USTP Prevails at Trial on Objection to Chapter 11 Debtors’ Executive Bonuses

The Justice Department’s U.S. Trustee Program (USTP) recently prevented the payment of bonuses to an executive of three small businesses that had stopped operating and already had sold their assets in bankruptcy.

Aviation Safety Resources and its two debtor affiliates, which filed for bankruptcy under subchapter V of chapter 11, argued that $30,000 in bonuses were designed to incentivize the companies’ president to avoid leaving for other employment and to facilitate a sale of the debtors’ assets. The U.S. Trustee’s Orlando office objected to the bonuses as a “key employee retention plan,” commonly known as a KERP, which is impermissible under the Bankruptcy Code for insiders unless the proponent can satisfy stringent standards. Among other things, the USTP argued that the bonuses were not incentivizing because they were not tied to any performance-based metrics and that the debtors had already closed on the sale of nearly all their assets three days before filing a motion to approve the bonuses.

On February 2, after a half-day trial, the Bankruptcy Court for the Middle District of Florida sustained the U.S. Trustee’s objection and denied the debtors’ KERP motion.

“The USTP scrutinizes executive bonus plans regardless of their label,” said Director Tara Twomey of the Executive Office for U.S. Trustees. “To ensure the faithful application of the Code, we will continue to hold the proponents of these plans to their proof.”

The Code restricts payments intended to induce corporate officers and other insiders to remain with the debtor through the bankruptcy. The proponent of those retention payments must prove that they are necessary because the insider has a bona fide job offer at the same or greater compensation, that the insider’s services are essential to the business’s survival and that the payments are within certain statutory limits. Many debtors improperly seek to characterize insider payments as incentive payments rather than retention payments to avoid this high standard.

The USTP’s mission is to promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders – debtors, creditors and the public. The USTP consists of 21 regions with 89 field offices nationwide and an Executive Office in Washington, D.C. Learn more about the program at www.justice.gov/ust.