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Reply #35: Taking aim at big 'retention bonuses' for managers of bankrupt firms [View All]

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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Sep-05-06 10:11 AM
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35. Taking aim at big 'retention bonuses' for managers of bankrupt firms

The U.S. Justice Department is setting the stage for what could become the first major test of a new provision in American bankruptcy law aimed at curbing large retention bonuses for top managers.

The agency has joined with unions and creditors of Dana Corp., an auto parts company in bankruptcy protection, in opposing a proposed pay system for top executives of the company.

The U.S. bankruptcy trustee, a Justice Department employee charged with ensuring that bankruptcy laws are complied with, also raised questions about the integrity of the proposed compensation plan.

She notified the court that she might request an independent examiner to investigate the "proposed executive compensation scheme" and the manner in which it was developed. Diana Adams, the trustee, said the proposal "appears to fall far short of the integrity required for this court's approval."


The provision was inserted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to win support from Democrats, who had complained that executives received lavish pay packages while citing a company's financial distress as a reason to reduce the pay and benefits of ordinary workers. The provision is known to lawyers by the numbers of the two new sections, 503(c)1 and 503(c)2.

In a submission to the court last week, the trustee defined the issue as raising the question: "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?"


"At a time when the debtor's work force faces great uncertainty and angst," she wrote, the company "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."


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