Discretionary Bonuses Are Not Per Se Fraudulent Transfers

An entirely discretionary bonus is not automatically a fraudulent transfer, even if the employer was insolvent, according to Bankruptcy Judge Laurie Selber Silverstein of Delaware.

Although the debtor’s business was failing, the company nonetheless decided to pay bonuses. The bonus program was spelled out in the company’s employee handbook, but there were no performance metrics.

The company filed a chapter 11 petition and ended up with a confirmed plan creating a liquidating trust. The trustee of the liquidating trust commenced more than 100 fraudulent transfer suits to recover discretionary bonuses.

The trustee contended that discretionary bonuses not tied to previously enunciated metrics were fraudulent transfers, as a matter of law, if the employer was insolvent at the time.

In her May 7 opinion, Judge Silverstein granted a motion to dismiss. Her opinion explores the standards in the Third Circuit for “value” and “reasonably equivalent value” under Section 548.

Judge Silverstein’s opinion seems to mean that a bonus is presumptively made for reasonably equivalent value, in the absence of pleading and proof of other facts. For instance, she said that the trustee did not allege that the employees had “not honestly, competently and diligently performed their jobs” or that the bonuses were excessive or not market-based.

The trustee argued that the discretionary bonuses were gratuitous and conferred no value on the employer because there was no obligation to make the awards.

To determine value in the Third Circuit, Judge Silverstein said there is a two-step process. First, the court must decide whether there was “any value at all,” and if there is, the court will then evaluate “whether that value was reasonably equivalent to what the debtor gave up.”

“Value” in the Third Circuit, Judge Silverstein said, “is not a high bar.” Even “a slight chance that a benefit . . . might be conferred . . . is sufficient to show that some value has been conferred.” [Emphasis in original.] Again citing Third Circuit authority, she said that “value” under Section 548 “does not require the finding of an obligation.”

Judge Silverstein therefore rejected the notion that a discretionary bonus “can never be for ‘value.’”

To the contrary, “normal experience and common sense” led Judge Silverstein to “the reasonable inference . . . that the employer paying the bonus believes it confers value on the employer.” Further, she said, rewarding the best employees builds loyalty, enhances morale, and prevents the best employees from leaving.

Judge Silverstein granted the motion to dismiss, saying, “I cannot conclude as a matter of law that the Bonus Payments conferred no value on Debtors simply because they were discretionary and without enunciated performance metrics. Thus, the Trustee’s per se legal theory must fail.”

In substance, Judge Silverstein was saying that the trustee’s bare-bones pleading did not make out a “plausible” claim under the Supreme Court’s Twombly and Iqbal standards. She did not grant leave to amend the complaint because the trustee did not intend to offer other facts.