The Bankruptcy Hotline

The Bankruptcy Court for the Southern District of New York has denied a Chapter 11 debtor's request for an order approving the payment of millions of dollars in executive compensation to the Chief Executive Officer and five other executives, finding that the payments would violate ' 503(c) as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In re Dana Corp., No. 06-10354 (Sept. 5).

The executive compensation plan proposed to continue paying the CEO his $1.5 million annual salary and the other executives their salaries ranging from $500,000 to $600,000. The proposed plan also called for annual in-centive bonuses ranging from $336,000 to $2 million. The proposed plan also included a two-part completion bonus. Part one awarded the executives between $400,000 and $3.1 million in cash regardless of performance or creditor recovery when the debtor emerges from bankruptcy. Part two of the completion bonus was an uncapped, variable component based on the debtor's 'total enterprise value' 6 months after emerging from bankruptcy, a benefit potentially worth $6.2 million, according to the court. There was also a severance package, which proposed to pay the CEO $166,667 per month for 18 months if he was terminated and agreed to sign a non-compete agreement. Further, the plan retained an existing pre-bankruptcy senior executive retirement program that entitled the CEO to more than $18 million. Under the proposed executive compensation plan, the debtor would have assumed this agreement on the earlier of the CEO's termination or the debtor's emergence from bankruptcy. Objections were filed by creditors and the U.S. Trustee, who claimed that because the executives were hired pre-petition, the proposed plan should be subject to either ' 503(c)(1) or ' 503(c)(2). The debtor argued that the benefits should be reviewed subject to the less burdensome ' 503(c)(3).