S. 1381 — Protecting Employees and Retirees in Business Bankruptcies Act of 2025

This section revises priority unsecured claims for wages and employee benefits in bankruptcy cases (11 U.S.C. § 507(a)). (1) For fourth-priority claims (i.e., wages, salaries, commissions, vacation pay, severance pay, and sick leave pay), it increases the cap to $20,000 (from $10,000) per claimant; removes the prior limitation to amounts earned within 180 days before the bankruptcy filing or business cessation, whichever first; and deems severance pay earned in full upon an employee's layoff or termination. (Thus, larger and older wage claims receive priority over general unsecured claims.) (2) For fifth-priority claims (i.e., unpaid contributions to employee benefit plans), it removes the prior 180-day limitation and revises the cap to $20,000 multiplied by the number of employees covered by each plan.

This section amends the Bankruptcy Code definition of "claim" (11 U.S.C. §101(5)) by adding a new subparagraph (C) to include a right or interest in equity securities of the debtor or an affiliate held in a defined contribution plan (i.e., an individual account retirement plan such as a 401(k), per ERISA §3(34) (29 U.S.C. §1002(34))) for the benefit of an individual who is not an insider, senior executive officer, or among the debtor's 20 highest compensated non-insider, non-senior-executive employees, if (1) the securities are attributable to employer contributions by the debtor or affiliate, elective deferrals (IRC §402(g)), or earnings thereon; and (2) the debtor or plan sponsor committed fraud with respect to the plan or breached a duty to the participant proximately causing the loss in value. (Thus, such interests are treated as creditor claims eligible for distribution in the bankruptcy case, rather than subordinated equity interests.)

This section adds to the list of priority administrative expenses in bankruptcy cases under 11 U.S.C. § 503(b) two new categories: (1) severance pay owed to employees of the debtor—excluding insiders, senior executive officers, the 20 highest compensated employees who are not insiders or senior executive officers, department or division managers, and consultants—under a generally applicable plan, program, policy, or collective bargaining agreement (but not an individual employment contract), for layoff or termination on or after the petition date, deemed earned in full upon such layoff or termination; and (2) contributions to an employee benefit plan due on or after the petition date. (Thus, these claims receive priority payment ahead of general unsecured creditors.)

This section revises the requirements for confirmation of a Chapter 11 bankruptcy reorganization plan under 11 U.S.C. §1129(a) as follows: (1) replaces paragraph (13) to require continuation of retiree benefits (i.e., payments for retirees' medical, surgical, hospital, life insurance, or other specified benefits, as defined in 11 U.S.C. §1114(a)) at the level established prior to plan confirmation under §1114(e)(1)(B) or (g)—or at pre-petition levels if unmodified—and recovery under the plan of claims arising from any modification of those benefits or other financial returns negotiated with the authorized representative of the retirees; and (2) adds paragraph (17) to require recovery under the plan of damages payable for rejection of a collective bargaining agreement or other financial returns negotiated under 11 U.S.C. §1113 with the authorized representative. (Thus, such recoveries must be paid through the plan rather than outside it.)

This section amends administrative expense priorities under the Bankruptcy Code (11 U.S.C. §503(b)(1)(A)(ii)) to include, ahead of wages and benefits, any back pay, civil penalty, or damages for violations of federal or state labor and employment laws—including the Worker Adjustment and Retraining Notification (WARN) Act (29 U.S.C. §2101 et seq.), which requires 60 days' advance notice of certain plant closings and mass layoffs, and any comparable state law. (Thus, these labor law claims receive first-priority payment from the bankruptcy estate, ahead of general unsecured claims.)

This section revises the procedures under 11 U.S.C. §1113 for a Chapter 11 debtor in possession or trustee (other than for Railway Labor Act agreements) to modify or reject a collective bargaining agreement (CBA). (As background, §1113 governs CBA rejection to permit labor cost adjustments essential for reorganization while requiring good-faith negotiations and court approval to protect unionized employees' bargained-for rights.) The revision (1) prohibits unilateral termination or alteration of any CBA provision without compliance and requires timely payment of all CBA monetary obligations as allowed administrative expenses under §503 prior to plan confirmation; (2) mandates notice to the labor organization, a prompt initial proposal based on the debtor's business plan and most reliable information (with relevant data provided and possible protective orders), and good-faith conferral for a reasonable period considering case complexity; (3) limits proposed modifications to those that are part of overall workforce and nonworkforce cost savings (including management), achieve no more than the minimum savings essential to avoid likely liquidation or further reorganization, and do not disproportionately burden CBA-covered employees; and (4) authorizes a rejection motion only after failed negotiations, with a hearing no earlier than 21 days after notice to the labor organization (from 14 days after filing under prior law), limited to appearances by the debtor and labor organization. The court may approve rejection, effective immediately upon order entry, only upon clear and convincing evidence that the trustee complied with negotiation requirements, labor organization alternatives are insufficient, further negotiations are unlikely to succeed, the trustee's proposal causes no material diminution in employee purchasing power or adverse effects on workforce retention or labor relations, and rejection with immediate implementation is essential for the debtor to exit bankruptcy without likely liquidation or further reorganization.

This section revises Bankruptcy Code protections for retiree benefits (i.e., payments for retired employees' medical, surgical, hospital care, or benefits in the event of sickness, accident, disability, or death) by (1) clarifying in subsection (a) that such benefits include payments under any debtor-maintained plan, fund, or program without regard to whether the debtor asserts a unilateral right to modify them; (2) granting labor organizations serving as authorized representatives under subsection (c)(1) the same rights, powers, and duties as court-appointed retiree committees under subsection (b)(2); (3) replacing subsection (f) to require the trustee to provide notice and an initial proposal based on a reorganization business plan, confer in good faith with the authorized representative (sharing relevant information under potential protective order), and propose modifications only as part of a broader cost-savings program that is limited to the minimum savings essential for the debtor to exit bankruptcy without near-term liquidation or further reorganization and not disproportionate to retirees; (4) revising subsection (g) to authorize court-approved modifications only after failed negotiations (with a hearing no earlier than 21 days after notice, limited to debtor and authorized representative), upon clear and convincing evidence of subsection (f) compliance, rejection of viable alternatives, no irreparable harm to retirees, and essentiality for reorganization (with a presumption of noncompliance if certain pre- or post-petition executive incentives were implemented), and to replace the prior standard with one assuring fair and equitable treatment clearly favored by the balance of equities; (5) limiting temporary modifications under subsection (h)(1) to a period of not longer than 14 days; and (6) striking subsection (k) and redesignating subsections (l) and (m) as subsections (k) and (l). (Thus, the changes strengthen negotiation requirements, narrow court authority to approve modifications, and enhance retiree safeguards during corporate bankruptcies.)

This section amends Bankruptcy Code §363 (governing sales and leases of estate property outside the ordinary course of business) by adding subsection (q) to require courts, in approving such transactions or sales under chapter 11 plans, to give substantial weight to the extent a prospective purchaser or lessee will (1) preserve the debtor's employees' jobs, (2) maintain those employees' terms and conditions of employment, and (3) assume or match the debtor's pension and health benefit obligations to retirees; if multiple offers exist, the court must approve the one that best achieves these goals. (As background, §363 sales are common in chapter 11 cases to maximize value for creditors.) The section further amends §1129(a) (governing chapter 11 plan confirmation) by adding paragraph (17) to require, as a condition of confirmation, that any plan selling all or substantially all estate property obligate the purchaser to achieve these same three goals.

This section amends Bankruptcy Code section 502 (11 U.S.C. §502), which governs the allowance of claims filed in bankruptcy cases (generally deemed allowed unless objected to and disallowed under specified exceptions), by adding subsections (l) and (m). (1) Subsection (l) requires courts to allow claims by active or retired participants, or labor organizations representing them, in a defined benefit pension plan (i.e., promising fixed retirement benefits) terminated under ERISA sections 4041 or 4042 (29 U.S.C. §§1341, 1342) for any shortfall in accrued benefits as of the plan's termination effective date due to the termination and ERISA benefit payment limits (29 U.S.C. §1322), notwithstanding claims asserted or collected by the Pension Benefit Guaranty Corporation (PBGC) (i.e., the federal insurer of such plans). (Thus, participants may recover directly from the bankrupt debtor's estate for benefits above PBGC guarantees.) (2) Subsection (m) requires courts to allow claims of a type described in Bankruptcy Code section 101(5)(C) (11 U.S.C. §101(5)(C)) by active or retired participants, or labor organizations representing them, in a defined contribution plan (i.e., account-based plans such as 401(k)s under ERISA section 3(34) (29 U.S.C. §1002(34))), measured as the difference between the market value of stock at the time of contribution to or purchase by the plan and its value as of the bankruptcy petition date.

This section revises the Bankruptcy Code provision authorizing surcharges against a secured creditor's collateral for reasonable, necessary costs of preserving or disposing of the collateral (to the extent benefiting the creditor) by deeming postpetition unpaid employee wages, accrued vacation, severance, other compensation, and employee benefit plan contributions as such costs. The trustee may recover these amounts from the collateral for payment to employees or plans, even if surcharge rights were previously waived by agreement with the secured creditor.

This section amends Chapter 11 of the Bankruptcy Code (i.e., business reorganization proceedings) as follows: (1) inserts a new section 1100 stating that cases involving non-individual debtors shall have as their principal purpose the reorganization of the debtor's business to preserve going concern value to the maximum extent possible through the productive use of its assets and the preservation of jobs that sustain productive economic activity; (2) adds a new confirmation requirement under section 1129(a)(18) that, if a plan contemplates continuation of the debtor's business, its proponent must demonstrate preservation of going concern value to the maximum extent possible through productive asset use and job preservation; and (3) revises section 1129(c) to require courts, when multiple plans satisfy confirmation standards, to select the plan that best preserves going concern value and jobs, with a plan incorporating a settlement with a labor organization presumptively satisfying this standard.

This section includes as cause under 11 U.S.C. §1121(d) for reducing a Chapter 11 debtor's exclusivity periods—the 120-day period to file a reorganization plan or the 180-day period to solicit acceptances—(1) the filing of a motion under §1113 to reject a collective bargaining agreement if a plan based on an alternative proposal by the labor organization is reasonably likely to be confirmed within a reasonable time; and (2) the proposed filing of a plan by a proponent other than the debtor that incorporates terms of a settlement with a labor organization if such plan is reasonably likely to be confirmed within a reasonable time. (As background, §1121 exclusivity periods give the debtor sole rights to propose and seek acceptance of a reorganization plan, subject to court reduction for cause; §1113 governs rejection of collective bargaining agreements.)

This section establishes a new administrative expense priority claim under the Bankruptcy Code (11 U.S.C. § 503(b)(12)) for the portion of withdrawal liability to a multiemployer pension plan attributable to employee service rendered to the debtor from the bankruptcy case commencement date to the date of complete or partial withdrawal from the plan, if the withdrawal occurs on or after case commencement. (Withdrawal liability under ERISA requires a withdrawing employer to pay its allocable share of the plan's unfunded vested benefits.)

This section amends the chapter 11 plan confirmation requirements of 11 U.S.C. §1129(a)(4) and (5) to restrict payments to certain debtor insiders and executives and to require court approval of their compensation. (1) In §1129(a)(4), it prohibits payments or distributions to an insider, senior executive officer, any of the 20 highest compensated employees who are not insiders or senior executive officers, department or division manager, or consultant unless the payments are part of a program generally applicable to all full-time employees and do not exceed compensation limits under §503(c)(1) compared to the nonmanagement workforce (except for compensation under new §1129(a)(5)(C)). (2) In §1129(a)(5), it requires court approval of disclosed compensation to directors, officers, or trustees as reasonable compared to individuals in comparable positions at comparable companies in the same industry and not excessive or disproportionate relative to economic losses of the nonmanagement workforce.

This section revises restrictions under Section 503(c) of the Bankruptcy Code on administrative-expense priority for transfers or obligations related to employee retention, severance, or other compensation enhancements during bankruptcy cases. (As background, these limits curb abusive "key employee retention plans" for insiders and executives that were prevalent in cases such as Enron and Lehman Brothers.) Specifically, the section— (1) expands covered personnel to include, beyond insiders, senior executive officers, the 20 highest compensated employees who are not insiders or senior executive officers, department or division managers, and consultants providing services to the debtor; (2) prohibits such transfers or obligations designed to replace or enhance pre-petition incentive, stock, or other compensation; (3) for retention programs in paragraph (1)— (A) requires they be generally applicable to all full-time employees of the debtor; (B) strikes the prior condition in subparagraph (B) that they not be greater than customary levels; (C) in the remaining conditions (redesignated subparagraph (B))— (i) reduces the maximum recipient threshold to 2% of the debtor's workforce (from 10%); and (ii) reduces the maximum aggregate amount threshold to 10% of disbursements for non-management workforce (from 25%) and applies it to any "person" (from "insider"); (4) for severance payments in paragraph (2), reduces the maximum recipient threshold to 2% of the debtor's workforce (from 10%); and (5) revises the catch-all prohibition in paragraph (3) to bar other such transfers or obligations outside the ordinary course of business, except as part of a chapter 11 plan of reorganization approved by the court under sections 1129(a)(4) and (5) (i.e., for reasonableness and good faith). The section also subjects all such claims to section 363(b)(3) (i.e., court approval or notice for non-ordinary-course uses of property). (Thus, these changes substantially narrow permissible payments to debtor executives, managers, and consultants during bankruptcy.)

This section amends 11 U.S.C. 363 (governing trustee use, sale, or lease of estate property in bankruptcy cases) by (1) prohibiting court approval of any plan, program, transfer, or obligation benefiting an insider, senior executive officer, the 20 highest compensated employees who are not insiders or senior executive officers, department or division manager, or consultant if, within one year before the petition filing date, the debtor discontinued or reduced severance pay for its nonmanagement workforce; and (2) requiring prior court approval, after notice and a hearing, for ordinary-course-of-business transactions that are transfers or obligations described in 11 U.S.C. 503(c)(1)-(3) (i.e., retention payments to insiders, insider severance pay, or insider incentive plans). (Thus, such transactions previously authorized without court approval under 363(c)(1) now generally require it.)

This section limits the bankruptcy trustee's authority under 11 U.S.C. 365(a) to assume certain executory contracts and unexpired leases by adding exceptions in new subsections (q) and (r). Subsection (q) prohibits assumption of any deferred compensation arrangement benefiting an insider of the debtor, a senior executive officer, or any of the 20 highest compensated employees who are not insiders or senior executive officers if a defined benefit pension plan for the debtor's employees has been terminated under ERISA §§4041 or 4042 (29 U.S.C. §§1341, 1342) on or after one year before the bankruptcy case commenced. Subsection (r) prohibits assumption of any plan, fund, program, or contract providing retiree benefits to such insiders, senior executive officers, or top 20 compensated employees if the debtor, on or after one year before the case commenced, has obtained bankruptcy court relief under 11 U.S.C. §1114(g) or (h) to reduce retiree benefits, under §1113(d) or (e) to reduce active employees' health benefits, or has otherwise reduced or eliminated health benefits for employees or retirees. (Thus, these executives' benefit arrangements become rejectable, potentially reducing administrative expenses in Chapter 11 reorganizations where employee benefits have been cut.)

This section adds a new section 563 to the Bankruptcy Code (11 U.S.C.), establishing procedures for the bankruptcy estate to recover a portion of executive compensation when a debtor reduces obligations under a collective bargaining agreement or retiree benefits plan. Specifically, (1) if the debtor obtains court relief under Bankruptcy Code sections 1113(d) or 1114(g) to reduce such obligations—including from termination of a defined benefit pension plan under ERISA sections 4041 or 4042 (29 U.S.C. §§1341, 1342) effective on or after 180 days before the bankruptcy filing—the court must determine the percentage diminution in value of those obligations (excluding benefits paid or payable by the Pension Benefit Guaranty Corporation); (2) if no such relief is granted but a plan is terminated within that 180-day period, the court must make the determination upon motion by a party in interest, similarly excluding Pension Benefit Guaranty Corporation benefits. Upon that determination, (1) the estate gains a claim for recovery of the same percentage of compensation paid directly or indirectly (including to self-settled trusts or nonqualified deferred compensation plans) to debtor officers serving as board members in the year before the bankruptcy filing, and to the chairman or lead director at the time of relief or plan termination; (2) the trustee or creditors committee may pursue recovery, but any party in interest may do so if neither acts by the first plan confirmation hearing date under section 1129, with costs borne by the estate; and (3) the court may not approve postpetition compensation to those individuals if likely intended to reimburse or replace recovered amounts. This section also makes a conforming amendment to the table of sections for Bankruptcy Code chapter 5.

This section adds subsection (j) to Bankruptcy Code Section 547 (preferential transfers) to authorize a trustee, based on reasonable due diligence, to avoid any transfer made in anticipation of bankruptcy within one year before the petition date to or for the benefit of (1) an insider (including obligations under an employment contract), (2) a senior executive officer, (3) the 20 highest compensated employees who are not insiders or senior executive officers, (4) a department or division manager, or (5) a consultant providing services to the debtor (including a former insider retained to provide services to the debtor). Subsection (c) defenses (e.g., contemporaneous exchange for new value or ordinary course of business) do not apply to such transfers. The trustee or creditors' committee under Section 1102 may recover the transfers; if neither acts by the start of a Section 1129 plan confirmation hearing, any party in interest may seek court authority to recover for the estate, with costs borne by the estate.

This section establishes an exception to the automatic stay in bankruptcy for the commencement or continuation of a grievance, arbitration, or similar dispute resolution proceeding under a collective bargaining agreement that was or could have been commenced against the debtor before the bankruptcy filing, or for the payment or enforcement of an award or settlement from such a proceeding. (The automatic stay generally prohibits creditors from pursuing claims against a debtor after a bankruptcy petition is filed.)

This section establishes, as a new subsection (m) of 11 U.S.C. §103, that notwithstanding 11 U.S.C. §§365 (executory contracts and unexpired leases), 1113 (rejection of collective bargaining agreements), or 1114 (retiree benefits), neither the court nor the trustee may change wages, working conditions, or retirement benefits of a debtor's employees or retirees established by a collective bargaining agreement subject to the Railway Labor Act (RLA; 45 U.S.C. §151 et seq.), except in accordance with RLA section 6 (45 U.S.C. §156). (Thus, modifications to such agreements must follow the RLA's required negotiation and mediation processes, which apply to labor relations in the railroad and airline industries.)