Aceto Corporation U.S. Trustee Objects to Proposed KEIP and KERP (and Related Seal); Part of New Focus on Filing Practices in Region 3?

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April 3, 2019 – The U.S. Trustee assigned to the Aceto Corporation cases has objected to (i) the Debtors' request for approval of a key employee investment plan (the "KEIP") and a key employee retention plan (the "KERP") and (ii) a related seal motion [Docket Nos. 309 and 310]. The objections pick apart what many will view as standard practice in respect of the presentation of KEIP and KERP motions and follows on an equally scathing objection filed by the same U.S. Trustee in a separate bankruptcy on April 2, 2019 (we cover this objection in respect of the retention of professionals by CTI Foods separately).

The objection likes almost nothing about the Debtors KEIP and KERP motions and pretty clearly views the motions as fundamentally lacking in an understanding of the relevant law and the arguments expected of the Debtors' counsel. They are sloppy and the U.S. Trustee asks the Court not to rubberstamp motions that are not up to the mark. In particular, the U.S Trustee takes issue with:

  1. in respect of the KEIP, the fudging of lines as to whther a plan is incentive or retentive (and the Debtors' obligations for proving the point, "benchmarks… are not lay-ups"), 
  2. the Debtors' apparent preference for the business judgment rule as to determining the legal standard for a plan (the U.S Trustee argues that the Debtors "fail to accord proper meaning to the restrictions imposed by Section 503(c)…KEIP and KERP payments…are administrative expenses and their allowance must be determined under administrative expense jurisprudence, rather than the more lenient business judgment rule") 
  3. failing to establish that KERP participants are not insiders as required by Section 503(c)(1) and 
  4. the Debtors' choice of Section 105(a) of the Bankruptcy code as opposed to Section 503(c) as the basis for approving the plans: "The specific provisions of Section 503(c) preclude resort to the general provisions of Section 105(a), as well as those of Section 363(b)."

The objection states, "The Debtors contend the KEIP is purely incentive-based and not retentive. The U.S. Trustee leaves the Debtors to their proofs to show that the KEIP benchmarks are difficult to achieve and are not 'lay-ups.'  Without such proof, then the KEIP is a KERP in disguise and the Debtors would have to show that the insider KEIP participant has satisfied Section 503(c)(1), which they have not because they have failed to show that he has a bona fide job offer.  Absent a showing that the Debtors have satisfied all the requirements of Section 503(c)(1), the KEIP should not be approved.  

Without disclosing a job description of the duties and responsibilities of each of the KERP participants, the Debtors cannot establish their burden to show that the participants are not insiders of the Debtors.  The Debtors admit that the KERP participants include at least one Senior Vice President level employee, and retention applications list certain person(s) on the KERP participant list as Officers and Directors for the purposes of the professional’s retention application.  If one or more of the KERP participants are insiders, the Debtor has failed to show that these insider KERP participants have satisfied Section 503(c)(1), because they have failed to show that each insider has a bona fide job offer, provides a service essential to the survival of the business, and that the bonus is appropriate as compared to nonmanagement employees. Absent a showing that the Debtors have satisfied all the requirements of Section 503(c)(1), the KERP should not be approved.

Even if the Court were to determine that some portion of the Debtors’ KEIP was incentive-based, rather than retentive, the Debtors would have to demonstrate that such incentive bonuses are necessary to preserve the value of the Debtors’ estates under § 503(b), and are “justified by the facts and circumstances of the case” under § 503(c)(3). So too for the KERP. The Court must make an independent determination that any incentive-based bonuses to insiders, and retention bonuses to non-insiders, are justified by the facts and circumstances of the case, rather than deferring to the Debtors’ business judgment. Without such a showing, the KEIP and KERP should not be approved under Section 503(c)(3).

The objection to the seal motion also picks on what has become fairly standard practice, assuming that a Court will seal confidential information realted to plan participants pretty much as a matter of course with the sprinkling of some well worn precedents. Not so fast, says the U.S Trustee, arguing that the Debtors must provide back-up as to "compelling need for protection and extraordinary circumstances" in their seal motion: "The burden is on the moving party to show that a request to place documents under seal falls within the parameters of Section 107(b) and Rule 9018 by demonstrating 'that the interest in secrecy outweighs the presumption in favor of access.'…Here, the Debtors have not provided sufficient justification to 'seal' information pertinent to the proposed KERP. There has been no evidence submitted that protection is needed based on a trade secret or confidential research, development, or commercial information. The Debtors have failed to establish a compelling need for protection and extraordinary circumstances."

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