Dana’s Bankruptcy Motion Denied

A bankruptcy court judge disallowed Dana Corp.'s pay plan to award incentive bonuses to six executives when the company emerges from Chapter 11.
Marie Leone and Stephen TaubSeptember 5, 2006

Dana Corp.’s bankruptcy court motion to allow the company to award incentive bonuses to six top executives was denied on Tuesday, has learned from a McDermott Will and Emery attorney who attended the hearing.

Based on the source’s account, Judge Burton Lifland of the U.S. Bankruptcy Court for the Southern District of New York said that the disputed payout Dana categorized to an “incentive” bonus, was in fact, a “retention” bonus, that did not meet the requirements of the current bankruptcy law. Dana filed for Chapter 11 protection in March.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, companies reorganizing under Chapter 11 are required to meet a stringent set of criteria laid out in Section 503 of the act if they choose to award retention bonuses to executives. Based on Lifland’s denial, he did not believe that Dana met the evidentiary burdens imposed by the law, and therefore disallowed the bonuses, noted the attorney.

Lifland read the ruling from the bench, and is expected to issue a memorandum of decision in the near future, said the law firm’s memo. “This is good news for creditors,” commented Stephen Selbst, a bankruptcy lawyer with McDermott Will & Emery. Creditors consider some incentive bonuses being handed out by debtor companies “disguised” incentive bonuses,” and therefore an abuse of the bankruptcy code, explained Selbst.

He emphasized that, “there was no question about what Congress intended” when it made it tougher for bankrupt companies to award retention bonuses. Congress’ aim was to stop the abusive practice of awarding significant retention bonuses to executives who led companies into bankruptcy, added Selbst.

Pressure by the U.S. Justice Department, unions, and creditors had mounting against Dana in the months following its request to award incentive bonuses. The company planned to pay bonuses to its chief executive, Michael J. Burns, and five others after the auto-parts maker emerged from bankruptcy.

One provision of the new bankruptcy law requires the debtor to convince the court that retention bonuses are “essential to the retention” of executives because they have competing job offers for at least the same pay.

Diana Adams, the United States bankruptcy trustee, a DOJ employee charged with assuring compliance with bankruptcy laws, agreed with the opponents of the Dana pay plan, stating, “At a time when the debtor’s work force faces great uncertainty and angst, 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,” reported the New York Times.

Adams raised the bonus issue in a court submission, last week asserting, “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?”

Dana defended its pay plan, asserting its opponents were trying “to short circuit the business judgment of Dana” and “replace that fully informed and careful judgment with their own parochial interests,” added the Times Reportedly, Dana argued that the opponents were seeking “a dangerously expansive and unworkable interpretation of Section 503(c).”

The decision to deny Dana’s bonus plan follows a Delaware bankruptcy court decision made earlier this year which approved an incentive bonus plan submitted by Nobex Corp. McDermott’s Selbst said Dana can appeal the decision.