Friday, September 4, 2015

UFCW Files Objections to A&P KERP

Today, our union attorneys, along with the UFCW International attorneys, filed official objections against A&P's KERP plan. The KERP plan is a fancy acronym for a management bonus plan, A&P seeking to pay up to $5m in bonuses to certain corporate employees.  The argument on the KERP is scheduled for next Friday.

Below are our official filed objections:

1.              All of A&Ps employees are working hard in the face of uncertainty regarding their future.  At the same time it was seeking approval to reduce the timely payment of severance for its 26,000  employees represented by the Unions, the Debtors filed this Motion  seeking authorization to pay other employees an additional $5 million in retention payments.[1]

2.              The Debtors are proposing a retention plan where approximately 20% of the available funds would be paid to 11 employees.  See Motion at ¶6, n.2.   In fact, under the proposed plan, at least some of the Debtors’ employees will receive an additional $125,000, id., at the same time its rank-and-file union employees are losing contractual rights.[2]

3.              As part of the reason for not including union employees in the KERP who will be the face of A&P to its customers at the closing stores, and in contrast to the situation in Hostess, the Debtors assert that the payment to union members would be too small—only a few hundred dollars—to retain its employees.  See Motion at ¶7.  For UFCW-represented workers, many of whom work part-time and do not earn more than a few hundred dollars a week and are faced with unemployment in the near future, payment would be helpful, whether or not they would seem too small to management.

4.              It is also important to note that the Debtors set aside about $6 million in a trust for six individuals, apparently members of its senior management team, to ensure they would be paid, including apparently $2.5 million for one individual (along with many hundreds of thousands of dollars in Board and consulting fees),  and $1.5 million for two other individuals.  See Motion Of Debtors Pursuant To 11 U.S.C. §§ 105(a), 363 And 507(a) For Interim And Final Authority, But Not Direction, To (A) Pay Certain Prepetition Wages And Reimbursable Employee Expenses, (B) Pay And Honor Employee Medical And Other Benefits, And (C) Continue Employee Benefits Programs, And For Related Relief at ¶¶15-18 [Docket No. 14]; Statement of Financial Affairs, Section 3c [Docket No. 721] at, e.g., 416, 430, and 434 (showing distributions on behalf of certain unnamed individuals to trust and monthly payments to certain members of Board ).

5.              Section 503(c) of the Bankruptcy Code limits the payment of retention bonuses by prohibiting transfers outside the ordinary course of business unless justified by the facts and circumstances of the case.  The enactment of Section 503(c) was a result of increasing public sentiment against the practice of executives of bankrupt companies generously rewarding themselves during restructuring at the same time that rank-and-file workers were suffering tremendous economic blows as a result of the bankruptcy.  See generally In re U.S. Airways, Inc., 329 B.R. 793, 797 (Bankr. E.D. Va. 2005).

6.              Congress’ purpose in enacting new Section 503(c) could not be more clear:  key employee programs when justified at all should be limited and based upon actual, demonstrable need rather than on speculation and largesse.  The Section 503(c) provisions support rigorous scrutiny of the Debtors’ proposed retention agreements given Congress’ clear intent that such obligations be strictly regulated, and not deferential and presumptive reliance on the Debtors’ articulated rationale.

7.              The court in In re Dana Corp. set forth the factors that should be considered in evaluating motions for enhanced compensation under Section 503(c)(3):
“[1]  Is there a reasonable relationship between the plan proposed and the results to be obtained. . . in the case of a performance incentive, is the plan calculated to achieve the desired performance?;

[2]  Is the cost of the plan reasonable in the context of the debtor’s assets, liabilities and earning potential?;

[3]  Is the scope of the plan fair and reasonable. . .?;

[4]  Is the plan consistent with industry standards?;

[5]  What were the due diligence efforts of the debtor in investigating the need for a plan; analyzing which key employees need to be incentivized. . . .; [and]

[6]  Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the compensation?”

358 B.R. 567, 576-77 (Bankr. S.D.N.Y. 2006) (emphasis in original).

8.              The Debtors’ use of average compensation to justify the program deflects the fact that that the top 11 employees are receiving substantial payments in relation to their annual salaries, see Declaration of Christopher W. McGarry in Support Of The Debtors’ Motion For Entry Of An Order Approving Debtors’ Key Employee Retention Plan For Certain Non-Insider Employees [Docket No. 654] at ¶15 (noting highest paid employee in KERP program is paid $285,000 per year and the highest payment is $125,000), while only being required to continue to work through either October 10, 2015 or December 12, 2015.  Thus, while union-represented employees are receiving only 52% of their severance payments upon store closing under the Section 1113(e) relief, and lost key bumping rights, at least some of the key employees will be receiving nearly half of their salary to work between one and three months.

9.              Moreover, the proposed KERP does not have any demonstrated relationship to the success of the Debtors’ sales process, even though the Debtors consistently note that the maximizing the recovery at these auctions is the primary goal of the Debtors.  See Motion at ¶1.

10.           The Debtors have not met their burden of proof, In re Pilgrim’s Pride Corp., 401 B.R. 229, 236-237 (Bankr. N.D. Tex. 2009), to show, for example, the reasonable relationship to the results to be obtained, reasonableness in light of the particular debtor involved, fairness, and consistency with industry standards.  See In re Global Home Products, LLC, 369 B.R. 778, 784 (Bankr. D. Del. 2007).

11.           For a Debtor with thousands of employees facing uncertainty regarding their future and whose efforts are key to the estate and the sales process, the Debtors’ proposed  KERP program inequitably and inappropriately seeks to reward 495 employees.

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