted into law by the President.
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\2\See Baird Webel & Edward V. Murphy, The Emergency Stabilization
Act and Recent Financial Turmoil: Issues and Analysis, Congressional
Research Service, Jan. 23, 2009.
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On July 24, 2008, Congress passed the Housing and Economic
Recovery Act of 2008, which was signed by President George W.
Bush on July 30, 2008. This Act sought to restore confidence in
Fannie Mae and Freddie Mac, two of the Nation's largest
suppliers of mortgage financing, by strengthening regulations
and injecting capital into these entities.\3\
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\3\Pub. L. No. 110-289 (2008).
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In early October 2008, Congress passed and President Bush
signed the Emergency Economic Stabilization Act of 2008, which
established the Troubled Assets Relief Program (TARP). Under
TARP, the Treasury Department was authorized to purchase
mortgage-backed securities and to provide Government funding
for other purposes.\4\
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\4\Pub. L. No. 110-343 (2008).
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Most recently, Congress passed and President Barack Obama
signed the American Recovery and Reinvestment Act of 2009 last
month. This Act included tax reduction provisions and
authorized various spending programs to stimulate the
economy.\5\
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\5\Pub. L. No. 111-5 (2009).
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In each of these three major pieces of legislation
addressing the economic crisis, the Government sought to impose
executive compensation limits on those entities receiving
taxpayer funding. The Housing and Economic Recovery Act of
2008, for example, imposes restrictions on compensation for
executives of Federal home loan banks, Fannie Mae, and Freddie
Mac, and limits golden parachute payments to executives.\6\
Under the Emergency Economic Stabilization Act of 2008, the
Secretary of the Treasury was tasked with requiring financial
institutions whose troubled assets are purchased to meet
appropriate standards for executive compensation.\7\ The
American Recovery and Reinvestment Act of 2009 replaced and
expanded the executive compensation requirements previously
imposed under the Emergency Economic Stabilization Act of
2008.\8\
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\6\Specifically, Section 1117 allows the Secretary of the Treasury,
in exercising temporary authority to purchase obligations issued by any
Federal home loan bank, Fannie Mae, or Freddie Mac to consider
limitations on the payment of executive compensation. Sections 1113 and
1114 allow the Director of the Federal Housing Finance Agency to
prohibit and withhold executive compensation from executives of Federal
home loan banks, Fannie Mae, or Freddie Mac if wrongdoing has occurred.
Section 1114 also provides authority to the Director of the Federal
Housing Finance Agency to limit golden parachute payments to these
executives.
\7\Pursuant to Section 111, these standards are required to include
limits on incentive-based compensation for unnecessary and excessive
risks, recovery of bonuses and incentive compensation based on criteria
later proven to be materially inaccurate, and a prohibition on golden
parachutes.
\8\As amended by the American Recovery and Reinvestment Act of
2009, Section 111 provides a more comprehensive and uniform set of
rules for all TARP recipients.
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In the months following the passage of these initiatives,
reports began to surface alleging excessive executive
compensation arrangements by companies that had received
billions of dollars in government funds. For example, the
revelation that one company that had received $20 billion in
taxpayer funds had paid out $3.6 billion in executive bonuses
prompted a State attorney general to file suit alleging the
bonuses were fraudulent.\9\ Evidence also emerged that another
company had awarded a total of $4.4 million in retention
bonuses to four of its top executives after it was taken over
by the government.\10\ In March 2009, reports emerged that
another company had given its executives hundreds of millions
of dollars in bonus payments after receiving $180 billion from
the government.\11\ Despite prior legislative efforts to limit
excessive executive compensation and bonuses paid by recipients
of government assistance, these efforts have proven to be
ineffective.
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\9\Louise Story, Cuomo Wins Ruling to Name Merrill Bonus
Recipients, N.Y. Times, Mar. 19, 2009, at B1.
\10\See, e.g., Dawn Kopecki, Frank Asks Regulator to Pull Fannie,
Freddie Bonuses, Bloomberg, Mar. 20, 2009.
\11\See, e.g., Dennis Cho & Brady Dennis, Bailout King AIG Still to
Pay Millions in Bonuses, Wash. Post, Mar. 15, 2009, at A01.
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LEGAL ANALYSIS OF H.R. 1575
Fraudulent Transfer Law and Its Applicability to H.R. 1575
Overview
A fraudulent transfer\12\ essentially involves the act of
placing assets beyond the reach of one's creditors. Thus, being
able to undo a fraudulent transfer is one of the ``most
powerful tools'' available to creditors who otherwise would
have been able to satisfy their claims from those assets, if
they had not been transferred.\13\ The modern law of fraudulent
transfers dates back at least to Elizabethan times, with the
enactment in 1571 of the Statute of Elizabeth,\14\ and possibly
earlier.\15\
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\12\As used here, the term ``fraudulent transfer'' is intended to
be interchangeable with the term ``fraudulent conveyance.''
\13\5 Alan N. Resnick & Henry J. Sommer, eds., Collier on
Bankruptcy, 548.01 at 548-8 (15th ed. rev'd 2007).
\14\See, e.g., Statute of 13 Eliz. c. 5 (1571) (deemed void any
conveyance made with intent to delay, hinder or defraud creditors);
Twyne's Case, 3 Coke 80b, 76 Eng. Rep. 809 (Star Chamber 1601) (thought
to be one of the oldest cases interpreting the 1571 Statute of
Elizabeth). As one leading bankruptcy law treatise observes, ``The
substance of the Statute of Elizabeth is part of the common law of
every state, and forms the basis of the actual fraudulent intent
avoidance provisions of section 548(a)(1)(A) of the [Bankruptcy] Code,
as well as the uniform laws that most states have enacted.'' 5 Alan N.
Resnick & Henry J. Sommer, eds., Collier on Bankruptcy, 548.LH[1] at
548-89 (15th ed. rev'd 2007).
\15\See Bruce A. Markell, Lawyer-Made Law, Lex Juris and Confusing
the Message with the Messenger--A Comment on Frankel, 12 Duke J. of
Comp. & Int'l L. 493, 497 n. 18 (2002) (``Roman law had recognized as a
nominate tort an action fraus creditiorum similar in purpose and effect
to the modern intentional fraudulent conveyance.'').
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The classic illustration of a fraudulent transfer is where
someone--rather than using his or her assets to repay debts
owed to his or her creditors--transfers them to a friend or
relative with actual intent to defraud his or her creditors.
The law of fraudulent transfers also applies to an asset
transfer made by an entity who is in a precarious financial
condition and who received less than reasonably equivalent
value in exchange for the transfer.
Types of Fraudulent Transfer Laws
Four States, including New York,\16\ have adopted the
Uniform Fraudulent Conveyance Act (UFCA), which essentially
codifies the Statute of Elizabeth.\17\ Thirty-nine States and
the District of Columbia have adopted the Uniform Fraudulent
Transfer Act (UFTA),\18\ a modernized, though very similar,
successor to the UFCA.\19\ Other States rely on common law
theories of fraudulent transfer.
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\16\These states are: Maryland, New York, Tennessee, and Wyoming.
Cornell University Law School Legal Information Institute--Uniform
Business and Financial Laws Locator, at http://www.law.cornell.edu/
uniform/vol7.html#frcon
\17\The National Conference of Commissioners on Uniform State Laws
proposed the Uniform Fraudulent Conveyance Act (UFCA) in 1918.
According to the Conference, ``It was created to supersede the Statute
of 13 Elizabeth which was enacted in some form by many states, and
which introduced the concept of the fraudulent conveyance into the law
of every American jurisdiction, with or without enactment.'' National
Conference of Commissioners on Uniform State Laws, Uniform Fraudulent
Transfer Act--Summary, at http://www.nccusl.org/nccusl/
uniformact_summaries/uniformacts-s-ufta.asp (last visited Mar. 22,
2009).
\18\Cornell University Law School Legal Information Institute--
Uniform Business and Financial Laws Locator, at http://
www.law.cornell.edu/uniform/vol7.html#frcon
\19\The National Conference of Commissioners on Uniform State Laws
approved the UFTA in 1984. The principal differences between the UFCA
and the UFTA are summarized by the Conference as follows:
Much of the UFTA resembles the UFCA, its predecessor. What,
then, are some of the differences? . . . To begin with, the
term ``transfer'' taken from the Federal Bankruptcy Act
replaces the term ``conveyance.'' UFCA uses the term ``fair
consideration'' instead of ``reasonably equivalent value.''
``Reasonably equivalent value'' does not include the
element of good faith as ``fair consideration'' does, and
is more sharply defined than ``fair consideration'' is in
the UFCA. UFTA overcomes the problem raised in the case of
Durrett v. Washington National Insurance Co., 621 F.2d 201
(5th Cir. 1980), a case that jeopardized mortgage
foreclosure sales. Under UFTA, a properly conducted
foreclosure sale is not a fraudulent transfer,
notwithstanding the fact that it does not recover an amount
somewhat near the actual market value of the property. The
concept of the ``insider'' is new in the UFTA. UFTA
provides for defenses of transferees and for a statute of
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limitations. Both issues are not addressed in the UFCA.
National Conference of Commissioners on Uniform State Laws, Uniform
Fraudulent Transfer Act--Summary, at http://www.nccusl.org/nccusl/
uniformact_summaries/uniformacts-s-ufta.asp (last visited Mar. 22,
2009).
The law of bankruptcy is currently the only federally
codified source of fraudulent transfer law. Under bankruptcy
law, a trustee (a fiduciary for creditors) may undo or
``avoid'' a fraudulent transfer on behalf of all of the
debtor's creditors. If the trustee's action is successful, the
assets are brought into the bankruptcy estate for distribution
to the debtor's creditors.
A bankruptcy trustee may pursue a fraudulent transfer under
two authorities. First, section 548 of the Bankruptcy Code\20\
codifies Federal fraudulent transfer law for bankruptcy cases.
It is substantively identical to the UFTA. Second, Section
544(b) of the Bankruptcy Code\21\ allows the trustee to ``step
into the shoes of a creditor of the debtor'' and assert that
creditor's rights under applicable state fraudulent transfer
law.\22\ Thus, in a bankruptcy case filed in New York where the
debtor transferred assets for less than reasonably equivalent
value while insolvent, the trustee may invoke the applicable
New York law with respect to such transfers.\23\
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\20\11 U.S.C. Sec. 548 (2008).
\21\11 U.S.C. Sec. 544(b) (2008).
\22\5 Alan N. Resnick & Henry J. Sommer, eds., Collier on
Bankruptcy, 548.01[4] at 548-12 (15th ed. rev'd 2007).
\23\See N.Y. Debtor & Creditor L. Sec. 273 (2008) (``Every
conveyance made and every obligation incurred by a person who is or
will be thereby rendered insolvent is fraudulent as to creditors
without regard to his actual intent if the conveyance is made or the
obligation is incurred without a fair consideration.''); N.Y. Debtor &
Creditor L. Sec. 275 (2008) (``Every conveyance made and every
obligation incurred without fair consideration when the person making
the conveyance or entering into the obligation intends or believes that
he will incur debts beyond his ability to pay as they mature, is
fraudulent as to both present and future creditors.'').
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Section 548, in pertinent part, authorizes a trustee to
undo a transfer by a debtor in exchange for less than
reasonably equivalent value in a case where the debtor:
(I) was insolvent on the date that such transfer was
made or such obligation was incurred, or became
insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was
about to engage in business or a transaction, for which
any property remaining with the debtor was an
unreasonably small capital;
(III) intended to incur, or believed that the debtor
would incur, debts that would be beyond the debtor's
ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an
insider, or incurred such obligation to or for the
benefit of an insider, under an employment contract and
not in the ordinary course of business.\24\
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\24\11 U.S.C. Sec. 548(a)(1)(B) (2008).
It should be noted that the last item, concerning employment
contracts, was added on a retroactive basis in 2005, based on a
bipartisan floor amendment passed by voice vote by the House
during the course of its consideration of bankruptcy reform
legislation in the 108th Congress.\25\
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\25\149 Cong. Rec. H2055 (daily ed. Mar. 19, 2003). In the 108th
Congress, the House adopted, by voice vote, an amendment offered by
Representative Chris Cannon (R-UT) and William Delahunt (D-MA), which,
in relevant part, increased the reach-back period during which
fraudulent transfers can be avoided from 1 to 2 years, and clarified
that section 548(a)(1)(B) applied to compensation paid to insiders
under an employment contract.
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Relation to the End the GREED Act
H.R. 1575 is intended to, among other things, establish a
uniform law giving the United States Attorney General similar
authority to what a bankruptcy trustee has under relevant
portions of sections 548(a)(1)(B)(i)(I), (II), 544(b), and 550
of the Bankruptcy Code with respect to a entity's payment of
compensation to its employees. Accordingly, the Attorney
General would have the discretion under H.R. 1575 to commence a
civil action to avoid and recover any transfer of compensation
made by a recipient entity (as defined in section 6 of the
bill), and to avoid the obligation pursuant to which the
transfer occurred, to the extent of the transfer, under certain
circumstances.
Much like Bankruptcy Code section 548(a)(1)(B)(ii), the
Attorney would be so authorized to pursue this action if: (1)
the recipient entity was insolvent on the date that such
compensation was transferred (not taking into account any line
of credit, loan, or payment in exchange of stock received by
such entity from the United States); or (2) such entity was
engaged in business or in a transaction (or about to engage in
such activities) that left the entity with an unreasonably
small capital for the continuation of such business or
transaction.
In addition, H.R. 1575 is intended to empower the Attorney
General with the same authority as under Bankruptcy Code
section 544(b). As such, the Attorney General would be
authorized to ``step into the shoes of a creditor'' of the
entity and assert that creditor's rights under applicable State
fraudulent transfer law.
In determining whether an entity is insolvent for purposes
of H.R. 1575, the court should use the long-established
definition of this term under section 101(32) of the Bankruptcy
Code,\26\ which is ``essentially a balance sheet test in which
the sum of the debts is greater than the sum of the assets, at
a fair valuation,'' exclusive of certain types of property
interests.\27\ Likewise, the term ``transfer,'' as it is used
under H.R. 1575, is intended to have the same breadth of
application as that term has under the Bankruptcy Code, which
defines it in section 101(54) of the Code.\28\
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\26\11 U.S.C. Sec. 101(32) (2008). Section 101(32), in pertinent
part, defines ``insolvent'' as follows:
(A) with reference to an entity other than a partnership and a
municipality, financial condition such that the sum of such entity's
debts is greater than all of such entity's property, at a fair
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valuation, exclusive of--
(i) property transferred, concealed, or removed with intent
to hinder, delay, or defraud such entity's creditors; and
(ii) property that may be exempted from property of the
estate under section 522 of this title;
(B) with reference to a partnership, financial condition such that the
sum of such partnership's debts is greater than the aggregate of, at a
fair valuation--
(i) all of such partnership's property, exclusive of
property of the kind specified in subparagraph (A)(i) of
this paragraph; and
(ii) the sum of the excess of the value of each general
partner's nonpartnership property, exclusive of property of
the kind specified in subparagraph (A) of this paragraph,
over such partner's nonpartnership debts[.]
Id.
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\27\5 Alan N. Resnick & Henry J. Sommer, eds., Collier on
Bankruptcy, 548.05[1][a] at 548-32-33 (15th ed. rev'd 2007).
\28\In relevant part, Bankruptcy Code section 101(54) defines
transfer to mean ``each mode, direct or indirect, absolute or
conditional, voluntary or involuntary, of disposing of or parting
with--(i) property; or (ii) an interest in property.'' 11 U.S.C.
Sec. 101(54) (2008).
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Under H.R. 1575, an employee who received a bonus or
excessive compensation has an opportunity to prove why he or
she provided value warranting such payment. Thus, where the
employee, in good faith, received such compensation, the court
should allow the employee to retain that portion of the
compensation representing fair value provided by the employee
in exchange.\29\
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\29\Cf. 11 U.S.C. Sec. 548(c) (2008).
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CONSTITUTIONAL CONSIDERATIONS
The Committee has considered carefully the constitutional
issues implicated in H.R. 1575, and is confident that the bill
is constitutionally sound. It is well within Congress's
authority under the Bankruptcy Clause, the Commerce Clause, the
Spending Clause, and the Necessary and Proper Clause. Nor is
H.R. 1575 an unconstitutional taking of property in violation
of due process under the Fifth Amendment, or an
unconstitutional bill of attainder.
Congress's authority under article I, section 8, clause 4
to ``establish . . . uniform Laws on the subject of
Bankruptcies throughout the United States'' applies not only to
laws regarding bankruptcy itself, but also to laws regarding
companies facing insolvency generally. ``While attempts have
been made to formulate a distinction between bankruptcy and
insolvency, it has long been settled that, within the meaning
of the [Bankruptcy Clause], the terms are convertible.''\30\
Although the Supreme Court has ``noted that `[t]he subject of
bankruptcies is incapable of final definition,' [it has]
previously defined `bankruptcy' as the `subject of relations
between an insolvent or nonpaying or fraudulent debtor and his
creditors, extending to his and their relief.'''\31\ As the
Supreme Court noted in Wright v. Union Central Life Ins.
Co.,\32\ Congress also has a broad general grant of enhancing
power under the Necessary and Proper Clause, article 1, section
8, clause 18.
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\30\Continental Illinois National Bank & Trust Co. v. Chicago Rock
Island & Pacific Railway, 294 U.S. 648, 667-68 (1945).
\31\Railway Labor Executives' Ass'n v. Gibbons, 455 U.S. 457, 466
(1982) (quoting Wright v. Union Central Life Ins. Co., 304 U.S. 502,
513-14 (1938)).
\32\304 U.S. at 513.
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Congress also has broad authority under the Commerce
Clause, article I, section 8, clause 3, ``to regulate Commerce
with foreign Nations and among the several States. . . .'' The
Supreme Court has reiterated the breadth of the Commerce Clause
power on numerous occasions.\33\ And again, Congress also has
broad applicable enhancing authority under the Necessary and
Proper Clause.
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\33\See, e.g., Gonzales v. Raich, 545 U.S. 1, 17 (2005); Perez v.
United States, 402 U.S. 146, 150-152 (1971); Wickard v. Filburn, 317
U.S. 111, 123-24 (1942).
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Aside from these authorities, in this instance, where the
bill is limited to companies that have received extraordinary
Federal financial support of at least $10 billion since last
September 1, Congress also has ample authority under the
Spending Clause to set conditions on how these funds are
spent\34\--again, enhanced by the Necessary and Proper Clause.
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\34\See, e.g., South Dakota v. Dole, 483 U.S. 203, 206-07 (1987);
Lau v. Nichols, 414 U.S. 563, 569 (1974); Steward Machine Co. v. Davis,
301 U.S. 548 (1937).
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H.R. 1575 is clearly not an unconstitutional taking without
due process. First, the Attorney General would not be
recovering the unjustified bonuses and other compensation for
the Government's own use, but rather would be restoring them to
the company where they originated, for its proper benefit and
use. ``Congress has considerable leeway to fashion economic
legislation, including the power to affect contractual
commitments between private parties.''\35\ And second, the
threshold burden for the claimant in a takings case is
demonstrating a legitimate interest in the property in
question.\36\ It is axiomatic that there is no legitimate
property interest in the proceeds of a fraudulent transfer.
Moreover, the determination that a particular transfer of
compensation was for ``less than a reasonably equivalent value
in exchange'' is made by the court, after trial, based on the
evidence presented. The Act, including its application to
existing compensation arrangements, is manifestly ``supported
by a legitimate legislative purpose furthered by rational
means.''\37\
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\35\Eastern Enterprises v. Apfel, 524 U.S. 498, 528 (1998).
\36\See Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005);
Bair v. U.S., 515 F.3d 1323, 1327 (Fed. Cir. 2008).
\37\United States v. Carlton, 512 U.S. 26, 32 (1994); Pension
Benefit Guaranty Corporation v. R.A. Gray & Co., 467 U.S. 717, 729
(1984); Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16 (1976).
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Nor is H.R. 1575 a bill of attainder or violation of the Ex
Post Facto Clause. It is an essential hallmark of a bill of
attainder that it must ``inflict punishment without a judicial
trial.''\38\ As the Court explained in United States v.
Brown,\39\ ``[t]he Bill of Attainder Clause was intended . . .
as an implementation of the separation of powers, a general
safeguard against legislative exercise of the judicial
function, or more simply--trial by legislature.'' In contrast,
under H.R. 1575, no one would be required to surrender any
compensation except pursuant to court action. Thus, even
assuming that the act of avoiding, and recovering for the
benefit of the company, a bonus unjustifiably given might be
considered ``punishment''--doubtful under well-settled
precedents\40\--it is the court, not the legislature, that
would impose it. And because the legislation is not criminal in
nature, it cannot violate the Ex Post Facto Clause.\41\
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\38\Garner v. Board of Public Works, 341 U.S. 716, 722 (1951);
Cummings v. Missouri, 17 U.S. (4 Wall.) 277, 323 (1866).
\39\381 U.S. 437, 442 (1965).
\40\See, e.g., Nixon v. Administrator of General Services, 433 U.S.
425, 471-73 (1977).
\41\See, e.g., Collins v. Youngblood, 497 U.S. 37, 41 (1990);
Calder v. Bull, 3 U.S. (3 Dall.) 386, 397 (1798).
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Hearings
The Committee on the Judiciary held no hearings on H.R.
1575.
Committee Consideration
On March 18, 2009, the Committee met in open session and
ordered the bill, H.R. 1575, favorably reported without
amendment by voice vote, a quorum being present.
Committee Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises that there
were no recorded votes during the Committee's consideration of
H.R. 1575.
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority or increased tax
expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 1575, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 23, 2009.
Hon. John Conyers, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1575, the End
Government Reimbursement of Excessive Executive Disbursements
(End GREED) Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Leigh Angres,
who can be reached at 226-2860.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure
cc:
Honorable Lamar S. Smith.
Ranking Member
H.R. 1575--End Government Reimbursement of Excessive Executive
Disbursements (End GREED) Act.
H.R. 1575 would invoke the bankruptcy power of the U.S.
Constitution to authorize the U.S. Attorney General (AG), after
consultation with the Secretary of the Treasury, to recoup
existing, and limit future, payments for employment
compensation made by companies that have received federal
financial assistance since September 2008. The bill would apply
to those companies that received a loan, line of credit,
payment made in exchange for stock purchases, or some
combination of assistance that exceeds a total of $10 billion.
Specifically, the bill would allow the AG to commence a
civil action under certain circumstances to recover any payment
made by a company to an employee on or after September 1, 2008,
if such employee received an amount that was unreasonably
greater than the value received by the company. Such recoveries
would be returned to the company. The AG could also commence a
civil action to limit the amount of the compensation paid or
payable under an employment contract to a company's employees
on or after the date of enactment, if such compensation exceeds
a certain amount. That amount would be greater than 10 times
the average amount of compensation paid or payable to such
company's nonmanagement employees during a calendar year.
Any costs to pursue such cases would be subject to the
availability of appropriated funds. Because CBO expects few
cases would be pursued under the bill, any associated costs
would be negligible.
H.R. 1575 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would impose no
costs on state, local, or tribal governments.
H.R. 1575 would impose a private-sector mandate, as defined
in UMRA, to the extent that it would require individuals to pay
back certain compensation received from companies that accepted
$10 billion or more in financial assistance from the federal
government on or after September 1, 2008. The costs of
complying with that mandate would be the lost compensation,
plus court costs and attorney fees. Because those costs, if
any, would depend on future court decisions and settlements,
CBO cannot determine whether they would exceed the annual
threshold established in UMRA for private-sector mandates ($139
million in 2009, adjusted annually for inflation).
The CBO staff contacts for this estimate are Leigh Angres
(for federal costs) and Paige Piper/Bach (for the private-
sector impact). This estimate was approved by Theresa Gullo,
Deputy Assistant Director for Budget Analysis.
Performance Goals and Objectives
The Committee states that pursuant to clause 3(c)(4) of
rule XIII of the Rules of the House of Representatives, H.R.
1575 will promote the stewardship of taxpayer dollars that have
been used to stabilize entities in financial distress.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in article I, section 8, clauses 1, 3, 4, and
18 of the Constitution.
Advisory on Earmarks
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 1575 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as defined in clause 9(d), 9(e), or 9(f) of Rule XXI.
Section-by-Section Analysis
The following discussion describes the bill as reported by
the Committee.
Sec. 1. Short Title. Section 1 sets forth the short title
of the bill as the ``End Government Reimbursement of Excessive
Executive Disbursements (End GREED) Act.''
Sec. 2. Statement of Authority. Section 2 sets forth a
statement of congressional authority. Pursuant to this
authority, section 2 authorizes the Attorney General, after
consultation with the Secretary of the Treasury, to: (1) seek
recovery of previous excessive payments of compensation made by
recipient entities (as defined in section 6 of the bill); and
(2) limit excessive payments of compensation to be made by such
entities.
Sec. 3. Recovery of Excessive Compensation. Subsection (a)
of section 3 authorizes the Attorney General, after
consultation with the Secretary of the Treasury, to review on
behalf of the Government any employment contract made by a
recipient entity, and any payment made by a recipient entity to
an employee on or after September 1, 2008.
Subsection (b) authorizes the Attorney General to commence
a civil action in the appropriate United States district court
to avoid any payment made by a recipient entity to an employee
(including a payment under an employment contract) that was
made on or after September 1, 2008, if such entity received
less than a reasonably equivalent value in exchange for such
payment, under certain circumstances. The provision applies if
such entity was either: (1) insolvent on the date that the
payment was made, not taking into account any line of credit,
loan, or payment in exchange for stock, received by such entity
from the United States on or after September 1, 2008; or (2)
engaged in business or a transaction (or about to engage in
business or a transaction) for which property remaining in the
recipient entity was an unreasonably small capital.
For purposes of this subsection, the Attorney General may
avoid any interest of a recipient entity in property, or any
obligation incurred by such entity, that is avoidable under
applicable law by a creditor holding an unsecured claim against
such entity.
Subsection (c) authorizes the Attorney General to commence
a civil action in the appropriate United States district court
to limit the amount of compensation paid or payable on or after
the date of enactment of this Act by a recipient entity under
an employment contract if such compensation is greater than an
amount equal to ten times the amount of the mean amount of
compensation paid or payable to such entity's non-management
employees for any purpose during the calendar year in which
compensation was paid or payable by such entity.
Sec. 4. Subpoena Authority. Section 4 authorizes the
Attorney General to issue a subpoena to require the attendance
and testimony of witnesses as well as require the production of
documentary evidence relating to any matter relevant to the
implementation of this Act, including the circumstances
surrounding any employment contract or payment of compensation.
In any instance of contumacy or refusal to obey, section 4
provides that the subpoena shall be enforceable by order of an
appropriate district court of the United States.
Sec. 5. Rule of Construction. Section 5 sets forth a rule
of construction. Other than limiting compensation paid or
payable under employment contracts or providing for the
recovery of previously paid compensation, section 5 provides
that nothing in this Act shall be construed to have any impact
on a recipient entity, its financial status, or the financial
status of its creditors.
Sec. 6. Definitions. Section 6 defines two terms used in
the Act. First, it defines ``employment contract'' as a
contract that provides for the payment of compensation
(including performance or incentive compensation, bonus, or
other financial return designed to replace or enhance
incentive, stock, or other compensation. Second, it defines
``recipient entity'' as a person (including any subsidiary of
such person) that receives during any period beginning on
September 1, 2008 from the United States, in excess of $10
billion in the aggregate, (1) a line of credit or a loan, (2) a
payment in exchange for stock of such person (or such
subsidiary), or (3) any combination of such lines of credit,
loans, or payments.
Additional Views
As the financial crisis of Fall 2008 sprang to life, the
United States bailed out of imminent financial disaster the
insurance giant American International Group (AIG). This
decision was attended by no small controversy. It preceded a
much greater controversy still, that over the passage of the
Emergency Economic Stabilization Act of 2008.
Since those actions, federal bailouts have continued to
come to the rescue of financial institutions. The Executive and
the Department of the Treasury have attempted multiple
strategies to revive the Nation's ailing finance system, its
associated institutions, and the broader economy. Chief among
these was the American Recovery and Reinvestment Act of 2009,
commonly known as the ``Stimulus Bill.'' Governments around the
world have taken parallel actions to save their ravaged systems
and economies. Yet still the crisis rages on. Public
frustration mounts, and global anxiety has not diminished.
In this tension-filled environment, over the weekend of
March 14-15, 2009, it was revealed that, out of the $180
billion-plus dollars that AIG has received from the federal
government to date, AIG had just distributed more than $160
million in retention bonuses to its executives and members of
its Financial Products Subsidiary, the AIG unit principally
responsible for the firm's meltdown. According to the Attorney
General of New York, the most richly paid bonus recipient
received more than $6.4 million in taxpayer funds. The top
seven bonus recipients received more than $4 million each. The
top ten bonus recipients received a combined $42 million.
Twenty-two individuals received bonuses of $2 million or more;
combined they received more than $72 million. Seventy-three
individuals received bonuses of $1 million or more. Eleven of
the individuals who received ``retention'' bonuses of $1
million or more are no longer working at AIG. One of these
received $4.6 million. Meanwhile, in the devastated economy AIG
helped to unleash upon the American public, unemployment has
risen by leaps and bounds, standing now at over eight percent.
The stock market has plunged by well over 30 percent. Trillions
of dollars of American wealth has evaporated.
As the week of March 15, 2009 has unfolded, the chairman of
the Senate Banking Committee has admitted that he inserted into
the Stimulus Bill a stealth provision protecting AIG's ability
to pay these bonuses, in response to the urging of the Obama
Administration. The Secretary of the Treasury has admitted that
it was his department that urged the Banking Committee chairman
to insert the provision into the Stimulus Bill, in response to
concerns over lawsuits that could be filed if the bonuses were
not paid. It has been revealed that Executive Branch officials
knew about the bonuses but made no effort to prevent them. And
AIG has responded that it had no choice but to pay these sums,
due to contractual obligations that were part of its employee
retention plan.
The American people have had a different response. Outrage
has swept the country. The AIG bonuses have detonated the
powder keg that was first filled, and has since progressively
smoldered, as the congressional majority and the Administration
have failed to take the steps needed to halt the economy's
bleeding.
The House majority, for its part, has taken yet another
response to this debacle. It could have held itself accountable
for its role in the scandal. After all, the House majority
passed the bonus-enabling Stimulus Bill without even reading
it, over the opposition of every Republican member of the
House. But the majority did not hold itself accountable. The
House majority also could have held the Executive and the
Department of the Treasury accountable for their failures. But
it did not, and, adding insult to injury, it blocked Republican
legislation that would have helped to ensure that the
Executive, including the Treasury Secretary, would never let
this happen again. What is more, the House majority has failed
to introduce legislation to recoup the taxpayers' lost funds
through the course of future dealings with a company the U.S.
government now effectively owns, AIG--which will surely come as
the crisis drags on. Rather than hold itself, the Executive or
the Secretary accountable, the House majority has even gone so
far as to offer and debate a resolution that the Executive
Branch has done everything it could to avoid what has gone
wrong in this crisis. Stunningly, this resolution, H. Con. Res.
76, garnered nearly every House Democrat's vote.
The majority has, in addition, introduced the bill before
us, H.R. 1575, entitled the ``End the Government Reimbursement
of Excessive Executive Disbursements (End the GREED) Act.''
Ostensibly using the Congress' power under the Bankruptcy
Clause, the bill asserts that AIG, had it not been bailed out,
would be insolvent; that AIG, were it insolvent, would be
subject to the bankruptcy power; that, in bankruptcy, AIG's
bonus contracts could have been abrogated, so that the bonuses
need not have been paid; and that, accordingly, the still
solvent AIG should be subject to the abrogation of contracts
outside of bankruptcy, in civil actions brought by the Attorney
General and involving no other AIG creditors. In addition to
this gerrymandering of the Bankruptcy Clause, the bill extends
the power to abrogate contracts, not simply to the employment
contracts of AIG, but to those of any institution receiving $10
billion or more from a loan, line of credit, or payment by a
federal agency. It establishes the power for the Attorney
General to suppress significantly, not just executive
compensation, but any employee's compensation. And it enshrines
these powers in perpetuity.
This sweeping bill raises clear constitutional concerns
under the Bankruptcy Clause and the Takings Clause. It may
raise concerns under other clauses of the Constitution as well,
such as Article III's Case or Controversy Clause. It is likely
to trigger litigation on one or more of these grounds; if those
challenges are successful, the statute will accomplish nothing
to remedy the enormity that is the AIG bonuses. The bill also,
by its highly unusual, overly broad and open-ended incursion on
contracts, threatens to chill lenders from seeking needed
federal aid, and to chill investors from investing in our
markets for fear of what the Congress might do next.
For example, the Bankruptcy Clause, residing in Article I,
section 8, clause 4 of the Constitution, provides that the
Congress has the authority to establish ``uniform Laws on the
subject of Bankruptcies throughout the United States.'' This
power, while broad, is not without limit. In Louisville Joint
Stock Land Bank v. Radford, 295 U.S. 555, 589 (1935), the
Supreme Court held that ``[t]he bankruptcy power, like the
other great substantive powers of Congress, is subject to the
Fifth Amendment.'' Similarly in United States v. Security
Industrial Bank, 459 U.S. 70, 75 (1982), the Court stated that
``[t]he bankruptcy power is subject to the Fifth Amendment's
prohibition against taking private property without
compensation.'' As a result, because the bill relies on the
Bankruptcy Clause as authority for its enactment, the bill must
respect, not only the limits of the Bankruptcy Clause's terms
in and of themselves, but the limits which the Fifth Amendment
superimposes on those terms. We believe it fair to presume that
the bill relies on the Bankruptcy Clause specifically to try to
skirt the reach of the Takings Clause. But 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.
What is more, while it may be true that, in a case brought
in bankruptcy court, bonus compensation might be subject to
limitation or recapture provisions in the Bankruptcy Code, see
11 U.S.C. secs. 503(c) and section 544(b), such a limitation or
recovery would generally accrue to the benefit of all of the
creditors in the case. The federal government would ordinarily
be a party to the case only if it were owed tax payments, or if
a government agency such as the Pension Benefit Guaranty
Corporation had a legitimate seat at the table. H.R. 1575's
quasi-bankruptcy proposal, however, makes the federal
government the only party in interest. Any and all recoveries
of excessive executive compensation will flow back to the U.S.
Treasury. Not one dime will accrue to other AIG creditors, of
whom there assuredly are many. We understand that, in this
instance, the Congress desires to recover specifically federal
monies. We raise the point, however, merely to illustrate how
clearly the bill stands outside the ordinary bankruptcy
framework.
Also departing from usual bankruptcy norms is the complete
lack of any end to the reach of the bill. In a true bankruptcy
case, there is always an end, and a prompt one. That end is
called ``discharge,'' see, e.g., 11 U.S.C. sec. 727, or
ultimately liquidation. Under H.R. 1575, however, there is no
release from the reach of the federal government. There is no
discharge. On the contrary, once an entity has received
government assistance that exceeds $10 billion it is subject to
the bill's tortured, quasi-bankruptcy control of executive
compensation--and non-executive compensation--until the end of
time. In other words, a continuous government presence to
determine compensation.
In an attempt to smooth over the bill's lurking Bankruptcy
Clause problems, the majority has advanced the theory that
state and federal fraudulent conveyance laws provide a
foundation for incorporating bankruptcy powers into the bill.
This is a provocative theory; we are willing to concede for
purposes of argument that there may be at least partial merit
to it. The Committee, however, has not had time to explore this
claim fully through the testing of witnesses at a hearing, and
serious questions remain. For example, what is to be done with
AIG bonuses that may not have constituted ``fraudulent
conveyances?'' Let it not be forgotten that the congressional
majority, at the behest of the Administration, snuck into the
Stimulus Bill a provision specifically to protect AIG's right
to pay these bonuses after removing a bipartisan Senate
amendment that could have prevented the payment of these
bonuses, and that the bonus-protecting provision was signed
into law. Could that not drastically undermine the theory that
the bonuses were fraudulently conveyed? If the bonuses were not
fraudulently conveyed, might not an attempt to recoup the
bonuses through the civil actions H.R. 1575 would authorize
amount to an attempted taking? Might not that attempt strain
this stretch of the Bankruptcy Clause beyond the breaking
point? Finally, if it is a fraudulent conveyance theory that
the majority embraces, why does the majority not simply
introduce a fraudulent conveyance statute, eschewing any
reliance on the Bankruptcy Clause? Is it because the majority
knows that there are serious obstacles to proving that any of
these bonuses were fraudulently--as opposed to foolishly--
conveyed?
The above issues do not exhaust our concerns under the
Bankruptcy Clause. But for the sake of brevity--and because the
majority's hasty tactics have not permitted time to plumb these
questions fully--let us turn to our concerns under the Takings
Clause and the Case or Controversy Clause.
To begin with the Takings Clause, contracts, of course, are
constitutionally protected property. See, e.g., Lynch v. United
States, 292 U.S. 571, 579 (1934) (``Valid contracts are
property, whether the obligor be a private individual, a
municipality, a state, or the United States.''); United States
Trust Co. v. New Jersey, 431 U.S. 1, 19 (1977) (``Contract
rights are a form of property and as such may be taken for a
public purpose provided that just compensation is paid.''). As
a result, the proposal to exact from recipients payments that
have already been paid, pursuant to pre-existing contracts that
are not suggested to be invalid, under the shadow of Stimulus
Bill authority that could easily be viewed to have ratified the
contractual rights to the payments, could very well be a
proposal to exact a taking. Of course, if this were a taking,
it would have to be either compensated--defeating the very
purpose of the exaction--or held unconstitutional. United Trust
Co., 431 U.S. at 19. This quandary, no doubt, lies at the root
of the majority's invocation of the Bankruptcy Clause.
The Case or Controversy Clause may also present an issue
that is destined to doom the bill. In the case of In re TMI
Litigation Cases II, 940 F.2d 832 (3rd Cir., 1982), for
example, the federal courts held once again that, under this
clause of the Constitution, for Congress to confer a valid
grant of federal jurisdiction, the cause of action concerned
must be one which ``arises under'' the laws of the United
States. Yet while H.R. 1575 certainly endeavors to grant the
courts jurisdiction to hear, and the Attorney General authority
to bring, cases that would undo the AIG bonus contracts, the
bill cites no underlying substantive federal law which the
bonus payments violated. And, again, struggle as it might, it
is questionable whether the bill could, given that the Stimulus
Bill appears to have ratified the payment of the bonuses under
existing AIG contracts.
Amendments to the bill might have been reached that could
have avoided these and other problems, had we been given time
to work the problems through and craft appropriate solutions.
That time was available, and the Constitution deserved it. The
AIG bonuses have already been paid. The time for urgent action
to keep them from being paid has passed us, however so much in
the night. The time to take steps to recover them is ample. Yet
this bill was brought to our attention in draft form on the
morning of March 17, 2009; introduced in a new form on the
evening of that day; and brought directly to full Committee
mark-up on March 18, 2009. No Subcommittee or full Committee
hearings were held. No Subcommittee mark-up was entertained. No
time for reasoned consideration was allowed. And no time is
being lost in hurrying this bill to the floor of the House. We
understand that the majority will bring the bill to a vote as
soon as three legislative days after our Committee's mark-up,
under a suspension of the House rules, preventing any final
possibility of amendment.
AIG's bonus payments are astounding. Still more astounding,
however, is the rush by the majority to legislate, when that
rush risks trampling the Constitution. In the current
environment, we can only conclude that this haste is being
indulged in, not so much to address the AIG bonuses, but to
deflect attention from, and deter reflection on, the role of
the congressional majority and the current Administration in
allowing the outrage of the bonuses to occur in the first
place. Our Constitution and our people deserve better.
Lamar Smith.
Steve King.
Trent Franks.
Jim Jordan.
Ted Poe.
Jason Chaffetz.
Gregg Harper.