EaglePicher Holdings, Inc.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
EAGLEPICHER HOLDINGS, INC.,
ET AL.
Debtors.
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Jointly Administered
Case No. 05-12601
Judge Aug
Chapter 11
ORDER UNDER 11 U.S.C. §§ 105(a), 363(b)(1) AND 365(a)
AUTHORIZING DEBTORS TO IMPLEMENT KEY
EMPLOYEE RETENTION BONUS AND SEVERANCE PAY PLAN
This matter is before the Court on the motion dated July 19, 2005, (the
“Motion”) (Doc. 460), wherein EaglePicher Holdings, Inc. and certain of its affiliates,
debtors and debtors-in-possession in the above-captioned cases (collectively, the
“Debtors”), moved this Court for entry of an order, pursuant to §§ 105(a), 363(b)(1)
and 365(a) of the Bankruptcy Code, authorizing the implementation of a Key
Employee Retention Bonus and Severance Pay Plan (“KERP”). An objection (the
“Objection”) (Doc. 568) to the Motion was filed by the United Steelworkers, Paper
and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers
International Union (the “Union”). An evidentiary hearing was held on August 8, 2005.
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: August 26, 2005
____________________________________________________________
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Counsel for the Debtors proffered testimony on behalf of his clients and also
presented the testimony of Gerald Mills, the Sr. Vice President of Human Resources
for the Debtors.
This Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a
core proceeding under 28 U.S.C. § 157(b)(2). The following constitutes the Court’s
findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy
Procedure 7052.
Debtors move for approval of the KERP under 11 U.S.C. §§ 105 and 363(b).
Section 105 allows this Court to “issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of the [Bankruptcy Code].” 11
U.S.C. § 105(a). Section 363(b) of the Bankruptcy Code provides that the “trustee
[or debtor in possession], after notice and a hearing, may use, sell, or lease, other than
in the ordinary course of business, property of the estate,” 11 U.S.C. § 363(b)(1),
when a sound business purpose justifies such action. See Stephens Indus. Inc. v.
McClung, 789 F.2d 386, 390 (6th Cir. 1986); see also, In re Lionel Corp., 722 F.2d
1063, 1070 (2d Cir. 1983) (“there must be some articulated business justification, . . .
for using, . . . property out of the ordinary course of business before the bankruptcy
judge may order such disposition under section 363(b)).
The Union cites In re Lionel Corp. as instructive to the Court in considering
whether the Debtors have exercised sound business judgment.
[A] bankruptcy judge must not blindly follow the hue and cry of the most
vocal special interest groups; rather, he should consider all salient factors
pertaining to the proceeding and, accordingly, act to further the diverse
interests of the debtor, creditors and equity holders, alike.
In re Lionel Corp., 722 F.2d at 1071. See Stephens Indus., Inc., 789 F.2d at 389
(adopting the reasoning in In re Lionel).
“[T]he debtor carries the burden of demonstrating that a use, sale or lease will
assist the debtor’s reorganization, however, an objectant [to a § 363(b) motion] is
required to produce some evidence supporting its objections.” Dai-Ichi Kangyo
Bank, Ltd. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding
Corp.), 242 B.R. 147, 155 (D. Del. 1999) (citing In re Lionel Corp., 722 F.2d 1071))
(additional citation omitted).
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1An insider of a corporation includes, among others, an officer, director or
person in control of the debtor. 11 U.S.C. § 101(31)(B)(i), (ii), (iii).
3
In addition to § 363(b) and the case law analyzing that section of the
Bankruptcy Code, this Court is in a position that it must also determine what effect,
if any, certain provisions of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (“BAPCPA”) have on its decision in this case. The BAPCPA
does not go into effect until October 17, 2005, but after that date, the amendment to
11 U.S.C. § 503 will greatly affect the use and approval of KERPs by
set[ting] forth limitations on the payment or allowance of claims for
retention bonuses or severance pay to the debtor’s insiders,1 “key” or
otherwise. It disallows payments to induce persons who are insiders to
remain in the debtor’s employ unless the payment is essential to retain a
person who has “a bona fide job offer from another business at the same
or a greater rate of compensation.”
William Houston Brown, Lawrence Ahern III, 2005 Bankruptcy Reform Legislation
with Analysis, BAPCPA 59 (Westlaw, May 2005). Revised § 503(c) also sets forth
limitations on the amount that may be paid to insiders under a KERP when the initial
hurdle of a bona fide job offer is met. Further, there are limitations on the amounts
that can be paid to insiders as severance payments or “other transfers or obligations.”
11 U.S.C. § 503(c)(1) (as amended April 17, 2005). The revisions to § 503(c)(1) add
a perspective to our analysis that we have considered in reaching our decision in this
case. However, the revisions are not yet binding on this Court; and our main
consideration, therefore, is whether the Debtors have a sound business purpose for
implementing the KERP.
On April 11, 2005, the Debtors commenced their respective reorganization
cases by filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code.
These cases were consolidated for procedural purposes only and are being
administered jointly. The Debtors are continuing in possession of their respective
properties and are operating and managing their businesses as debtors in possession.
On April 22, 2005, the United States Trustee (“UST”) appointed the Official
Committee of Unsecured Creditors (the “Committee”) in these cases. The Union is
a member of the Committee.
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In the Motion, Debtors request that the Court approve a KERP for certain
employees of the Debtors. The Debtors assert that the KERP is necessary and an
exercise of the sound business judgment because the Debtors’ managers have
significant, unique knowledge of the Debtors’ operations and those managers play a
key role in ensuring that the Debtors’ businesses operate efficiently. The Debtors
assert that the loss of key employees could have disastrous effects on the Debtors’
ability to accomplish their reorganization plans. In addition, the evidence presented
by the Debtors through Gerald Mills, indicates that the Debtors’ concerns are real in
that Debtors have already lost four key employees since the filing of their respective
petitions.
A total of 155 employees (3.6 to 3.8 percent of Debtors’ employees) may
participate in the KERP. The total potential payout, if all of the employees become
entitled to maximum benefits under the plan, is approximately $7.9 million. The plan
provides for three tiers of employees to be compensated. Of those employees, three
are in top management positions. The remaining 152 employees are at the technical
and division management levels. The three employees in the top management tier
could obtain as much as 28% of the payments made under the KERP.
In order to be entitled to receive payment under the KERP, the employees must
remain with the Debtors through confirmation of a plan of reorganization. Exceptions
to this requirement whereby the employee (or his/her estate) will be entitled to full or
partial benefits under the KERP are (i) involuntary termination without cause, (ii) death
or disability of the employee, and (iii) termination as a result of the sale of a business
so long as the employee remains with the new employer if asked to do so. In addition,
each employee participating in the KERP waives certain rights and obligations under
prepetition employment agreements and retention agreements relating to future
retention and stay bonuses only. Finally, the tier I bonuses that may be paid to top
management vary based on the date of confirmation of the plan to encourage early
completion of a plan. If the plan is confirmed on or before March 1, 2006, tier I
participants under the KERP will be entitled to 100% of the benefits provided for by
the KERP. If the plan is not confirmed until after June 30, 2006, then participants will
be entitled to 66.67% of the benefits under the KERP. For the time period after March
1, 2006 and before July 1, 2006, the KERP provides a mathematical equation to
calculate the percentage between 66.67% and 100% to be paid to the tier I participants.
The Union objects to the KERP on the bases that (a) the Debtors have offered
little objective evidence in support of the KERP; (b) the KERP has no direct relation
to the ultimate success of this case; (c) many employees have been excluded from the
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2Debtors raised the issue of whether the Union has standing to object to the
KERP with respect to any Debtor other than EaglePicher Technologies since that is
the only Debtor entity with which the Union has any relationship. Due to our decision,
we do not need to discuss this issue.
3Counsel for the Union indicated at the hearing that the Union has never
endorsed a KERP and that it has objected in a number of cases. However, in deciding
when to object, counsel noted that the Union has not objected in some cases merely
because they had a good relationship with the debtor in those cases.
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program and the Debtors have failed to consider the impact this fact will have on
lower-level management employees who are excluded from the KERP. With respect
to this last objection, the Union asserts that the “Debtors did not discuss the KERP
with the United Steelworkers or any of the other unions representing its employees
prior to filing the Motion, thus illustrating Debtors’ failure to appropriately exercise
their business judgment.” Objection at 5-6 (citing In re Geneva Steel Co., 236 B.R.
770, 773 (Bankr. Utah 1999) (finding that “to propose [a] retention program without
having discussed its provisions with [the union] is not an example of sound business
judgment.”)).
The Court notes that both counsel for the Debtors and counsel for the Union
indicate that EaglePicher Technologies2 and the Union have had a strained bargaining
relationship at the Joplin, Missouri, plant. Thus, the parties are already starting out on
the wrong foot to try to amicably resolve any issues between themselves.3
We address the Union’s last objection first. It is disingenuous for the Union to
state that Debtors did not discuss the KERP with the Union. Unlike the union in In
re Geneva Steel Co., here the Union is a member of the Committee and had access to
all discussions and documents. The fact that the Committee disagreed with the
Union’s position on the KERP, does not mean that the Union was left out of the
process. Counsel for the Committee and counsel for the Debtors’ lenders have
indicated that their clients support the KERP. Further, the U.S. Trustee, the
independent “watchdog” for bankruptcy cases, has also indicated support for the
KERP. Most importantly, all of these entities indicated that support was given only
after a “spirited debate” and vigorous negotiations with the Debtors and after the
Debtors made significant concessions in the KERP in response to concerns expressed
by those parties.
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With respect to the Union’s concern that many employees have been excluded
from the program, Counsel for the Debtors stated that the KERP was limited to only
those employees who needed to be retained. The plan covers only a small minority
of employees but is broad enough so that it does not include just members of senior
management. One of the Union’s concerns is that the KERP does not include
members of the Union working at the Joplin, Missouri, plant and that this will cause
further deterioration in the relationship between EaglePicher Technologies and the
Union and will cause a loss of morale at that plant. However, the purpose of a KERP
is not to include every employee. “[N]ot all employees . . . of Debtor are similarly
situated in terms of their importance to the reorganization process.” In re Georgetown
Steel Co., LLC, 306 B.R. at 558. In Debtors’ situation, counsel for the Debtors’
stated that the cost analysis for the steelworkers to be included in the KERP simply
was not justified. See Id. at 549 (approving KERP over objection of certain union and
nonunion employees, where the employees failed to present evidence that their services
would be essential to the debtor’s reorganization and where lenders, creditor’s
committee and the UST all approved the KERP after “substantial negotiations”).
It is interesting to note that in this case the Union is the “special interest group”
trying to assert its own special interests. See In re Lionel Corp., 722 F.2d at
1071(“[A] bankruptcy judge must not blindly follow the hue and cry of the most vocal
special interest groups.”). As counsel for the Committee noted, and the Court agrees,
we should consider the position of the constituency with the most to lose. That is the
unsecured creditors and not merely the small special interest group of the unsecured
creditors represented by the Union. By lending its support to the KERP, the
Committee obviously has determined that the KERP is in the best interests of the
unsecured creditor body as a whole.
With respect to the Union’s other two objections, the Debtors have presented
evidence of the need for the KERP through both the proffers of counsel and the
testimony of Mr. Mills indicating that key employees have left Debtors’ employment.
Further, the fact that the Debtors have negotiated and given concessions satisfactory
to the lenders, the Committee and the UST is indicative that those parties are in
agreement that implementing the KERP is not only an exercise of sound business
judgment but is also in the best interests of those parties and the Debtors’.
We note that payments made under the KERP are tied directly to the successful
and prompt confirmation of a plan of reorganization. Contrary to the Union’s
argument, the Debtor’s are not required to establish that they have any particular
chance of successfully reorganizing in order for this Court to grant Debtors the
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authority to enter into the KERP. See In re Georgetown Steel Co., LLC, 306 B.R. at
557-58; In re Montgomery Ward Holding Corp., 242 B.R. at 154. Rather, the
decision on whether to approve a retention plan depends on the facts and
circumstances of each case. Id. at 154.
The Debtors presented sufficient evidence to establish that the decision to
implement the KERP was an exercise of sound business judgment. The Union failed
to produce any evidence at the hearing that controverted this evidence. See In re
Montgomery Ward Holding Corp., 242 B.R. 147.
Accordingly, it is hereby ORDERED, ADJUDGED and DECREED that:
1. The Motion is Granted in its entirety and the Union’s Objection is
overruled.
2. The Debtors are authorized to implement the KERP Plan, substantially
in the form attached to the Motion and to take all necessary and appropriate action
consistent with the relief sought in the Motion to carry out the KERP.
3. The Debtors agree to provide notice to the Office of the U.S. Trustee,
counsel to the Lenders and counsel to the Committee of any terminations by reason
of other than confirmation of a plan of reorganization or sale of a business which
results in an obligation to make a KERP payment within a reasonable time after such
termination.
4. Nothing contained in this Order is intended to modify or affect the rights
of the Lenders under the Second Interim Financing Order entered by the Court on
July 29, 2005 (Doc. 531) and any final financing order entered by the Court in respect
of the Supplemental Motion for Final Debtor-in-Possession Financing filed on July 28,
2005 (Doc. 526), including rights with respect to adequate protection and use of cash
collateral.
5. The KERP modifies and replaces in its entirety all pre-existing agreements
and policies providing for employees stay and retention bonuses and, solely with
respect to the employees identified on Appendix A to the KERP, all pre-existing
agreements and policies providing for severance. The KERP does not modify any
pre-existing agreements and policies with respect to wages, annual incentives, other
bonus and reimbursement payments and severance (to the extent not expressly
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addressed in the KERP), including, without limitation, such compensation and benefits
approved by the Court by order entered on April 14, 2005.
IT IS SO ORDERED.
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