Approval Of Key Employee Retention Plans: Did Global Aviation Get It Right?

We recently commented here on the standard for reviewing key employee incentive plans (KEIPs) and the approval of the KEIP in the Velo Holdings chapter 11 cases pending in the Southern District of New York. On July 24, Bankruptcy Judge Carla Craig of the Eastern District of New York approved a KERP (a key employee retention plan) in the Global Aviation bankruptcy cases aimed at retaining five employees deemed critical to the consolidation of the debtors' U.S. headquarters in Peachtree City, Georgia by August 31, 2012. In re Global Aviation Holdings, Inc., 2012 WL 3018064 (Bankr. E.D.N.Y. July 24, 2012).

KERPs are distinct from KEIPs in that the former rewards employees for staying with the debtor for a certain time period, while the latter rewards employees for reaching certain performance targets. As discussed in our prior post, the analysis of any key employee bonus plan begins with a determination as to whether eligible employees are insiders of the debtor and whether the plan is primarily retention-oriented, in which case the plan must satisfy the strict standards of section 503(c)(1) of the Bankruptcy Code enacted to limit "pay to stay" bonuses for executives. As KERPs are retention-oriented by nature, the primary issue regarding their approval is the insider status of the eligible employees.

In Global Aviation, the KERP was not directed at the debtors' most senior employees. The five employees eligible to receive payments under the KERP included a "Director of Safety," the "Vice President of Operations," the "Chief Pilot," the "Senior Director of Maintenance," and the "Chief Inspector" – all certainly important positions. The debtors, the official creditors' committee, and the U.S. trustee disagreed as to whether these employees were in fact insiders, and while the court likely reached the correct outcome, its analytical flight-path encountered some turbulence.

Who is an Insider?

Per section 101(31)(B) of the Bankruptcy Code, "[t]he term 'insider' includes—if the debtor is a corporation— "(i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or person in control of the debtor." These types of relationships give rise to a conclusive presumption that the person or entity commands preferential treatment by the debtor. Rupp v. United Security Bank...