Court: United States Bankruptcy Court, E.D. Missouri; May 16, 2013; Us Bankruptcy; United States Bankruptcy Court
Debtors Patriot Coal Corporation and affiliates, having filed for Chapter 11 bankruptcy on July 9, 2012, seek court approval for two proposed compensation plans: the 2013 Annual Incentive Plan (2013 AIP) for approximately 225 employees and the 2013 Critical Employee Retention Plan (2013 CERP) for 119 employees, with some eligible for both. Debtors argue that current employee compensation is below market levels, leading key employees to pursue other job opportunities. This situation, coupled with financial instability, necessitates the proposed plans to retain essential personnel for ongoing operations. Historical compensation included salaries, cash incentives, and equity awards through a Long Term Equity Incentive Plan (LTEIP), which has become less valuable due to a significant decline in stock price since the bankruptcy filing. The matter was discussed in a hearing held on March 18, 2013, involving various stakeholders, including the United Mine Workers and the Official Committee of Unsecured Creditors, and was taken under submission by the court.
Debtors have ceased the Long-Term Employee Incentive Plan (LTEIP), meaning no new awards will be granted; only time-vested restricted stock awards will be issued as scheduled or when employees become eligible to exercise stock options. Employees faced tax liabilities on equity awards that vested prior to the bankruptcy filing, but these awards will not be distributed due to the LTEIP discontinuation. Debtors maintain a mine-level incentive program that is not currently under judicial consideration.
The top six executives were eligible for LTEIP participation. Since 2008, Debtors also implemented an Annual Incentive Plan (Pre-Petition Incentive Plans), allowing participants to earn annual cash bonuses tied to performance objectives, ranging from 5%-60% of base salary for target bonuses and up to 90% for maximum bonuses. Debtors paid $9.4 million in 2010 and $7.9 million in 2011 under this plan, but no payments were made in 2012.
The Pre-Petition Incentive Compensation Plans, established in 2009, aimed to retain essential personnel at the coal mines. Debtors did not have a corporate-level retention plan until now, seeking to combine these plans with a new retention program for corporate employees. Towers Watson Delaware Inc. has been retained by Debtors' Compensation Committee since January 2008 to conduct a benchmarking analysis of employee compensation, revealing that most corporate employees earn below the market median.
In 2012, Debtors introduced the 2012 Compensation Plans, offering 281 employees the opportunity to earn an aggregate maximum of $12.3 million in bonus compensation. The plans were developed with input from Mr. Nick Bubnovich of Towers but primarily created by CEO Mr. Bennett Hatfield and approved by Debtors' Board. Employees were notified of their eligibility in mid-2012, but the Official Committee of Unsecured Creditors (OCUC) opposed these plans when presented in late 2012.
On December 5, 2012, the OCUC communicated to the Debtors that there was no support for the 2012 Compensation Plans, primarily due to concerns that these plans could hinder negotiations with workers and retirees regarding concessions under Sections 1113 and 1114. Following this, the Debtors and the OCUC engaged in negotiations, leading to multiple versions of the compensation plans. The fourth version was accepted by the OCUC and became the basis for the 2013 Compensation Plans now presented to the Court. The OCUC claims that these plans represent a 44% reduction in costs and structural changes to prevent increases in management compensation despite retiree sacrifices.
The Debtors seek Court approval to implement the 2013 Compensation Plans, which Mr. Hatfield initiated with input from his executive team, legal counsel, Towers, and the Compensation Committee. Blackstone also assisted in financial analysis for these plans. The Debtors assert that the total cost of the 2013 AIP and 2013 CERP, if fully paid, will be 0.36% of their annual revenues.
The 2013 AIP targets approximately 225 employees (5-6% of the workforce) identified as key to enhancing financial and operational performance, including roles in management, finance, HR, legal, engineering, and support staff. Notably, the top six executives have opted out of the AIP. The plan's design was informed by Towers’ benchmarking of the current compensation of 109 proposed participants against market rates and analysis of incentive programs from other Chapter 11 reorganizations, none of which involved coal industry debtors. Additionally, Mr. Bubnovich contributed to the design by recommending EBITDA and cash flow as performance metrics.
Mr. Bubnovich utilized Towers’ compensation database and the Mercer Executive Compensation Survey to inform the design of the 2013 AIP, which he characterized as conservative since top management will not participate. The program includes a broad range of corporate employees and caps potential incentive payments, eliminating additional payments for surpassing performance targets and offering no partial payments for unmet metrics. A second benchmarking analysis, prompted by the OCUC, assessed the salaries of 151 of the 225 Proposed AIP Participants, showing that employees were slightly more under-compensated compared to the first analysis, though the difference was minimal.
Under the 2013 AIP, incentive payments range from 1.25% to 20% of base salaries, with percentages determined by Mr. Hatfield, management, and the Compensation Committee. The program is structured around two six-month performance periods: the First Period (January 1 - June 30, 2013) and the Second Period (July 1 - December 31, 2013), with payments made 30-60 days after each period’s end, funded by the parent company, Patriot Coal.
Following the filing of the Motion, six insiders removed from the 2013 CERP became eligible for higher incentive payments under the AIP, ranging from 40-60% of their base salaries. The AIP includes five performance metrics, each weighted differently: four are collective corporate goals (financial at 60%, safety at 5%, Mine Safety and Health Administration compliance at 5%, and environmental at 5%), while the fifth is individually tailored (weighted at 25%). All metrics must be met for participants to receive corresponding incentive payments. Financial performance is assessed through two requirements, each weighted at 30%: a threshold of $75.1 million in EBITDAPP for the First Period and $72.4 million for the Second Period, with "pensions" included to prevent management incentives that could impact ongoing negotiations related to Sections 1113 and 1114.
Incentive payments for Debtors depend on meeting liquidity requirements as stipulated in their D.I.P. credit agreements aligned with a five-year plan. For the First Period, a liquidity target of $205.8 million must be met, followed by $100.6 million in the Second Period. Although Debtors currently exceed the 2013 AIP liquidity target, their liquidity is declining, raising concerns that the Second Period target may not be met. Additionally, Debtors are lagging in achieving the EBITDAP target for the First Period.
The overall safety incidence rate must remain at 3.27 throughout the 2013 AIP, weighted at 5%. This metric measures accidents per 100 personnel without regard for accident severity. Despite a record safety incidence rate in 2012, performance in 2013 has deteriorated due to incidents early in the year, likely leading to failure in meeting this incentive target for the First Period.
Compliance with the Mine Safety and Health Administration (MSHA) is also essential, with a required incidence rate of no more than 0.95, also weighted at 5%. This reflects the number of violations per inspector during inspections. The 0.95 target is lower than the 2012 rate, but is deemed aggressive yet realistic by Mr. Hatfield.
Environmental performance must reach an incidence rate of 0.0092 under the Surface Mining Control and Reclamation Act, with a 5% weight. There was minimal discussion on current performance relative to this target.
Individual performance metrics for the Proposed AIP Participants were established at the end of 2012, comprising three to five qualitative goals linked to individual roles and overall business performance. This metric accounts for 25% of the incentive payment, with supervisors determining goal attainment.
Debtors aim to implement the 2013 CERP involving approximately 113 employees. A benchmarking analysis of Proposed CERP Participants’ salaries was conducted, resulting in the exclusion of certain high-level individuals, who were deemed insiders by the U.S. Trustee due to their appointments by Patriot Coal Corp.’s Board of Directors.
Proposed AIP Participants, identified employees in the 2013 AIP, received an increased incentive payment following a compromise between the U.S. Trustee and Debtors. Mr. Hatfield testified that none of the Proposed CERP Participants have authority over Debtors' finances, strategic decisions, or corporate policy, nor are they appointed by the Board of Directors of Patriot Coal. Although some hold executive titles, these serve merely morale purposes, as actual executives are excluded from the 2013 CERP. The Proposed CERP Participants represent about 3% of the workforce and work in various operational roles. Their participation is based on being high performers with essential skills for the company's viability. They are eligible for retention compensation ranging from 11% to 45% of their annual salary, distributed in three installments: two of 25% on March 31 and September 30, 2013, and a final installment of 50% payable by March 31, 2014, or 90 days post-Chapter 11 emergence. Mr. Bubnovich noted that, even post-distribution, their compensation would remain below market rates. The Debtors announced a 2.5% salary cut effective March 1, 2013, alongside reductions in hourly wages for certain classifications and benefits, including the termination of retiree health plans and life insurance. The Debtors argue that the significant reduction in total compensation for the Proposed CERP Participants is critical to minimizing employee loss and ensuring successful reorganization, especially given the high attrition rates that threaten to derail the process.
Debtors report that over 30 key employees have left the organization between June 5, 2012, and March 18, 2013, primarily due to uncertainty regarding the success of their reorganization efforts. Notable positions vacated include Vice Presidents, Senior Auditors, and an Assistant General Counsel. Debtors have struggled to find qualified replacements, occasionally resorting to outside consultants, which has been financially burdensome. Some employees have remained with the expectation that their income will improve under the proposed 2013 Compensation Plans, despite significant challenges in meeting the financial metrics due to falling coal prices.
The OCUC and Creditor Bank of America support the Motion for the Compensation Plans, while the U.S. Trustee has not objected. Conversely, the United Mine Workers of America (UMWA) opposes the Motion, arguing that the 2013 Annual Incentive Plan (AIP) functions as a retention plan requiring stricter approval standards. UMWA asserts that Debtors have not adequately demonstrated the necessity of the Compensation Plans or provided sufficient participant information for evaluation. They also contend that the attrition issues claimed by Debtors do not exceed normal levels for similar companies post-recession and argue against the comparability of coal mining companies with other industries in this context.
Additionally, the UMWA 1974 and 1993 Pension Trusts argue that achieving the performance metrics of the 2013 AIP requires minimal effort and that the plans disproportionately favor high-paid employees, with a small number of participants set to receive a significant majority of the distributions. They claim the Compensation Plans lack a reasonable connection to the results sought and do not provide equitable benefits across the employee base.
Jurisdiction is established under 28 U.S.C. §§ 151, 157, and 1334, along with Local Rule 81-9.01(B) for the Eastern District of Missouri, affirming that this is a core proceeding per 28 U.S.C. § 157(b)(2)(A). Venue is appropriate under 28 U.S.C. § 1409(a). The Court is tasked with evaluating whether Debtors can implement the 2013 Compensation Plans aimed at incentivizing current employees and retaining key personnel to enhance operational performance. This consideration occurs alongside another motion seeking concessions from unionized miners under Section 1113 and modifications to retiree benefits under Section 1114, which will be judged independently.
The motion addresses the necessary incentives for a range of employees within corporate offices and mining operations as part of the reorganization process. Under Section 363(c), a Debtor In Possession may use estate property in the ordinary course of business, while Section 363(b)(1) allows for non-ordinary use, sale, or lease of estate property. Section 503(c) prohibits certain transfers to insiders unless specific criteria are met, including necessity for retention due to bona fide job offers, essential services for business survival, and limitations on transfer amounts compared to non-management employees. Transfers are deemed within the ordinary course of business if they align with the reasonable expectations of interested parties regarding debtor transactions.
Transfers made outside the ordinary course of business for the benefit of post-petition officers, managers, or consultants must be justified under the business judgment standard set forth in Section 363(b). Courts evaluate incentive plans based on several criteria, including the relationship between the proposed plan and the expected results, the reasonableness of costs in relation to the debtor's financial situation, the fairness and scope of the plan, alignment with industry standards, due diligence efforts, and the involvement of independent counsel. Section 503(c) was added to the Bankruptcy Code to prevent executives from receiving bonuses merely for remaining with the company during bankruptcy. Courts must scrutinize incentive plans to ensure they genuinely incentivize performance rather than simply retaining employees without additional effort. The burden of proof rests with the proponent of the plan to demonstrate that it is not merely retentive. The court in this instance rejects the debtors' argument that the 2013 Compensation Plans can be implemented as part of the ordinary course of business, noting that no distributions occurred under the previous plans and that a corporate-level retention plan had never been implemented before.
The 2013 Compensation Plans differ significantly from the Debtors’ prior compensation structures, namely the LTEIP and Pre-Petition Incentive Plan. Both the 2013 AIP and CERP are aligned with the unique circumstances of the Debtors' Chapter 11 cases, which are not considered ordinary transactions. Historically, the Debtors have not utilized a combined corporate and mine-level retention plan, nor implemented an incentive plan similar to the 2013 AIP; thus, creditors would not expect such plans in the ordinary course of business. There is no evidence to suggest that it is standard practice for mining companies to adopt compensation plans.
The Court must determine whether the higher standard of Section 503(c)(1) or the less stringent Section 503(c)(3) applies. The UMWA and associated funds argue that the 2013 AIP functions as a retention plan, implicating Section 503(c)(1) due to the inclusion of insiders and lack of evidence negating insider involvement in the CERP. The 2013 AIP outlines specific performance targets: 60% based on financial performance, 15% on safety and environmental compliance, and 25% on individual performance. Testimony indicates that the Debtors are likely to fail the EBITDAP target, yet the diversified metrics aim to incentivize performance under challenging conditions.
The Court acknowledges that achieving record-breaking performance annually is unreasonable, particularly given the current challenges and decreased coal prices. Individualized targets are deemed appropriate for the size of the Debtors’ operations, with supervisors responsible for monitoring performance. The distribution of 2013 AIP payments in three installments aims to motivate participants to exceed pre-bankruptcy performance expectations. The potential delay for the third installment post-bankruptcy suggests a retention aspect; however, the Court concludes that the AIP is fundamentally incentive-based with a secondary retention effect, designed to encourage participants to enhance the Debtors' overall performance and facilitate successful reorganization.
The 2013 Compensation Plans' total cost, contingent on meeting all targets, is projected at $6.9 million, representing only 0.36% of the Debtors’ annual revenues. Historical incentive payments were $9.4 million in 2010 and $7.9 million in 2011, with no payments in 2012. The First and Second Periods of the 2013 Annual Incentive Plan (AIP) have a maximum cost of approximately $1.2 million each. The proposal is deemed reasonable given the Debtors’ asset and liability situation and the need to maintain workforce stability during reorganization to enhance market performance.
Mr. Hatfield stated that the 2013 AIP includes all corporate employees across various roles, including management and administrative staff. The United Mine Workers of America (UMWA) 1974 and 1993 Funds argue that the plan is inequitable as higher-paid employees receive most incentive funds. While the objection is acknowledged, the Court notes that incentive structures often favor higher earners due to their significant impact on organizational performance. The AIP is inclusive, extending beyond senior management, and the top six executives have opted out of the plan.
The Court finds the scope of the AIP fair and reasonable, asserting it does not discriminate against lower-paid employees. The Debtors utilized Towers’ benchmarking analysis to establish incentive payments, which reveal that even with full distribution, most employees will still earn below market compensation. Compensation levels have notably decreased since 2010, and the Court recognizes that many employees possess transferable skills applicable beyond the mining sector, justifying a broader benchmarking approach than solely within coal industry standards.
The second benchmarking analysis conducted by Towers indicated that Debtors' employees were more undercompensated than initially assessed. The Court determined that the 2013 Annual Incentive Plan (AIP) aligns with industry standards, validating Debtors’ business judgment. Mr. Hatfield testified that he relied on input from his direct reports to select the AIP participants, noting a historical peak in employee attrition that could threaten Debtors' restructuring efforts. The selection method for AIP participants was deemed reasonable given the company's size, and outside expertise from Blackstone and Towers was appropriately utilized in developing the AIP, incorporating feedback from the Official Committee of Unsecured Creditors (OCUC) and the U.S. Trustee. The Court concluded that Debtors conducted adequate due diligence, allowing for the implementation of the 2013 AIP under Section 503(c)(3).
Regarding the 2013 Contingent Equity Rights Plan (CERP), the United Mine Workers of America (UMWA) argued that Debtors failed to prove the absence of insiders, questioning the operational control of only a few individuals in such a large corporation. The UMWA highlighted a specific participant in the 2013 CERP linked to a subsidiary of Debtor Patriot Coal. In response, Debtors asserted that the 2013 CERP does not involve insiders, referencing an agreement with the U.S. Trustee that removed six individuals from the plan due to their appointments by Patriot Coal’s Board. The definition of "insider" under Section 101(31)(B) of the Bankruptcy Code includes directors and officers, and the term is broadly interpreted by courts. The Court's ruling is based on these considerations, ultimately supporting Debtors' position concerning the 2013 CERP's compliance with the required standards.
The term “officer” in the context of the Bankruptcy Code refers to individuals elected or appointed to manage a corporation's daily operations, such as the CEO or treasurer, as defined by Black’s Law Dictionary. An employee's status as an insider is determined by their involvement in the debtor's affairs rather than their title, as established in various cases. An insider must have substantial authority to dictate corporate policy and asset disposition. In this case, all payments for the 2013 CERP and AIP will be made by the parent company, Patriot Coal Corp., whose top six executives have opted out of the 2013 Compensation Plans, addressing U.S. Trustee concerns. The Court finds that no proposed CERP participant was appointed by the Board and that individuals with minor roles, such as the Corporate Secretary, do not qualify as insiders. Testimonies indicated that many executives may have titles without corresponding authority, and although some participants hold significant spending authority, this does not automatically designate them as insiders. The Court concludes that the remaining individuals in the 2013 CERP do not make critical corporate decisions, nor do they have the authority to influence corporate policy. The Court affirms that no CERP participant significantly contributed to the Compensation Plans' creation. The appropriate standard for reviewing the 2013 CERP is under Section 503(c)(3), and the Court finds it to be a prudent exercise of the Debtors' business judgment, aimed at retaining essential employees critical for successful reorganization, benefiting all stakeholders involved.
Debtors’ Motion for Authority to Implement Compensation Plans is granted, while the United Mine Workers’ objection to the motion and the objections from the United Mine Workers of America 1974 Pension Trust and the 1993 Benefit Plan are overruled. The 14-day stay under Bankruptcy Rule 6004(h) is waived. The Court acknowledges the Debtors' notice addressing concerns from the U.S. Trustee regarding seven insider participants in the 2013 CERP; these individuals have been removed from that plan, with their incentive compensation opportunities increased in the 2013 AIP. The Court notes that although one insider is no longer employed by the Debtors, their specific title remains unidentified. It references prior cases where courts approved incentive and retention plans that disproportionately allocated distributions to top management, citing examples of payments made to key employees in previous bankruptcy cases, highlighting the approval of significant retention and incentive payments to management roles.
