479 B.R. 308
Bankr. S.D.N.Y.2012Background
- Debtors sought approval of a KEIP and a non-insider KERP; the KERP was approved, but KEIP was denied without prejudice.
- Debtors proposed KEIP for eight insiders (SLT) with two paths: Standalone Plan and Third-Party Transaction, targeting bonuses up to 200% of base salary.
- RSA provided a plan to convert prepetition debt to equity; the Standalone Plan and potential Third-Party Transaction were pursued in dual tracks.
- Superior Aviation Beijing proposed a cash-free, debt-free purchase of assets for $1.79 billion; exclusivity was granted for 45 days.
- Court found the KEIP largely functions as a retention plan by insiders, with low hurdles and bonuses achievable irrespective of financial performance.
- Court concluded BAPCPA 503(c) requires challenging targets for insiders; the KEIP’s lower-end targets were insufficient to meet this standard.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KEIP is a true incentive plan or a disguised retention plan | Debtors argue KEIP incentivizes performance beyond staying employed. | Court considers whether structure and targets make it a true incentive plan. | KEIP denied as retention-like and not sufficiently incentive-based. |
| Compliance with § 503(c)(1) retention standards for insiders | KEIP targets align with business needs and target milestones. | Lower-end targets resemble a layup; plan largely rewards staying employed. | Plan fails to meet high hurdles of § 503(c)(1); not approved. |
| Adequacy of targets for Standalone and Third-Party paths | Targets tied to business plan and sale outcomes ensure accountability. | Some targets are easily met or not challenging, especially if a sale occurs. | Lower targets are not sufficiently challenging; KEIP not approved. |
| Effect of potential delays and extended deadlines on incentives | Deadlines can be extended with consent; performance should be assessed later. | Extensions under RSA render deadlines flexible and undermine incentive rigidity. | Flexibility under extensions worsens incentive effectiveness; supports denial. |
| Whether approving KEIP is consistent with case law limits on insiders’ bonuses | Authorities allow incentive plans when properly structured. | Dana, Borders, Velo require genuine incentives; KEIP falls short. | KEIP not approved; falls short of required standards and purpose. |
Key Cases Cited
- In re Borders Group, Inc., 453 B.R. 459 (Bankr.S.D.N.Y. 2011) (KEIP approved when both milestones and qualifying transactions are required)
- In re Dana Corp., 351 B.R. 96 (Bankr.S.D.N.Y. 2006) (distinguishes true incentives from retention-type bonuses)
- In re Dana Corp., 358 B.R. 567 (Bankr.S.D.N.Y. 2006) (Dana II; long-term incentive plan with challenging targets approved)
- In re Global Home Prods., LLC, 369 B.R. 778 (Bankr.D. Del. 2007) (factors for evaluating retention vs incentive plans)
- In re Velo Holdings, Inc., 472 B.R. 201 (Bankr.S.D.N.Y. 2012) (caution against disguising insider retention as incentive; need meaningful targets)