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By Diane Davis
July 1 — American Eagle Energy Corporation's incentive bonus plan for two employees for their work as the bankrupt company seeks to sell its assets is a permissible incentive plan, not a prohibited retention plan, a bankruptcy court in Colorado held June 23 ( In re Am. Eagle Energy Corp., 2016 BL 202150, Bankr. D. Colo., No. 15-15073 HRT, 6/23/16 ).
Judge Howard R. Tallman concluded that the debtor met its burden to demonstrate that the payments owed to the Vice President of Marketing and Strategy, CFO, and Treasurer, Marty Beskow, and in-house counsel and Secretary Laura Peterson have been earned as part of a key employee incentive plan.
Courts must determine whether the debtor has proposed a retentive plan disguised as an incentive plan, and after applying the nine factors found in In re Alpha Natural Resources, Inc., 546 B.R. 348 (Bankr. E.D. Va. 2016), the bankruptcy court found that the debtor's plan was an incentive plan.
“This is not a case where the same management that rode the company into a Chapter 11 filing is now proposing, through the Debtor-In-Possession, to pay themselves bonuses and gold parachutes merely for remaining with the Debtor and performing all or most of their same duties for a given time period — a plan where those approving such a plan get the most benefit,” the court said.
The bonuses proposed to be paid under the plan are transfers out of the ordinary course of business that are fully “justified by the facts and circumstances of the case” the court said, citing Bankruptcy Code Section 503(c)(3). The debtor's plan isn't the type of insider retention plan that Congress was trying to prohibit in Section 503(c)(1), the court said.
Section 503(c) was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, according to Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 52 (D. Michael Lynn et al. eds., 2016).
“Congress enacted section 503(c) to ‘eradicate the notion that executives were entitled to bonuses [and other compensation] simply for staying with the [debtor] through the bankruptcy process,'” according to Bloomberg Law: Bankruptcy Treatise.
Debtor American Eagle Energy Corporation filed for Chapter 11 protection May 8, 2015 (27 BBLR 694, 5/14/15) after oil prices dropped. Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate under a plan that must be approved by the bankruptcy court.
Before and after the Chapter 11 filing, the CFO and other employees resigned or were let go to save costs. The debtor's CEO proposed “retention” bonuses for certain employees that remained and were doing essential jobs. The plan proposed bonuses of $60,000 to Beskow and $7,500 to Peterson for staying with the company, performing their duties, and meeting the financial goals established through the sale of the debtor's assets or the confirmation of a reorganization plan.
Beskow and Peterson were asked to take on new job responsibilities and were, in effect, performing two or three jobs previously performed by employees no longer with the company.
The U.S. Trustee and Power Energy Partners, LP, objected to the debtor's incentive bonus plan, arguing that it was a disguised, prohibited retention plan. According to the UST and Power, the plan only set easily attainable financial and cash position milestones and provided little incentive to perform since Beskow and Peterson could easily reach the goals.
The debtor, however, contended that the bonus payments were not a retention plan (KERP), but are owed as part of a key employee incentive plan (KEIP).
Analyzing the debtor's plan under the nine factors in In re Alpha Natural Resources, Inc., the court found that the scope of the debtor's KEIP was reasonable. While the debtor's plan may have “some retentive effect based on the cash balance standard, that does not mean that the Plan, overall, is retentive rather than incentivizing,” the court said. According to the court, the driving factor incentivizing Beskow and Peterson to stay and perform was to complete a sale of the oil producing assets that would maximize their value to the estate.
The debtor's retention concept was to keep the employees performing a “myriad” of new functions, not just to keep doing the same job, the court said.
The court also found that the plan was properly designed to achieve performance standards. According to the court, Beskow and Peterson were incentivized to work with the various professionals and debtor's board to do all they could to “ensure the Data Room contained all of the necessary information for prospective cash purchasers and to develop efficient and effective financial models regarding sale prospects.” The debtor's ultimate goal, the court said, was to obtain a cash sale, the court said.
The debtor's KEIP was consistent with industry standards, and fell within the “fair and reasonable business judgment of the debtor,” the court said. The use of bonus payments to incentivize the key employees, “while protecting the continuity of the Debtor's operations and sale process, were worth the expense,” the court said.
Finally, the court said that the debtor had met the heightened-scrutiny standard in In re Pilgrim's Pride Corp., 401 B.R. 229 (Bankr. N.D. Tex. 2009), which held that “the standard of approval under § 503(c)(3) is higher than the business judgment standard and contemplates judges playing a more critical role in assessing transaction,” according to Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 52 (D. Michael Lynn et al. eds., 2016).
Although Beskow and Peterson held officer titles, they didn't participate in the Compensation Committee and Board decisions to award bonuses and they weren't the ultimate decision makers on the key goal of the Chapter 11 case, the court said. The court was impressed with Beskow's credibility, candor, and competence based on his testimony and accepted the testimony of the CEO that Peterson performed her duties so that crucial materials were available to parties in interest. According to the court, Beskow, in particular, had earned his promised bonus.
Lars H. Fuller, Denver, Colo., Elizabeth A. Green, Orlando, Fla., Jimmy D. Parrish, Orlando, Fla., represented debtors American Eagle Energy Corporation, AMZG, Inc.; James T. Markus, Denver, Colo., represented Trustee US Bank National Association; Daniel J. Morse, Cheyenne, Wyo., Alan K. Motes, Denver, Colo., represented the U.S. Trustee; Douglas A. Allison, Corpus Christi, Texas, represented intervenor Dylan Devore; Joshua M. Fried, San Francisco, Ira D. Kharasch, Los Angeles, Jeffrey N. Pomerantz, Los Angeles, Barry L. Wilkie, Denver, Colo., represented the Official Committee of Unsecured Creditors of American Eagle Energy Corporation; and Elizabeth A. Green, Orlando, Fla., Jimmy D. Parrish, Orlando, Fla., represented debtor AMZG, Inc.
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