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United Mine Workers of America 1974 Pension Plan & Trust v. Alpha Natural Resources, Inc.

United States District Court, E.D. Virginia, Richmond Division

July 7, 2016

UNITED MINE WORKERS OF AMERICA 1974 PENSION PLAN AND TRUST, et al. Appellants,
v.
ALPHA NATURAL RESOURCES, INC., et al. Appellees.

          MEMORANDUM OPINION (AFFIRMING THE DECISION OF THE UNITED STATES BANKRUPTCY COURT)

          Henry E. Hudson United States District Judge

         THIS MATTER is before the Court on appeal from the United States Bankruptcy Court for the Eastern District of Virginia ("Bankruptcy Court"). It evolves from a dispute over a proposed revised Key Employee Incentive Plan ("KEIP"). On December 3, 2015, the Debtors moved for entry of an order (1) authorizing payments to executive insiders under the Debtors' 2015 Annual Incentive Bonus Plan and (2) approving the Debtors' Key Employee Incentive Plan. (App. 1.) Only the second request was contested. On January 27, 2016, Judge Huennekens of the Bankruptcy Court entered an Order granting the Debtors' motion to approve the KEIP in its entirety. (App. 76.) Judge Huennekens followed that Order with a Memorandum Opinion on February 24, 2016, setting forth his reasoning. (App. 464.) For the reasons that follow, this Court will affirm the decision of the Bankruptcy Court in its entirety, articulated in its Order of January 27, 2016 and Memorandum Opinion of February 24, 2016.

         I. BACKGROUND

         The Appellants ("Appellants" or "Objectors" or "Creditors") in this case are creditors that also represent many of the Appellees' employees. (App. 466; Appellants' Br. 3.) The Appellees ("Appellees" or "Debtors") are debtors who own and operate coal mines. (App. 466.)

         The central dispute before this Court focuses on a ruling by the Bankruptcy Court pertaining to the approval of the KEIP. The Bankruptcy Court concluded that the Debtors' proposed KEIP was primarily an incentive program, not a retentive program, and met the required conditions under 11 U.S.C. § 503(c)(3), thereby granting Debtors' motion. This appeal followed.

         In essence, the Appellants claim that the Bankruptcy Court erred in analyzing the KEIP under § 503(c)(3), arguing that it should have been analyzed under § 503(c)(1), because it is not truly an incentive plan, but primarily an effort to retain certain employees. (Appellants' Br. 20.) Secondly, Appellants argue that even if the KEIP was an incentive plan, the Bankruptcy Court erred in concluding that it met the requirements of §§ 503(b)(1)(A) and 503(c)(3), because the payments to Debtors' managers and officers did not constitute the actual and necessary costs of preserving the estate and were not justified by the facts and circumstances of the case. (Id. at 21.)

         Both Appellants and Appellees have filed memoranda supporting their respective positions. The facts and legal contentions are adequately presented in the materials before this Court. Since the findings of the Bankruptcy Court stand on sound footing, oral argument would not aid in the decisional process.

         The central question in this appeal is whether the Bankruptcy Court erred in holding that the Debtors met their burden under 11 U.S.C. §§ 503(b) and 503(c), showing adequate grounds to approve the KEIP. Informing the analysis of that central question are several underlying inquiries, examining the Bankruptcy Court's judgment as to whether the KEIP is designed primarily for retentive effect or incentive effect, whether the KEIP is an actual and necessary cost of preserving Debtors' estates, and whether the KEIP was justified by the facts and circumstances.

         II. LEGAL STANDARDS AND FRAMEWORK

         The standard of review applied by this Court is well-settled. The Bankruptcy Court's legal conclusions are reviewed de novo and its factual findings for clear error. In re Harford Sands, Inc., 372 F.3d 637, 639 (4th Cir. 2004).

         Section 503 of the Bankruptcy Code authorizes a bankruptcy court to allow certain administrative expenses, which are defined as the "actual, necessary costs and expenses of preserving the estate" of the debtor. 11 U.S.C. § 503(b)(1)(A). This Section imposes restrictions on the compensation that a debtor can pay its executives and other employees in bankruptcy, which include a general prohibition on retention payments unless certain strict conditions are met. 11 U.S.C. § 503(c)(1). Section 503(c)(1) limits any "transfer made to, or [any] obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor's business." 11 U.S.C. § 503(c)(1).

         However, this does not mean that because a KEIP contains some retentive effect, it is then primarily a retentive plan. See In re Borders Grp., Inc., 453 B.R. 459, 471 (Bankr. S.D.N.Y. 2011) (internal citations omitted). A legitimate incentive plan may still have some retentive effect. Incentive payments under a KEIP are governed by the more general provisions of 11 U.S.C. § 363(b)(1) and § 503(c)(3). Section 363(b)(1) allows a debtor in possession to transact business outside the ordinary course with court approval. 11 U.S.C. § 363(b)(1). Section 503(c)(3) prohibits transfers to officers "that are outside the ordinary course of business and not justified by the facts and circumstances of the case." A debtor can make payments to officers and insiders that are not retentive in nature they are justified by the facts and circumstances of the case.

         While the Court of Appeals for the Fourth Circuit has not elaborated on the "facts and circumstances" standard under § 503(c)(3), other courts outside the Fourth Circuit have noted that this standard equates to the business judgment test under § 363(b)(1). See, e.g. In re Patriot Coal Corp., 492 B.R. 518, 530-31 (Bankr. E.D. Mo. 2013). Other courts, however, have held that § 503(c)(3) imposes a higher, stricter test. The elevated test requires a court to undertake its own independent analysis, apart from a debtor's sound business reason, to determine if the particular proposal will serve the best interests of the creditors and the debtors' estate. See In re Pilgrim's Pride Corp., 401 B.R. 229, 236-37 (Bankr. N.D. Tex. 2009).

         III. FACTUAL FINDINGS AND LEGAL CONCLUSIONS OF THE BANKRUPTCY JUDGE

         The following narrative represents the underlying facts, as found and described in Judge Huenneken's Memorandum Opinion. Alpha Natural Resources and 149 of its direct and indirect subsidiaries initiated bankruptcy proceedings under Chapter 11 of the Bankruptcy Code in August of 2015. (App. 464; Mem. Op., Judge Huennekens, Feb. 24, 2016 at 1.) The Debtors moved for entry of an order (1) authorizing payments to executive insiders under the Debtors' 2015 Annual Incentive Bonus Plan and (2) approving the Debtors' Key Employee Incentive Plan. (Mem Op. at 1.) While the first part of this motion was uncontested, the second part was contested. (Id. at 2.)

         The KEIP sought to incentivize the Debtor's senior management team to meet and exceed certain performance goals. (Id. at 7.) Eight Executive Insiders and seven Non-Executive Insiders constitute the fifteen KEIP participants. (Id. at 5.) The KEIP was designed and approved by the Debtors' Compensation Committee, who retained Meridian Compensation Partners ("Meridian") to provide independent advice. (Id. at 5-6.) In developing the KEIP, Meridian looked for companies with a similar profile to that of the Debtors. (Id. at 6.) Meridian focused on other KEIPs that had been approved by bankruptcy courts, then identified and suggested four key metrics/categories of performance goals: (1) cost savings; (2) EBITDA/liquidity; (3) safety; and (4) environmental compliance. (Id.) McKinsey Services ("McKinsey") then operationalized the savings and EBITD A/liquidity benchmarks to determine key targets the company would need to achieve in order to earn an incentive award. (Id. at 6-7.) Each metric was assigned a particular weight under the KEIP: 30%, 55%, 7.5%, and 7.5%, respectively. (Id. at 7.) The KEIP is designed to encourage participants to devise an effective exit strategy to successfully emerge from the Chapter 11 proceeding. (Id. at 8.)

         The primary claim of those objecting to the KEIP was that the KEIP is actually a retention plan, disguised as an incentive plan. (Id. at 9.) They asserted that the KEIP's performance goals were too low and easily achieved, thereby encouraging retention, not incentivizing performance. (Id.) Further, the Objectors contended that even if the KEIP was not primarily retentive, it was still not justified by the facts and circumstances of this Chapter 11 proceeding under § 503(c)(3). (Id.) Lastly, they insisted that the Debtors did not use their business judgment under ยง 363(b)(1) in formulating ...


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