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Re: Tibbits get huge raise + huge bonus< 11 U.S.C. 547 Preferences > Perhaps more apposite is a post-Enron amendment to the Bankruptcy Code, section 548: --- § 548. Fraudulent transfers and obligations The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or received less than a reasonably equivalent value in exchange for such transfer or obligation; and ... made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. --- http://www.law.cornell.edu/uscode/html/uscode11/usc_sec_11_00000548----000-.html Attorney Tom Kirkendall comments on the avoidance of pre-petition bonuses granted by Enron to its energy traders: --- Among the more interesting civil cases that arose out of the Enron Corp. bankruptcy case are the various lawsuits that were filed to recover retention bonuses paid to former key Enron executives. Retention bonuses are payments made to a company's key executives immediately before the filing of the company's bankruptcy for the purpose of retaining those key executives during the company's bankruptcy case, particularly during the early stages of the case when risk of liquidation is high. The theory behind retention bonuses is that ensuring that key executives continue to work for a debtor-company is a reasonable hedge against the risk of liquidation, which generally results in greater loss of jobs and lesser dividends on creditors' claims than if the debtor-company is reorganized. Retention bonuses have always been controversial, primarily because they are made immediately prior to the company going into bankruptcy and, thus, are not subject to Bankruptcy Court approval as they would be if proposed after the company enters bankruptcy. Nevertheless, creditors have traditionally used the avoidance powers in bankruptcy cases -- i.e., the power of the Bankruptcy Court to order the return to the debtor's bankruptcy estate of certain pre-petition payments that prefer certain creditors over others or that constitute fraudulent transfers to third parties -- to go after retention bonuses paid to a debtor-company's former executives. In most cases, the core issue in such lawsuits is whether the debtor-company's payment to the key executive was a reasonable price to pay for the executive's services in helping the debtor-company reorganize. Enron's bankruptcy involved a particularly interesting case in regard to retention bonuses. Once one of the most valuable public companies in the U.S., Enron went through a dizzing spiral downward during the last several months of 2001 amid revelations of an accounting scandal and CFO Andrew Fastow's use of special purpose entities to enrich himself and several of his close associates. Inasmuch as Enron was the market maker in its online trading business, that business (called "Enron Online") was hugely profitable and potentially one of Enron's most valuable assets as it entered bankruptcy. However, due to competitive pressures, Enron Online was losing its key traders during Enron's descent into bankruptcy, particularly after it became clear that the company's trading desk was going to have to go dark for a time after bankruptcy while Enron attempted to find a buyer for trading operation. Consequently, during the company's chaotic days leading up to bankruptcy, Enron's management and board of directors approved the payment of retention bonuses in the total amount of over $100 million to approximately 300 key traders and executives in an effort to retain that personnel during the early stages of Enron's bankruptcy case. The number and amount of those payments (one payment to a particularly successful trader was over $8 million) infuriated Enron's creditors and former employees who lost their jobs as a result of bankruptcy, so a former employee's committee was formed in Enron's chapter 11 case and that committee pursued the lawsuits on behalf of Enron's estate to recover the retention bonuses. Most of the cases settled, but approximately 40 former Enron key employees declined to settle and decided to defend their bonuses at trial, which took place earlier this fall. In this 102 page decision (pdf), Bankruptcy Judge Robert McGuire of Dallas (sitting by designation in Houston's bankruptcy court) concluded that the retention bonuses were either voidable preferences or constructive fraudulent transfers (i.e., payments made for inadequate consideration in return) and ordered that the former Enron executives pay damages to the Enron estate equal to the amount of their retention bonuses. ... The decision makes for interesting reading in an area of the law that does not have much precedent, but the recent amendments to the Bankruptcy Code limit the precedential value of the decision. Under those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case. Thus, the new Bankruptcy Code amendments make it more difficult for troubled companies to retain their key employees as they tumble toward reorganization in bankruptcy, which -- at least on the margin -- increases the risk that those companies will liquidate rather than reorganize in bankruptcy. Increased liquidations generally result in greater job loss for communities and smaller dividends (if any) on creditors' claims, which are two consequences that I don't think Congress had in mind when it passed this particular amendment. --- http://blog.kir.com/archives/002717.asp Bankruptcy specialist Steve Jakubowski reponds on his blawg: --- Tom K. says that BAPCPA's [Bankruptcy Abuse Prevention and Consumer Protection Act of 2005] "recent amendments to the Bankruptcy Code limit the precedential value of the decision [because] [u]nder those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case." Let me add two qualifications to this comment: First, while Tom K. is right that Bankruptcy Court approval is now needed for all proposed postpetition payments of retention bonuses (even if the bonuses were authorized prepetition), BAPCPA's amendments to new Code Section 548(a)(1)(B)(ii)(IV) do not presume that prepetition retention bonuses payments are voidable. Rather, such payments are voidable under the new Code section only to the extent that (i) the debtor "received less than a reasonably equivalent value in exchange," and (ii) the transfers were made to "an insider," "under an employment contract," and "not in the ordinary course of business." Notably, the new law does not appear to shift the burden of proof, which remains with the plaintiff/trustee as to all elements. ... Written By: Tom Kirkendall On December 14, 2005 9:20 AM Steve, nice analysis. However, under the new amendments, don't you think that pre-petition retention bonuses are a thing of the past? Stated another way, what debtor management team is going to risk the wrath of the Bankruptcy Court and creditors by paying retention bonuses pre-petition in the face of 548(a)(1)(B)(iv)? ... Written By: Steve Jakubowski On December 14, 2005 11:14 AM ... I agree that certain pre-[petition] retention bonuses, like those in Enron that are granted on the company's "deathbed," are a thing of the past. But, let's hope the financial shenanigans witnessed in Enron (see pp. 68-76 of Enron opinion) are also a thing of the past, too! I think the two go hand-in-hand. Still, I don't think the new provisions of Section 548 will stop retention bonuses from being granted in less egregious circumstances where the company's survival or turnaround is still feasible. Absent such bonus grants, who from the outside is going to come in and take control of a company desperate for turnaround help? And once retained, how does that person keep the people at the company needed to make the turnaround work without giving them retention bonuses too. When one works through the practicalities, I'm not sure that the new provision really did much to change the ways things really work. Most companies paying these bonuses are insolvent or undercapitalized anyway, and all the new law in Section 548 really did was allow the trustee to avoid the prepetition payment as a fraudulent transfer without having to prove the company was insolvent or undercapitalized. The trustee already gets the benefit of that rebuttable presumption in preference cases; here, the new law merely makes that presumption conclusive when dealing with insider retention bonuses in the fraudulent transfer context. The fact is that a retention bonus granted to an insider for less than reasonably equivalent value was a fraudulent transfer before BAPCPA (as long as the company was insolvent or undercapitalized). Many cases support that point. So, in the end, the hapless debtor is stuck between a rock and a hardplace, but that won't stop it from granting those retention bonuses because most people in these situations can be presumed to be primarily self-interested and will seek to drive the hardest bargain they can for themselves, or leave. Waiting until after the case is filed to grant such bonuses, as was often the case in the pre-Sarbox days, is not a realistic option, because the employees risk getting nothing under BAPCPA's new Section 503(c)(1). Alternatively, the debtor can give out retention bonuses prepetition, and risk being sued for the money. The old saw that "possession is 90% of the law" (or, if you prefer, "a bird in the hand is worth two in the bush") rings true here, and I expect that debtors will choose this route given the likely dead end that the postpetition alternative offers. Look at the Enron case, 300 were sued, only 40 went to trial. That means 260 did better with the bonus than with none at all. While the case started with lots of wrath, after over two years of intense hand-to-hand litigation combat, the revenge turned into a stone-cold, plodding affair (i.e., trial), with the Court showing respectful firmness, not wrath, in carefully considering the evidence. You have to wonder, though, had Judge McGuire's opinion been a post-BAPCPA opinion, would it really have looked any different? If you excise the insolvency analysis (about 30 pages), I think Judge McGuire issues the same opinion, but does it under the new 548, instead of the old. --- http://www.bankruptcylitigationblog.com/archives/12620-print.html |
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Msg # | Subject | Author | Recs | Date Posted |
44114 | Re: Tibbits get huge raise + huge bonus - Enron & 548 | AllParadox | 39 | 9/20/2007 12:16:41 AM |