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March 16, 2021 – The U.S. Trustee assigned to the Debtor's cases and the Debtor's Official Committee of Unsecured Creditors (the “Committee”) have each objected to the Debtor's proposed key employee incentive plan (the "KEIP") arguing that it is "a disguised retention plan" [Docket Nos. 332 and 334, respectively] and urging the Court to reject metrics not "directly tied to unsecured creditor recoveries," ie the recoverries of community residents.
The Debtor's willingness to pay bonuses to executives even when targets in respect of key metrics are not met (eg, $130k to be paid even if budgeted occupancy and net operating income targets are missed), is that more galling in the context of a debtor operating a retirement community "where millions of dollars of unpaid entrance fee refunds comprising the life savings of current and former senior residents…are at risk." Given these "unique circumstances," the Committee argues, a "bonus program should only be authorized if it is directly tied to unsecured creditor recoveries…"
The U.S. Trustee’s objection [Docket No. 332] reads: “The Debtor calls its proposed plan an incentive plan. But it is not an incentive plan; it is a disguised retention plan. The metrics in the plan do not require extraordinary results to achieve the awards, and it is not even clear the performance of the plan’s recipients would directly impact those metrics. In addition, the awards in the plan are not allocated in a fair and reasonable way, promising huge awards for the two top employees and more modest awards for the others. The Debtor has not demonstrated a need for the plan nor a benefit from adopting it. The Debtor hasn’t identified any negative consequences if it doesn’t adopt the plan. The Debtor has not justified the cost of the plan.
The Committee objection [Docket No. 334] states, “…[W]hile the Committee understands and appreciates the challenges of managing Henry Ford Village in bankruptcy during a global pandemic, it objects to the payment of these insider bonuses when over $100 million of unsecured claims owed to residents and other creditors may not get paid. Debtor’s justifications for the KEIP Motion demonstrate that the proposed payments appear to be retention bonuses instead of incentive payments. Specifically, Debtor proposes paying over $250,000 in insider bonuses if Henry Ford Village simply meets its budgeted occupancy and net operating income targets—and even proposes to pay over $130,000 in bonuses to executives if Henry Ford Village misses its budgeted occupancy and net operating income targets. The proposed executive bonuses are therefore more appropriately characterized as a key employee retention plan (‘KERP’), subject to greater scrutiny under section 503(c)(1) of the Bankruptcy Code. Under that standard, the KEIP Motion cannot be approved. Considering the unique circumstances of this case, where millions of dollars of unpaid entrance fee refunds comprising the life savings of current and former senior residents of Henry Ford Village are at risk, any insider bonus program should only be authorized if it is directly tied to unsecured creditor recoveries…the structure of Debtor’s proposed executive bonus plan demonstrates that its primary purpose is to retain Debtor’s key executives—not incentivize these executives to achieve extraordinary results. The bonus structure proposed by Debtor establishes three targets (Threshold, Budgeted and Stretch) for two metrics (Occupancy in Independent Living and Net Operating Income %) for the first three quarters of 2021."
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