Chapter 11 Treatment of Executive Compensation and Bonuses

Prefiling executive retention and other performance-based awards before or after bankruptcy are becoming the norm. Such payments may be subject to clawbacks under Bankruptcy Code Section 548. Corporate debtors may arrange a deal with their creditors behind the scenes to fend off a public fight before announcing a bonus plan to avoid these issues. They must understand the risks because the Bankruptcy Code provides creditors and other parties in interest with a potential and effective means of challenging restructuring compensation payments.

When seeking approval for KEIPs and KERPS, counsel must understand the applicable standards and burdens of proof under Bankruptcy Code Sections 503(c)(1) and (c)(3), as well as whether testimony and other evidence are sufficient to meet its burden. If proceeding under Section 503(c)(3), the proponent must show how the payment incentivized participation and is not a hidden retention program. Courts are unsettled regarding the meaning in Section 503(c)(3) of "justified by the facts and circumstances of the case."

Other stakeholders' or U.S. Trustee objections may significantly modify and reduce these payments. Courts are required to consider many factors in approving incentive and retention payments. The structure of the plans, the treatment of each recipient, and platitudinous justifications are closely analyzed and require specific factual evidence to support them.

Listen as this experienced panel of bankruptcy attorneys and restructuring compensation professionals guides counsel through executive compensation in Chapter 11.