453 B.R. 459
Bankr. S.D.N.Y.2011Background
- Borders Group, Inc. seeks authorization to implement a two-tier KEIP and a KERP, plus assumption of certain employment agreements.
- KEIP provides incentive bonuses for Senior Management and Management Participants based on a Qualifying Transaction and designated financial Incentives.
- KERP provides fixed lump-sum awards to 25 Critical Employees and a discretionary pool for additional non-insider employees, with total KERP cost around $1.2 million.
- Significant post-petition attrition prompted the Debtors to pursue retention and incentive plans to stabilize operations during bankruptcy.
- Hearing involved negotiations with the Committee and the UST; after revisions, the UST withdrew objections and the court approved the proposed order.
- The court framed the relief as necessary to preserve going-concern value and maximize estate value amid ongoing restructuring.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are KEIP/KERP insiders under 101(31)? | Debtors: KERP non-insiders; KEIP not just retention. | UST: insiders may exist; need 503(c)(1) if insider. | KEIP not treated as insider retention; 503(c)(1) analysis not required. |
| Does KEIP satisfy 503(c)(3) and business judgment standards? | Proposed KEIP aligns with incentives and bankruptcy goals; justified under 503(c)(3). | UST opposition insufficient; parties negotiated revisions supporting business judgment. | KEIP approved under 503(c)(3) with sound business judgment. |
| Is KERP permissible under 503(c)(3) and not insubstantial to insiders? | KERP protects critical non-insiders essential to operations. | KERP limited, non-discriminatory, and necessary due to attrition. | KERP approved as non-insider retention with reasonable scope. |
| Are the proposed plans reasonably related to the Debtors' goals and cost-effective? | Plans align with goals of stabilizing operations and maximizing estate value. | Costs modest (0.17–0.26% of projected revenue) and industry-standard. | Plans are reasonable and cost-conscious in light of industry standards. |
| Did the Debtors exercise proper diligence and seek independent counsel where required? | Mercer independent advice and committee/UST input were sought; counsel participated in negotiations. | Independent counsel not strictly required; due diligence was performed. | Due diligence deemed sufficient; independent counsel not fatal to approval. |
Key Cases Cited
- In re Dana Corp., 358 B.R. 567 (S.D.N.Y. 2006) (income to incentivize performance; limits 503(c)(1) applicability when true incentives exist)
- In re Global Home Prods., LLC, 369 B.R. 778 (Bankr. D. Del. 2007) (discusses 503(c)(3) and business judgment standards for incentive plans)
- In re Nellson Nutraceutical, Inc., 369 B.R. 787 (Bankr. D. Del. 2007) (nature of incentive vs. retention under 503(c)(1) and related standards)
- In re Chas. P. Young Co., 145 B.R. 131 (Bankr. S.D.N.Y. 1992) (totality-of-circumstances approach to insiders and business judgment considerations)