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KEIPs v. KERPs: Court Shows Deference to Chapter 11 Companies to Defend Their Bonus Plans Under BAPCPA

By: Sumaya Restagno

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Congress imposed strict limitations on payments made specifically to retain key employees of companies in chapter 11 bankruptcy and narrowed the circumstances under which these payments could be made through the addition of section 503(c). Under section 503(c)(1), chapter 11 debtors may pay a bonus to certain employees under a Key Employee Retention Plan (“KERP”) upon approval of the court and after a showing that certain required factors have been satisfied. Under section 503(c)(3), chapter 11 debtors may pay a bonus under a Key Employee Incentive Plan (“KEIP”) to certain employees after they attain certain measurable, difficult-to-reach milestones. Payments under a KEIP are described as being outside the ordinary course of business and are statutorily prohibited unless justified by the facts and circumstances of the case. Many courts have held this standard to be synonymous with the “business judgment” standard that governed KERPS prior to the BAPCPA which is not as strict as the test under 503(c)(1).

Chapter 11 Liquidation and its Effect on Collective Bargaining Agreements

By: Dylan Coyne

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Alpha Natural Resources, Inc., a Virginia bankruptcy court allowed a coal mining company to reject its collective bargaining agreements thereby permitting the company to sell its revenue generating assets. Alpha Natural Resources, Inc. (“Alpha”) is the largest coal producing company by volume in the United States and began to sustain severe financial difficulties after the coal industry began to decline in 2011. In an effort to stay afloat, Alpha began to cut costs by freezing wages, laying off employees and reducing benefits for non-union employees in 2013. In its Chapter 11 case, Alpha explored selling its core revenue generating assets to its prepetition lenders (the “Bidders”), who served as a stalking horse for the sale. The Bidders, however, were not willing to assume Alpha’s liabilities to Alpha’s unions as required under the collective bargaining agreement or under the Coal Industry Retiree Health Benefit Act of 1992 (the “Coal Act”). Accordingly, Alpha filed a motion for an order rejecting the collective bargaining agreements. Alpha’s unions objected to the request, arguing that §§ 1113 and 1114 of the Bankruptcy Code do not apply to Alpha since Alpha is liquidating and those sections address reorganization, and further that Alpha had not satisfied the elements of those same statutes.

The Relationship between Declaring Bankruptcy and Piercing the Corporate Veil

By: Lauren Gross

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Music Mix Mobile, LLC v. Newman (In re Stage Presence, Inc.), the United States Bankruptcy Court for the Southern District of New York held that the plaintiffs’ alter ego allegations were sufficient to withstand a defendant’s motion to dismiss. Plaintiffs, Music Mix Mobile, LLC, et al., alleged they were not paid by Stage Presence Incorporated (a chapter 11 debtor), One for Each Island Ltd. (“OFEI”) and three individual producers of the benefit program: Newman, Weiner, and Marquette for audio, editing, teleprompter, music mixing and other services they provided in connection with the Childhelp program. Among other theories of contract liability against defendants, the plaintiffs asserted that OFEI, Newman, Weiner, and Marquette should jointly share in the contract liabilities of Stage Presence on “alter ego” grounds.

Debt Collection ‘versus’ Consumer Protection: The FDCPA’s Prohibition on False Representations of the Legal Status of Debt

By: Sara Brenner

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Murray, chapter 13 debtor Mr. Murray (the “Debtor”), sued Revenue Management Corporation and Donald Aucoin (“Defendants”), alleging that the Defendants violated the Fair Debt Collection Practices Act (“FDCPA”). According to the Debtor, the Defendants violated the FDCPA by including a reference to purported litigation as reflected by inserting a “vs” between the Defendants’ names and the Debtor in the top right corner of a collection letter.

Delaware Bankruptcy Court Creates Vendor-Friendly Forum by Preserving Reclamation Rights in the Face of DIP Lenders’ Liens

By: Dean Katsionis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Section 546(c) of the Bankruptcy Code preserves a vendor’s right to reclaim goods sold to an insolvent debtor within forty-five days of the debtor’s bankruptcy filing.[1] Courts have had to address whether a post-petition lender’s subsequently perfected security interest defeats the vendor’s reclamation rights when a post-petition loan is used to repay the debtor’s prepetition secured loan, which are generally subject to reclamation rights.[2] In In re Reichold Holdings US, Inc., the United States Bankruptcy Court for the District of Delaware overruled a liquidating trustee’s objection to a vendor’s reclamation claim, holding that the vendor’s reclamation rights arose before a post-petition DIP lender’s liens attached, and as such, those liens were subject to the prior reclamation rights of the vendor.[3]

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