Reversing a bankruptcy court in New York, District Judge J. Paul Oetken held that someone with the title of a corporate officer is not entitled to participate in a key employee retention program, or KERP, “absent a particularly strong showing that they do not perform a significant role in management.”
In his July 9 opinion, Judge Oetken also held that the appeal was not equitably moot, even though the KERP payments had been made to six officers and the U.S. Trustee had not sought a stay pending appeal.
On the subject of who is or is not an “officer” for the purpose of Section 503(c), Judge Oetken referred to the “messy state of the law on this topic.” The section prohibits retention payments to an “insider” absent evidence that the payment is “essential” to retain someone who has a bona fide offer from another business. In turn, an “insider” is defined in Section 101(31)(B)(ii) to include an “officer.”
The Six Corporate Officers and the KERP
The chapter 11 debtor established an $8 million KERP for 190 employees. The group included six officers slated for retention bonuses aggregating $1.8 million.
Among the six, one was the deputy general counsel, three were senior vice presidents, and two were vice presidents. The debtor conceded that all six were deemed to be officers under Delaware law.
The U.S. Trustee objected to approval of the KERP as to the six officers. The bankruptcy judge overruled the objection and approved the KERP across the board, adopting the debtor’s argument that the six were officers in name only and had no broad decision-making authority.
The U.S. Trustee appealed but did not seek a stay pending appeal. The KERP payments were made to everyone. The chapter 11 plan was confirmed and consummated.
Equitable Mootness
The debtor contended that the appeal was equitably moot because the U.S. Trustee had not sought a stay pending appeal and requiring repayment would be inequitable.
To determine whether the appeal was moot, Judge Oetken applied the five-part Chateaugay test. See In re Chateaugay Corp., 10 F.3d 944, 952 (2d Cir. 1993).
Among the tests relevant to the case on appeal, Judge Oetken saw no reason he could not provide relief by compelling disgorgement. Further, the six officers knew about the appeal and had been represented by the debtor, effectively speaking.
It was “regrettable,” Judge Oetken said, that the U.S. Trustee had not sought a stay, but clawing back the payments would not be “inequitable” if the payments were illegal in the first place.
Judge Oetken decided that the appeal was not equitably moot, noting that the lack of a stay “is much more dire” on appeal from a confirmation order.
The Significance of Being an ‘Officer’
In approving the KERP, the bankruptcy court applied a functional test to determine whether the six officers had “sufficient authority” to be seen as officers under Section 503(c). The debtor argued that being an officer under Delaware law was neither controlling nor dispositive.
“From a policy standpoint,” Judge Oetken said, “giving more weight to an objective criterion — whether an employee was appointed by the board — provides better guidance to parties than a functional, non-exhaustive test.”
Although a “functional approach” may be appropriate “in many cases,” Judge Oetken agreed “with the [U.S.] Trustee that with respect to officers appointed or elected by the Board, such individuals are ‘officers’ under the Bankruptcy Code, at least absent a particularly strong showing that they do not perform a significant role in management.” [Emphasis in original.]
Judge Oetken concluded that the bankruptcy court “erred by inquiring beyond the fact that the six employees were appointed by [the] board.” Even had he made a “more expansive analysis” beyond the fact that the six were appointed by the board and were officers under Delaware law, Judge Oetken said their designation as officers would be “dispositive, at least absent a strong showing that they do not perform any significant role in management.”
In the case at hand, Judge Oetken said that the debtor “failed to overcome the strong presumption that, as board-appointed employees, the six employees are officers.” He therefore reversed the order approving the KERP as to the six officers.
The Standards on Appeal
In a footnote at the conclusion of his decision, Judge Oetken said that the case presented mixed questions of law and fact, where the issues were “primarily legal.” On that basis, he reversed on de novo review.
If the questions were “primarily factual,” Judge Oetken said, then the bankruptcy court’s conclusion that the six were not officers was “clearly erroneous.”
Reversing a bankruptcy court in New York, District Judge J. Paul Oetken held that someone with the title of a corporate officer is not entitled to participate in a key employee retention program, or KERP, “absent a particularly strong showing that they do not perform a significant role in management.”
In his July 9 opinion, Judge Oetken also held that the appeal was not equitably moot, even though the KERP payments had been made to six officers and the U.S. Trustee had not sought a stay pending appeal.
On the subject of who is or is not an “officer” for the purpose of Section 503(c), Judge Oetken referred to the “messy state of the law on this topic.” The section prohibits retention payments to an “insider” absent evidence that the payment is “essential” to retain someone who has a bona fide offer from another business. In turn, an “insider” is defined in Section 101(31)(B)(ii) to include an “officer.”