ResCap: Plan To Pay $7.8M In Bonuses To Key Employees Complies With Code

by Tara Arick on April 11, 2013 · 0 comments

in Bankruptcy

- From LexisNexis® Mealey’s™ Daily Legal News.

Bankrupt financial group Residential Capital LLC (ResCap) on April 9 filed a brief in the U.S. Bankruptcy Court for the Southern District of New York defending its plan to pay $ 7.8 million in bonuses to key employees on grounds that it complies with the Bankruptcy Code (In Re: Residential Capital LLC, No. 12-12020, Chapter 11, S.D. N.Y. Bkcy.).

ResCap filed for Chapter 11 bankruptcy on May 14.

Bonuses

The U.S. trustee in the case on April 3 objected to ResCap’s plan to pay $ 7.8 million in bonuses to various employees because ResCap’s plan fails to provide crucial information about the details of how bonuses will be paid.

The bonuses comprise three separate incentive plans.

ResCap argues that the incentive plan in question contains challenging metrics and is proper pursuant to 11 U.S. Code Section 503(c)(3).

Business Judgment

Furthermore, ResCap contends that it is a “reasonable and sound exercise” of its business judgment, to offer the bonuses at issue. The company maintains that it has constructed compensation plans that align the creditors’ interests with ResCap’s employees by tying the executives’ awards to both their ability to be fiscally responsible and manage the estate’s core operational expenses.

ResCap insists that the incentive plans promote the creation of hundreds of millions of dollars of value for the estate; thus, as the estate benefits, so do the participants in the incentive plans.

Contrary to the assertions of the U.S. trustee, 11 U.S. Code Section 503(c)(1) does not apply to the incentive plans because the payments under those plans are not being made “for the purpose of inducing such person to remain with the debtor’s business,” ResCap says.

Metrics

The U.S. trustee contends that ResCap failed to prove that the incentive metrics designed for bonus recipients are not “virtually guaranteed” and mere “lay-ups” and that the present targets are difficult to achieve, forcing the insiders to “stretch” to earn their bonuses.

The trustee, Tracy Hope Davis, is represented by Brian S. Masumoto and Michael Driscoll of the U.S. Attorney’s Office in New York. ResCap is represented by Gary S. Lee, Lorenzo Marinuzzi and Jordan A. Wishnew of Morrison & Foerster in New York.

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