Document Type

Research Memorandum

Publication Date




When a company that has filed for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") seeks to retain essential employees through the course of its bankruptcy, the payments made with the goal of retaining key employees are subject to the requirements of section 503(c) of the Bankruptcy Code. These payment plans, also known as Key Employee Retention Plans or "KERPs", are designed to "provide certain Key Employees with a financial incentive to forgo seeking alternative employment during the Debtors' bankruptcy proceeding as well as after confirmation of a chapter 11 plan." In the face of public scrutiny surrounding these payments made to high level employees, Congress enacted certain of the BAPCPA amendments to "eradicate the notion that executives were entitled to bonuses simply for staying with the Company through the bankruptcy process." The amendments "limited the scope" of KERPs and other programs designed to induce management to remain with the debtor. The amendments were implemented to “put in place ‘a set of challenging standards’ and ‘high hurdles’ for debtors to overcome before retention bonuses could be paid.” The amendments narrowed the circumstances in which KERP payments could be made and limited the amount of the KERP payments.

Following the BAPCPA amendments, many debtors have been faced with the question of when the Bankruptcy Court will approve the proposed KERP. The answer is highly dependent on whether the employee is an insider of the debtor and if the KERP is a transaction outside the ordinary course of business. Precedent makes it clear that employees that exert sufficient control over the debtor are insiders and any KERP payments made to those employees must overcome the high hurdles imposed by section 503(c)(1). A debtor seeking to make payments to employees who lack such power will only have to meet the more lenient section 503(c)(3) requirements, provided that the KERP is a transaction outside the ordinary course of business.



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