Senator Edward M. Kennedy will be remembered for his contributions to a wide variety of issues, including his tireless advocacy for health-care reform, but the late Senator from Massachusetts also played a crucial role in the bankruptcy reform law of 2005, an infamous piece of legislation that made it more difficult to abuse the benefits of filing bankruptcy.

Peter Edmondston of The New York Times says that Kennedy’s contribution to the bill was typical of his populist philosophy.

As the passage of the bankruptcy “reform” plan became inevitable, Senator Kennedy inserted a provision on the bigger bill that was designed to stop large corporations in bankruptcy from handing out big bonuses to employees.

Bankruptcy in the Corporate World

The provision has withstood several court cases so far, and more can be expected as more corporations find themselves filing for Chapter 11 bankruptcy.

During his 18-minute speech in support of the change, Kennedy said that the Senate as a whole was “blatantly ignoring the real abuses in our bankruptcy laws: the corporate abuses that have become epidemic in recent years.”

He went on to call corporate bankruptcy law in the United States “grossly inadequate,” and criticizes the fact that the proposed 500-page bill did nothing to address this deficiency.

Key Employee Retention Plans

Kennedy’s amendment banned a common type of bankruptcy bonus program known as the “key employee retention plan,” or KERP.

So far, the KERP restriction program has gotten mixed reviews. Some believe that bankruptcy attorneys can sidestep KERP limitations by simply renaming the pay packages or making them available for those who meet very “low-bar” performance options or goals.

Rep. John Conyers of Michigan said in 2007 that despite Senator Kennedy’s “laudable efforts, creative practitioners have developed ways around the code’s restrictions.”

Others say that KERP has done a good job of requiring many corporate bonus programs to be based on real performance-related achievements. In 2006, a bankruptcy judge overseeing a Chapter 11 bankruptcy case rejected an initial bonus plan for top executives.

When explaining his decision, the judge cited the Kennedy amendment. That judge later approved bonuses for the same executives after a “modification” of the terms involved in the program.

Business Bankruptcy's Effects

Kennedy believed that rewarding individuals who have driven a company to a costly financial reorganization cost taxpayers’ money, pushed many workers out of jobs, and represented an unsupportable position in the face of the worst economy since the Great Depression.

As more such cases make their way through the courts and executives again feel bold enough to offer retention packages designed to keep their “best employees,” the true durability of Senator Kennedy’s contribution to the Bankruptcy Reform Act of 2005 will be put to the test.