U.S. Opposes Bankruptcy Bonus Plan
September 5, 2006
Market Place
By FLOYD NORRIS
nytimes.com
The Justice Department has joined with unions and creditors of the Dana Corporation, an auto parts company in bankruptcy protection, in opposing a proposed pay system for top executives of the company.
The move sets the stage for what could become the first major test of a new provision in the bankruptcy law aimed at curbing large retention bonuses for top management.
The United States bankruptcy trustee, a Justice Department employee charged with assuring that bankruptcy laws are complied with, also raised questions about the integrity of the proposed compensation plan.
She notified the court that she might request an independent examiner to investigate the “proposed executive compensation scheme” and the manner in which it was developed. Diana G. Adams, the trustee, said the proposal “appears to fall far short of the integrity required for this court’s approval.”
A bankruptcy judge in New York, Burton R. Lifland, will hear arguments today on whether the plan complies with the new law, which bars retention bonuses for corporate insiders unless the company can show that the executives in question have a bona fide job offer that would pay at least as much as they were already receiving.
The provision was inserted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to win support from Democrats, who had complained that executives received lavish pay packages while citing a company’s financial distress as a reason to reduce the pay and benefits of ordinary workers. The provision is known to lawyers by the numbers of the two new sections, 503(c)1 and 503(c)2.
In a submission to the court last week, the trustee defined the issue as raising the question of, “Can debtors circumvent the restrictions and evidentiary burdens enacted by Congress in sections 503(c)1 and 503(c)2 — provisions designed specifically to limit and restrict lavish insider retention and severance burdens — by avoiding the mere mention of the statute and transparently recharacterizing these payments as ‘incentive’ payments?”
The trustee said she agreed with the criticisms of the pay plan for six top executives voiced earlier by lawyers representing the company’s unions and shareholders, as well as by lawyers for two groups of creditors.
“At a time when the debtor’s work force faces great uncertainty and angst,” she wrote, the company “proposes to substantially insulate the six executives. It is exactly this type of managerial overreaching that led to the recent enactment of section 503(c), and exactly the type of insulation the statute is designed to prevent.”
Dana has indicated it may seek to reduce health benefits for retired workers. But it has not sought wage concessions from those still at the company.
Dana, which had not mentioned Section 503(c) in its original motion for approval of the pay plans, replied later in the week that the plan did conform to the law, and said that creditors and unions who opposed the plan were trying “to short circuit the business judgment of Dana” and “replace that fully informed and careful judgment with their own parochial interests.”
The company argued that the opponents were seeking “a dangerously expansive and unworkable interpretation of Section 503(c).”
The proposed contracts for Michael J. Burns, Dana’s chief executive since 2004, and five of his colleagues would give them large bonuses when the company emerges from bankruptcy, and could pay them additional bonuses based on the total value of the company’s securities six months after the bankruptcy is over.
One of the issues is whether that amounts to a retention provision because the targets are sure to be met, as maintained by the opponents, or whether they are difficult targets, in which case they would be more easily characterized as performance bonuses, which are not barred by the new law.
That has led to an unusual argument in which the company maintains that its securities are overpriced in the market, and that such trading values cannot be relied upon in assessing value. Instead, it uses an analysis that indicates the company is worth far less, based on multiples of earnings before interest, taxes, depreciation and amortization at other auto parts companies. To justify the top bonus, it argues, the company’s cash flow would need to double or better from 2005 levels.
Ms. Adams, the trustee, said “a consensus has emerged among the major constituencies that there is likely to be a confirmed plan with a substantial distribution to unsecured creditors, and perhaps a return to equity. Hence, the completion bonus cannot be characterized fairly as an ‘incentive’ bonus.”
The company, in its filing, said there was no evidence to support such claims. It said there was “a substantial unlikelihood” that shareholders would get anything when the reorganization was completed.
Dana’s securities performed well in the months after the company filed for bankruptcy in March. The stock, which traded for 66 cents on March 3, in the immediate aftermath of the filing, rose to as high as $3.52 in June. The company’s bonds also did well.
The result was that the total value of the company’s securities rose from $2 billion, just before the filing, to $2.6 billion on July 13. The proposed pay package would give the executives their minimum bonus if the total value was at least $2 billion, and a maximum value if it was $2.6 billion or higher. Opponents say that plan means the executives get bonuses for accomplishing little, but the company disagrees.
“The simple fact is that the proper standard by which to judge the appropriateness of executive compensation is not by tying it to distressed bond trading values, but rather by the business judgment of the debtors” and by the court’s determination of whether it complies with the law, Dana argued.
Last week, as Dana was arguing that the stock price was too high, its shares fell. Dana stock, which has been delisted from the New York Stock Exchange and now trades on the over-the-counter bulletin board, fell 26 cents, or 14 percent, to $1.65. But Dana bonds showed little change for the week.
The company argues that the plan is consistent with a pay plan that was approved by Judge Lifland for the Calpine Corporation after the new law took effect, and that other courts have also “exhibited deference to a debtor’s business judgment under Section 503(c),” as they had done under the previous law. It does not appear that any such plan has in the past been opposed by the trustee or appealed to higher courts, as could happen in this case.
The trustee maintains that to some extent the new statute supplants previous practice and so the business judgment rule is no longer the primary determining factor of whether a pay plan should be approved.
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