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Hearing Date and Time: August 8, 2012 at 2:00 p.m. (prevailing Eastern Time) Objection Deadline: August 1, 2012 at 4:00 p.m. (prevailing Eastern Time)
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MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Larren M. Nashelsky Gary S. Lee Jamie A. Levitt Jordan A. Wishnew Counsel for the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) ) ) ) ) ) )
In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.
Case No. 12-12020 (MG) Chapter 11 Jointly Administered
NOTICE OF DEBTORS MOTION FOR AN ORDER PURSUANT TO SECTIONS 363(b)(1) AND 503(c)(3) OF THE BANKRUPTCY CODE AUTHORIZING (I) IMPLEMENTATION OF (A) A KEY EMPLOYEE RETENTION PLAN FOR CERTAIN NON-INSIDERS AND (B) A KEY EMPLOYEE INCENTIVE PLAN FOR CERTAIN INSIDERS AND (II) PAYMENT OF ANY OBLIGATIONS ARISING THEREUNDER AS ADMINISTRATIVE EXPENSES PLEASE TAKE NOTICE that on July 17, 2012, the Debtors and Debtors in possession in the above-captioned cases (collectively, the Debtors) filed the attached Debtors Motion for an Order Pursuant to Sections 363(b)(1) and 503(c)(3) of the Bankruptcy Code Authorizing (I) Implementation of (A) Key Employee Retention Plan for Certain Non-Insiders and (B) A Key Employee Incentive Plan for Certain Insiders and (II) Payment of Any Obligations Arising Thereunder as Administrative Expenses (the Motion) with the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). A hearing to consider the Motion is scheduled for August 8, 2012 at 2:00 p.m. (prevailing
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Eastern Time) before the Honorable Martin Glenn, United States Bankruptcy Judge, in Courtroom 501 at the Bankruptcy Court, One Bowling Green, New York, New York 10004. PLEASE TAKE FURTHER NOTICE that any objection to the Motion must be in writing, conform to the Federal Rules of Bankruptcy Procedure, the Local Bankruptcy Rules for the Southern District of New York, and the Notice, Case Management, and Administrative Procedures approved by the Bankruptcy Court [Docket No. 141], be filed electronically by registered users of the Bankruptcy Courts electronic case filing system, and be served, so as to be received no later than August 1, 2012 at 4:00 p.m. (prevailing Eastern Time), upon (a) counsel for the Debtors, Morrison & Foerster LLP, 1290 Avenue of the Americas, New York, NY 10104 (Attn: Larren M. Nashelsky, Gary S. Lee and Lorenzo Marinuzzi); (b) the Office of the United States Trustee for the Southern District of New York, 33 Whitehall Street, 21st Floor, New York, NY 10004 (Attn: Tracy Hope Davis, Linda A. Riffkin and Brian S. Masumoto); (c) the Office of the United States Attorney General, U.S. Department of Justice, 950 Pennsylvania Avenue NW, Washington, DC 20530-0001 (Attn: US Attorney General, Eric H. Holder, Jr.); (d) Office of the New York State Attorney General, The Capitol, Albany, NY 12224-0341 (Attn: Nancy Lord, Esq. and Neal Mann, Esq.); (e) Office of the U.S. Attorney for the Southern District of New York, One St. Andrews Plaza, New York, NY 10007 (Attn: Joseph N. Cordaro, Esq.); (f) counsel for Ally Financial Inc., Kirkland & Ellis LLP, 153 East 53rd Street, New York, NY 10022 (Attn: Richard M. Cieri); (g) counsel to Barclays Bank PLC, as administrative agent for the DIP lenders, Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036 (Attn: Ken Ziman & Jonathan H. Hofer); (h) counsel for the committee of unsecured creditors, Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036 (Attn: Kenneth Eckstein & Greg Horowitz); (i)
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counsel for Nationstar Mortgage LLC, Sidley Austin LLP, One South Dearborn, Chicago, Illinois 60603 (Attn: Jessica C.K. Boelter); (j) Internal Revenue Service, P.O. Box 7346, Philadelphia, PA 19101-7346 (if by overnight mail, to 2970 Market Street, Mail Stop 5-Q30.133, Philadelphia, PA 19104-5016); and (k) Securities and Exchange Commission, New York Regional Office, 3 World Financial Center, Suite 400, New York, NY 10281-1022 (Attn: George S. Canellos, Regional Director). PLEASE TAKE FURTHER NOTICE that if an objection to the Motion is not timely filed and served, the Bankruptcy Court may enter an order granting the relief requested in the Motion without further notice or opportunity to be heard afforded to any party. Dated: July 17, 2012 New York, New York
/s/ Larren M. Nashelsky Larren M. Nashelsky Gary S. Lee Jamie A. Levitt Jordan A. Wishnew MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Counsel for the Debtors and Debtors in Possession
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Hearing Date: August 8, 2012 at 2:00 p.m. (ET) Objection Deadline: August 1, 2012 at 4:00 p.m. (ET) MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Larren M. Nashelsky Gary S. Lee Jamie A. Levitt Jordan A. Wishnew Counsel for the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) ) ) ) ) ) )
DEBTORS MOTION FOR AN ORDER PURSUANT TO SECTIONS 363(b)(1) AND 503(c)(3) OF THE BANKRUPTCY CODE AUTHORIZING (I) IMPLEMENTATION OF (A) A KEY EMPLOYEE RETENTION PLAN FOR CERTAIN NON-INSIDERS AND (B) A KEY EMPLOYEE INCENTIVE PLAN FOR CERTAIN INSIDERS AND (II) PAYMENT OF ANY OBLIGATIONS ARISING THEREUNDER AS ADMINISTRATIVE EXPENSES
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Filed 07/17/12 Entered 07/17/12 22:41:21 Pg 5 of 36 TABLE OF CONTENTS
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Page INTRODUCTION ......................................................................................................................... 2 BACKGROUND ........................................................................................................................... 5 A. B. C. Employees .............................................................................................................. 6 Employees Compensation .................................................................................... 7 The KEIP ............................................................................................................... 8 i. ii. D. KEIP Participants Compensation ................................................. 8 Structure Of The KEIP................................................................. 10
The KERP ............................................................................................................ 12
RELIEF REQUESTED ................................................................................................................ 13 BASIS FOR THE RELIEF REQUESTED .................................................................................. 13 I. THE KEIP SHOULD BE AUTHORIZED PURSUANT TO Bankruptcy Code SECTION 503(3) BECAUSE IT HAS A SOUND BUSINESS PURPOSE ................... 13 A. The KEIP Incentivizes the KEIP Participants to Effectuate a ValueMaximizing Sale of the Debtors Businesses for the Benefit of All Stakeholders ......................................................................................................... 14 The KEIP Should be Approved under Bankruptcy Code Section 503(c)(3) ....... 16 The KERP Participants are Not Insiders Under the Bankruptcy Code ................ 20 The KERP is Justified by the Facts and Circumstances of the Case ................... 22
B. II. A. B. III.
The KERP Should be Approved under Bankruptcy Code Section 503(c)(3) .................. 20
The KEIP and KERP Represent an Exercise of the Debtors Sound Business Judgment and Should be Approved under Section 363(b)(1) of the Bankruptcy Code ................................................................................................................................. 24
CONCLUSION ............................................................................................................................ 26
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TABLE OF AUTHORITIES Page(s) CASES In re Aerovox, Inc., 269 B.R. 74 (Bankr. D. Mass. 2001) .......................................................................................25 In re Allen Family Foods, Inc., No. 11-11764 (KJC) (Bankr. D. Del. July 13, 2011) ...............................................................18 In re Borders Group, Inc., 453 B.R. 459 (Bankr. S.D.N.Y. 2011) ............................................................................. passim In re Dana Corp., 358 B.R. 567 (Bankr. S.D.N.Y. 2006) ..................................................14, 17, 22 In re Diamond Glass, Inc., No. 08-10601 (CSS) (Bankr. D. Del. June 6, 2008) ................................................................17 In re Diamond Glass, Inc., No. 08-10601 (CSS) (Bankr. D. Del. May 8, 2008) ................................................................16 In re Global Grossing Ltd., 295 B.R. 726 (Bankr. S.D.N.Y. 2003) .....................................................................................25 In re Mesa Air Group, Case No. 10-10018 (MG), 2010 WL 3810899 (Bankr. S.D.N.Y. Sept. 24, 2010) ............13, 17 In re Metaldyne Corp., 409 B.R. 661 (Bankr. S.D.N.Y. 2009) .....................................................25 In re New Century TRS Holdings, Inc., Case No. 07-10416 (Bankr. D. Del. Apr. 24, 2007) ................................................................22 In re New Century TRS Holdings Inc., No. 07-10416 (KJC) (Bankr. D. Del. May 29, 2007) ..............................................................18 In re New Century TRS Holdings Inc., No. 07-10416 (KJC) (Bankr. D. Del. May 7, 2007) ..........................................................15, 16 In re Quigley Co., 437 B.R. 102 (Bankr. S.D.N.Y. 2010) .....................................................................................25 In re Velo Holdings, Inc., Case No. 12-11384 (MG) slip op. (Bankr. S.D.N.Y. June 6, 2012) ................14, 16, 17, 20, 21 Official Comm. of Unsecured Creditors v. LTV Corp. (In re Chateaugay), 973 F.2d 141 (2d Cir. 1992).....................................................................................................24
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Official Comm. of Subordinated Bondholders v. Integrate Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650 (S.D.N.Y. 1992)...........................................................................................24, 25 Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) .........................................................................24 STATUTES 11 U.S.C. 101(31) ...........................................................................................................13, 20, 21 11 U.S.C. 363 ...................................................................................................................... passim 11 U.S.C. 503(c) ................................................................................................................. passim OTHER AUTHORITIES BLACK'S LAW DICTIONARY 1193 (7th ed.1999) ...................................................................21
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TO THE HONORABLE MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE: The debtors and debtors in possession in the above-captioned cases (collectively, the Debtors)1 hereby move for entry of an order, pursuant to sections 363(b)(1) and 503(c)(3) of title 11 of the United States Code (the Bankruptcy Code), authorizing (i) implementation of (a) a key employee incentive plan for certain key executives (Key Employee Incentive Plan or KEIP) and (b) a key employee retention plan for certain non-insiders (Key Employee Retention Plan or KERP), and (ii) payment of any obligations arising thereunder as administrative expenses (the Motion). In support of the Motion, the Debtors rely upon and incorporate by reference (i) the Declaration of Ronald Greenspan (the Greenspan Decl., (ii) the Declaration of John Dempsey (the Dempsey Decl.) and the accompanying Report, attached thereto as Exhibit 1 (the Report), and (iii) the Declaration of Anne Janiczek (the Janiczek Decl., together with the Greenspan Decl. and the Dempsey Decl. the Supporting Declarations), each of which is being filed concurrently herewith. In further support of the Motion, the Debtors, by and through their undersigned counsel, respectfully represent: JURISDICTION 1. This Court has jurisdiction over this Motion under 28 U.S.C. sections 157 and
1334. Venue is proper under 28 U.S.C. sections 1408 and 1409. This is a core proceeding as defined in 28 U.S.C. section 157(b)(2). The statutory predicates for the relief requested herein are sections 363(b)(1) and 503(c)(3) of the Bankruptcy Code.
The names of the Debtors in these cases and their respective tax identification numbers are identified on Exhibit 1 to the Affidavit of James Whitlinger, Chief Financial Officer of Residential Capital, LLC, in Support of Chapter 11 Petitions and First Day Motions (the Whitlinger Affidavit) [Docket No. 6].
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INTRODUCTION 2. The Debtors primary and most valuable business operations consist of servicing
mortgage loans for investors, including loans originated by the Debtors, the Debtors non-debtor affiliate, Ally Bank, and other third parties. As of March 31, 2012, the Debtors were the fifth largest servicer of residential mortgage loans in the United States, servicing over 2.4 million domestic mortgage loans with an aggregate unpaid principal balance of approximately $374.2 billion. In addition, prior to the Petition Date (defined below), the Debtors and their non-debtor affiliates, including Ally Bank, were collectively the tenth largest originator of residential mortgage loans in the United States, producing approximately $56.3 billion and $8.6 billion in loan origination volume during the year ended December 31, 2011 and the three months ended March 31, 2012, respectively. 3. At this time, the Debtors have two separate asset purchase agreements
(collectively, the APAs) for the sale of substantially all of their assets. Nationstar Mortgage LLC (Nationstar) is the stalking horse bidder for the sale of the Debtors mortgage loan origination and servicing businesses (the Platform Sale), and Berkshire Hathaway Inc. (Berkshire, together with Nationstar, the Purchasers) is the proposed stalking horse bidder for the sale of the Debtors legacy portfolio consisting mainly of mortgage loans and other residual financial assets (the Legacy Sale, together with the Platform Sale, the Asset Sales). 4. As set forth in greater detail in the Whitlinger Affidavit, over the past several
years, the Debtors attempted going-concern sales of their businesses on several occasions, but the sales did not come to fruition. Whitlinger Affidavit 75. That makes the Asset Sales presently before the Court all the more critical to consummate. The Debtors must not only ensure that their businesses continue to operate in bankruptcy, but the Debtors management needs to ensure that upon closing of the Asset Sales, the Purchasers will be able to seamlessly 2
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take over the businesses without interruption of customer service. To that end, the Debtors must ensure that its employees work towards the collective goal of preserving and maximizing the value of the estates for the benefit of creditors. 5. As a service-driven business, the Debtors value is directly related to their
employees collectively providing first-class service to their customers, and that same level of outstanding customer service will undoubtedly be maintained during this bankruptcy. However, throughout this year, in addition to continuing to manage the day-to-day operations, the Debtors management team and key employees have taken on the additional task of simultaneously working with the Debtors professionals to market and consummate the Asset Sales that are expected to generate nearly $4 billion of value for Debtors estates. As a result, the restructuring and sale-related responsibilities borne by the Debtors management team and Key Employees (as defined herein) requires them to undertake significant additional tasks beyond the scope of their regular daily obligations. 6. In the months leading up to the Petition Date, the Debtors instituted a Business
Continuity Incentive Plan (BCIP), to ensure that their employees remained incentivized and focused throughout uncertain times and to manage the degree of employee attrition, especially in light of the additional tasks being asked of them during a time of substantial uncertainty. As the Debtors entered bankruptcy, they concluded that continuing the BCIP would be critical to maintaining employee morale and incentivizing employees in the face of additional responsibilities and uncertainty. The BCIP has been adapted to comply with the Bankruptcy Code and now takes the form of the plans described herein. The structure of the plan might appear different to the employee; however, the Debtors intend to deliver substantially similar economic benefits to its employees.
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7.
The KEIP provides 17 senior executives (the KEIP Participants) 2 with financial
incentives to compensate them for the extraordinary efforts being asked of them in these Chapter 11 cases. The incentives are tied to both the sale of the Debtors businesses and the achievement of certain financial and operational goals. The KEIP Participants consist of the senior management team3 who are collectively responsible for making the decisions that govern how the Debtors businesses are run on a daily basis. The financial and operational metrics are tailored to ensure that the KEIP Participants do not lose sight of the need to continue managing all of the components of the Debtors businesses, including those that are not being acquired by Nationstar or Berkshire under the APAs. The KEIP encourages these individuals to strive to improve the efficiency in the Debtors operations, meet financial goals, maintain and/or enhance the value of the Debtors businesses, and thereby preserve, and potentially enhance, the sale price for the benefit of all stakeholders. Without the proper incentives to motivate the KEIP Participants to take on the innumerable additional restructuring and sale-related duties, the Debtors businesses face a substantial risk of diminution in value. 8. The KERP is intended to provide a financial incentive to approximately 174 of
the Debtors more than 3,625 current employees (the Key Employees). The Key Employees have been identified by the Debtors senior management as necessary to execute the Debtors business plan, maintain operational stability throughout the sale processes, and transition the Debtors businesses as a going concern. The Key Employees provide critical services in areas such as finance, legal, origination, servicing, operations and technology, and they possess irreplaceable knowledge of the Debtors operations, their customers and the key functions
A list of the KEIP Participants and their respective titles will be provided to the Court, Office of the U.S. Trustee for the Southern District of New York (UST) and the Creditors Committee (as defined herein). The KEIP Participants do not include the Debtors Chief Executive Officer, President and Chief Capital Markets Officer.
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necessary to effectively operate the businesses up to and through the closing of the respective Asset Sales. As with the KEIP Participants, the Debtors stand to lose a significant amount of value if the Key Employees were to resign their positions. 9. As discussed in greater detail herein, the Debtors propose to make target
payments of $4.1 million under the KEIP and $10.8 million under the KERP.4 The total potential award payouts represent a reasonable amount, especially when compared with the combined stalking horse bids of nearly $4.0 billion. Accordingly, the Debtors submit that the KEIP and the KERP are justified by the facts and circumstances of these Chapter 11 cases and are in the best interests of the Debtors, their estates, and their creditors and should be approved by the Court. BACKGROUND 10. On May 14, 2012 (the Petition Date), each of the Debtors filed a voluntary
petition in this Court for relief under Chapter 11 of the Bankruptcy Code. The Debtors are managing and operating their businesses as debtors in possession pursuant to Bankruptcy Code sections 1107(a) and 1108. These cases are being jointly administered pursuant to Bankruptcy Rule 1015(b). No trustee has been appointed in these Chapter 11 cases. 11. On May 16, 2012, the United States Trustee for the Southern District of New
York appointed a nine member official committee of unsecured creditors (the Creditors Committee).
The target payments total $14.9 million; however, as noted herein, should new participants need to be added to the KEIP or KERP because of interim changes in the employee population, then the target payments would not exceed $15.9 million, which would be anticipated to be allocated $4.6 million to the KEIP and $11.3 million to the KERP. Janiczek Decl. fn. 5.
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12.
On June 20, 2012, the Court directed that an examiner be appointed [Docket No.
454], and on July 3, 2012, the Court approved Arthur J. Gonzalez as the examiner [Docket No. 674]. 13. On the Petition Date, the Debtors filed the Sale Motion5, and on June 28, 2012,
the Court entered an order approving the sale and bid procedures for the Asset Sales [Docket No. 62]. A. 14. Employees As of the Petition Date, the Debtors employed approximately 3,625 employees
(the Employees), of whom approximately 3,575 are full-time employees and approximately 50 are part-time employees. Janiczek Decl. 4. The Debtors also employ approximately 250 employees who earn wages primarily in the form of commissions and utilize the services of approximately 375 contract workers. Janiczek Decl. 4. 15. Potential bidders are in the process of conducting significant amount of due
diligence on both the Platform Sale and the Legacy Sale, for which Berkshire was only recently designated as the stalking horse bidder. See Greenspan Decl. 23. In addition to fulfilling their day-to-day operational obligations, the Key Employees and the KEIP Participants have been and will continue to be asked to simultaneously undertake the significant project of coordinating and responding to due diligence requests related to the Asset Sales. Greenspan Decl. 23. Further, the KEIP Participants and the Key Employees are continuing to assist the Debtors professionals in administering these Chapter 11 cases, including responding to numerous information requests
Debtors Motion Pursuant to 11 U.S.C. 105, 363(b), (f) and (m), 365 and 1123 and Fed R. Bank. P. 2002, 6004, 6006 and 9014 for Order: (A)(I) Authorizing and Approving Sale Procedures, Including Break-Up Fee and Expense Reimbursement; (II) Scheduling Bid Hearing and Sale Deadline; (III) Approving Form and Manner of Notice Thereof and (IV) Granting Related Relief and (B)(I) Authorizing the Sale of Certain Assets Free and Clear of Liens, Claims, Encumbrances, and Other Interests; (II) Authorizing and Approving Asset Purchase Agreements Thereto; (III) Approving the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases Related Thereto; and (IV) Granting Related Relief (the Sale Motion) [Docket No. 61].
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while also continuing to operate the Debtors businesses to maximize value for the Asset Sales. See Greenspan Decl. 24. B. 16. Employees Compensation Prior to the Petition Date, the vast majority of the employees received a portion of
their annual compensation in the form of variable pay awarded based on company, unit and individual performance targets established by management and approved by the compensation committee of the Debtors boards of directors (the Discretionary Variable Pay). Janiczek Decl. 5. Discretionary Variable Pay is generally paid in cash; however, as noted herein, certain Employees are required to receive less cash and have a portion of their Discretionary Variable Pay remitted in restricted AFI stock. Janiczek Decl. 7. Certain Employees receive Discretionary Variable Pay through participation in the Ally Financial Inc. Long-Term Equity Compensation Plan (the AFI LTECIP) and the Residential Capital, LLC (ResCap) Annual Incentive Plan (the ResCap AIP). 6 Janiczek Decl. 7. 17. Tying a portion of employees salaries to discretionary pay plans is typical in the
financial services industry and, therefore, the Debtors Employees generally view these programs as part of their base compensation and expect that they will receive some portion of incentive compensation. Janiczek Decl. 5. However, as described further below, because of the uncertainties associated with the bankruptcy and the sales of the businesses, and because the value of awards under the AFI LTECIP is tied to AFIs value, uncertainty exists as to the amount of Discretionary Variable Pay that Employees will ultimately realize. 18. In an effort to combat the uncertainty regarding the Debtors and their businesses
since the beginning of 2012, and to stem any resulting attrition, the Debtors took a proactive approach and implemented the BCIP during the first quarter of 2012. Janiczek Decl. 11. At
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Approximately 76 of the Debtors Employees are current participants in the AFI LTECIP. Janiczek Decl. 7.
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that point, it was still unclear whether the restructuring / sale of the Debtors would occur in Chapter 11. In formulating a restructuring strategy, employee and management stability was paramount. Janiczek Decl. 11. The Debtors are not seeking approval for the continuation of the BCIP within these cases; rather, the Debtors propose to replace the BCIP with the KEIP and KERP. Janiczek Decl. 12. The KEIP Participants and Key Employees are substantially similar to the participants under the BCIP. Janiczek Decl. 12. 19. As part of this Motion, the Debtors seek authority to have the necessary flexibility
to add new participants to the KEIP and KERP and adjust payments to Key Employees to reflect changes in job responsibility and employment terms. In the event the Debtors determine that the addition of a new participant is appropriate, they will provide the U.S. Trustee and the Creditors' Committee the name and title of the proposed Key Employee. The addition of new participants is not anticipated to result in either the KEIP or KERP exceeding the current estimated costs. C. The KEIP i. 20. KEIP Participants Compensation
On average, Discretionary Variable Pay historically comprised more than 50
percent of the KEIP Participants total annual compensation. Janiczek Decl. 5. As a result of AFI having received support under the federal governments troubled asset relief program (TARP), the Debtors (as indirect wholly-owned subsidiaries) have been required to adhere to specific compensation rules administered by the special paymaster appointed by the United States Treasury (the "Special Paymaster"). Janiczek Decl. 6. Since 2009, the compensation for those Employees that fall within AFIs next 757 most highly-compensated employees must
Under TARP, the Special Paymaster oversees the compensation structure for employees of a company that previously received TARP funds but has not yet repaid such funds. The Next 75 refers to employees whose total compensation ranks them amongst the 26-100 highest-paid employees at Ally Financial Inc. an its subsidiaries, including the Debtors.
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have their compensation structure reviewed and approved by the Special Paymaster.8 Janiczek Decl. 6. The pay structure approved by the Special Paymaster requires 50 percent of Discretionary Variable Pay to be in the form of equity that must be deferred for three years. Janiczek Decl. 6. Furthermore, of the 50 percent of Discretionary Variable Pay that is payable in cash, fifty percent must be deferred for one year (i.e., twenty-five percent of overall Discretionary Variable Pay). Janiczek Decl. 6. Therefore, over the past few years, the TARP restrictions have not allowed the KEIP Participants to immediately receive the full amount of their annual compensation. 21. In addition to having to defer a significant portion of the prior years
compensation, 50 percent or more of each KEIP Participants potential total annual compensation is at risk as a result of the Debtors filing for bankruptcy protection because the Discretionary Variable Pay Plans are just that, discretionary. The Debtors do not control awards that AFI grants under the AFI LTECIP, and it is uncertain if AFI will continue to make AFI LTECIP awards postpetition. Janiczek Decl. 10. Furthermore, the Debtors can not pay any Discretionary Variable Pay to the Employees without further order of the Bankruptcy Court.9 Therefore, it is difficult to assure the KEIP Participants of the amount of their Discretionary Variable Pay for 2012. 22. Consequently, the only guaranteed compensation for the KEIP Participants is
their base salary, which is approximately 50 percent of their compensation. Yet, the KEIP Participants are being asked to take on additional responsibilities with significant time
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Nine of the Debtors employees fall within AFIs 75 next most highly-compensated employees. See Final Order Under Bankruptcy Code Sections 105(a), 363(b), 507(a), 1107 and 1108 and Bankruptcy Rule 6003 (I) Authorizing But Not Directing Debtors to (A) Pay and Honor Prepetition Wages, Compensation, Employee Expenses and Employee Benefit Obligations; and (B) Maintain and Continue Employee Compensation and Benefit Programs; and (II) Directing Banks to Honor Prepetition Checks and Transfer Requests for Payment of Prepetition Employee Obligations entered by Judge Glenn on June 15, 2012 [Docket No. 386 at 4].
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commitments in order to consummate the Asset Sales and assist in the administration of the Chapter 11 proceedings. Thus, approving the KEIP is extremely important to ensuring the KEIP Participants remain motivated to commit the extraordinary time and effort required during these Chapter 11 cases. ii. 23. Structure Of The KEIP
The Debtors seek authorization to implement the KEIP for 17 key executives who
are critical to the Debtors ability to (a) manage the Debtors businesses during the pendency of the bankruptcy cases, (b) support an auction process to ensure the Debtors maximize the value of their businesses, (c) close the Asset Sales, (d) assist with the administration of the bankruptcy proceedings to achieve a successful restructuring and (e) transition the business over to the eventual Purchasers. The KEIP provides for performance-based incentive payments based on five separate milestones. 24. The size of a KEIP award is based on each KEIP Participants achievement of the
following milestones (the KEIP Milestones). As described further below, target Sales Awards (defined below) are intended to provide KEIP Participants with compensation consistent with market practice. See Dempsey Decl. 29. Certain payments are based upon achievement of the Asset Sales (the Sales Milestone).
Sales Milestone (70%)10 The Sales Milestone is deemed achieved, and a KEIP Participant will earn up to a total of 70% of the KEIP award, with the KEIP Participant vesting in 42% of the award upon closing of the Platform Sale and 28% upon closing of the Legacy Sale at the negotiated stalking horse sale prices, or higher and better offers approved by the court.11 90% of the Sales Milestone (the Threshold Sales Award) will be earned upon closing of each sale; and
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The Asset Sales, and the vesting of the awards, predicated on such sales, are intended to be treated separately. In the event that the Platform Sale closing occurs prior to the closing of the Legacy Sale, KEIP Participants will still be eligible to earn the Legacy Sale award if they accept employment with the buyer in the Platform Sale and leave the Debtors employ prior to the closing of the Legacy Sale. Greenspan Decl. fn. 3.
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10% of the Sales Milestone (the Target Sales Award) will be earned upon an auction of the Debtors assets that results in the closing of a sale with a higher and better offer than the stalking horse purchase price. KEIP Participants can achieve up to an additional 100% of the Target Award if the sale proceeds realized through the auction process exceeds the relevant stalking horse bid by 3%. The award level will be proportionate to the percentage of the potential 3% sale price increase actually achieved. Financial/Operational Performance Milestone (30%) Barclays DIP Covenant (10%) The DIP Covenant Milestone is achieved and a KEIP Participant will earn 10% of his/her target award provided the Debtors maintain compliance without being in default of the 20% Cash Flow Variance covenant (as such term is defined in the Barclays DIP financing agreement) through the earlier of (i) closing of the Platform Sale or (ii) payoff of the Barclays DIP. GSE Adherence (10%) The GSE Adherence Milestone is achieved and a KEIP Participant will earn 10% of his/her target award provided the Debtors maintain a year-todate top 3 Fannie Mae service ranking, measured as of the earlier of (i) closing of the Platform Sale or (ii) December 31, 2012. Performance Rating (10%) The Performance Rating Milestone is achieved and a KEIP Participant will earn 10% of his/her target award provided such participant achieves an Effective rating based on his/her overall individual performance for all goals, as determined by the Debtors compensation committee, measured as of the earlier of (i) closing of the Platform Sale or (ii) December 31, 2012.
Greenspan Decl. 34. 25. KEIP awards will vest upon the achievement of each KEIP Milestone and
payments will be made upon the earlier of (i) an Asset Sale closing and (ii) termination of the KEIP Participants employment.12 Greenspan Decl. 35. However, payment of 40% of the rested KEIP Awards will be deferred until the effective date of a confirmed plan of reorganization, or its equivalent. In addition, if a KEIP Participant:
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Through this structure, the Debtors seek to ensure that the Debtors funds are actually available to compensate the KEIP Participants for their efforts and that the Debtors estates do not unnecessarily incur an administrative expense.
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26.
is terminated for cause, the KEIP Participant will forfeit all vested and unvested awards; (ii) is terminated without cause, the KEIP Participant will receive all vested awards, but forfeit any unvested awards; or (iii) resigns, the KEIP Participant will receive any vested awards but will forfeit all unvested awards. The resulting total expected amount for all KEIP awards is approximately $4.1
(i)
million, with a potential payout of $7.0 million if the final sale proceeds exceeds anticipated sale proceeds by three percent or greater. Greenspan Decl. 34. D. 27. The KERP The Debtors also seek authorization to implement the KERP for 174 non-insider
Key Employees who are critical to the Debtors operations and their ability to support (a) the Debtors operations during these Chapter 11 cases, (b) the closing of the sale of the Debtors businesses and (c) the transition of the business over to the eventual buyers. See Greenspan Decl. 38. The KERP retention awards are intended to provide the Key Employees with a financial incentive to forgo seeking alternative employment during the Debtors bankruptcy proceeding. 28. The Debtors senior management have determined that each of the Key
Employees provide critical services in areas such as finance, legal, sales, operations and technology. Each of the Key Employees have been assigned to one of three tiers, based upon their business unit, job function and the roles they have been tasked with for the sale and transition of certain of the Debtors businesses as a going concern. 29. The KERP awards in the estimated aggregate amount of $10.8 million will vest
(i) 40% upon closing of the Legacy Sale and (ii) 60% upon closing of the Platform Sale, with payment made only after both closings have occurred. Greenspan Decl. 42.
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30.
Forfeiture of KERP awards will occur in the following manner, with Key
Employees (i) forfeiting all vested and unvested awards if terminated for cause, (ii) forfeiting no awards if terminated without cause and (iii) forfeiting only unvested awards if they resign. Greenspan Decl. 42. RELIEF REQUESTED 31. By this Motion, the Debtors seek entry of an order under Bankruptcy Code
section 503(c)(3) and, to the extent applicable, section 363(b)(1) of the Bankruptcy Code, authorizing (i) implementation of (a) the KERP and the KEIP, and (ii) payment of any obligations arising thereunder as administrative expenses. BASIS FOR THE RELIEF REQUESTED I. THE KEIP SHOULD BE AUTHORIZED PURSUANT TO BANKRUPTCY CODE SECTION 503(3) BECAUSE IT HAS A SOUND BUSINESS PURPOSE 32. The Debtors respectfully submit that the KEIP is governed by, and meets the
standards for approval under, section 503(c)(3) of the Bankruptcy Code. Key employee plans outside of the ordinary course and not governed by Bankruptcy Code section 363 must be analyzed under Bankruptcy Code section 503(c).13 See In re Borders Group, Inc., 453 B.R. 459, 470-71 (Bankr. S.D.N.Y. 2011); In re Mesa Air Group, Case No. 10-10018 (MG), 2010 WL 3810899 (Bankr. S.D.N.Y. Sept. 24, 2010).14 Bankruptcy Code section 503(c) restricts a debtors ability to treat certain payments to insiders as administrative expenses. Although the Debtors recognize that the KEIP Participants may be insiders, as defined in section 101(31) of the Bankruptcy Code, section 503(c) of the Bankruptcy Code does not bar approval of the KEIP.
13
14
The Debtors do not contend that the KEIP or KERP are ordinary course plans governed by Bankruptcy Code section 363. Due to the volume of the unreported orders cited herein, such orders are not annexed to the Motion. Copies of these orders (and, where cited material comes from motions and/or transcripts associated with the orders, copies of the relevant motions and/or transcripts) are being delivered to Chambers with copies of this Motion and will be made available to other parties in interest upon request to Debtors counsel.
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33.
Bankruptcy Code section 503(c)(1) restricts payments made to insiders of the
debtor for the purpose of inducing such person to remain with the debtors business i.e. those insider plans that are essentially pay to stay plans. In re Velo Holdings, Inc., Case No. 1211384 (MG) slip op. at 12-13 (Bankr. S.D.N.Y. June 6, 2012) (Docket No. 227); In re Borders Group, Inc., 453 B.R. at 471 (quoting In re Dana Corp., 358 B.R. 567, 571 (Bankr. S.D.N.Y. 2006) (Dana II)). 15 However, section 503(c) is not intended to foreclose a Chapter 11 debtor from reasonably compensating employees, including insiders, for their contribution to the debtors reorganization. In re Velo Holdings, Inc., slip op. at 12 (citing Dana II, 358 B.R. at 575). Instead, Debtors may implement incentive plans covering insiders that meet the requirements of Bankruptcy Code section 503(c)(3). See In re Borders Group, Inc., 453 B.R. at 471. 34. The Debtors businesses are highly people-intensive service businesses that derive
a substantial portion of their value from their employees. The KEIP is necessary to ensure that the Debtors employees remain motivated in these difficult and taxing times. Accordingly, the Debtors respectfully submit that the KEIP should be evaluated under Bankruptcy Code section 503(c)(3) and is justified by the facts and circumstances of the case. A. The KEIP Incentivizes the KEIP Participants to Effectuate a ValueMaximizing Sale of the Debtors Businesses for the Benefit of All Stakeholders The KEIP was carefully crafted to align the interests of the KEIP Participants
35.
with the interests of the Debtors stakeholders, by incentivizing the KEIP Participants to close the value-maximizing Asset Sales. Greenspan Decl. 19. A substantial portion of the KEIP Participants incentive payment i.e., 63% is contingent upon closing of the Asset Sales, with an
15
Section 503(c)(2) also restricts payments of severance to insiders. Because the KEIP does not propose to make any payments to insiders arising from termination of their employment with the Debtors, section 503(c)(2) is inapplicable.
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additional payout in the event the Asset Sales produce an auction process i.e., 7%. Greenspan Decl. 34. In sum, 70% of the overall KEIP award is tied to the disposition of the Asset Sales, and the KEIP Participants have the opportunity to achieve a higher award payment if the sale price improves. 36. Tying the KEIP Participants incentive pay to closing the Asset Sales will
encourage them to continue addressing the copious due diligence requests while also continuing to perform their day-to-day duties and all of the other restructuring related duties now being asked of them. Greenspan Decl. 42. At the same time, providing the KEIP Participants with the ability to share, in any increase in the purchase price received in the Asset Sales, will align the Debtors interest in achieving the highest and best offer for their assets with the creditors interest in maximizing the value of estate assets available for distribution to creditors. See Greenspan Decl. 42. 37. Likewise, the KEIP has been crafted to ensure that the KEIP Participants remain
incentivized to meet the types of financial and operational performance goals that they have historically strived to meet, which will ultimately benefit creditors through a further increased sale price, by tying 30% of the KEIP awards to the achievement of the Financial and Operations Milestones. Greenspan Decl. 34. 38. Courts have recognized the value of incentivizing a debtors senior-most
executives to address due diligence requests from a stalking horse and perform sale related activities that would not otherwise be within their normal job description. See Transcript of Hearing at 260, In re New Century TRS Holdings Inc., No. 07-10416 (KJC) (Bankr. D. Del. May 7, 2007) (Docket No. 1318) (court found it necessary to incentivize employees to perform activities that would not otherwise be within their normal job descriptions in order to perform
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functions necessary to close a sale to the stalking horse bidder and produce the most value for the estate.); see also In re Borders Group, Inc., 453 B.R. at 472. 39. The KEIP may have the incidental effect of encouraging the KEIP Participants to
remain with the Debtors; however, this does not change the analysis. See In re Velo Holdings Inc., slip. op. at 12-13 (explaining that the fact that a plan has same retentive effect does not mean that the plan, overall is retentive rather than incentivizing); In re Borders Group Inc., 453 B.R. at 471. Although the KEIP proposes to make payments upon a sale to the stalking horse bidder, this, in and of itself does not render the KEIP primarily retentive. See, e.g., Transcript of Hearing at 88-89, In re Diamond Glass, Inc., No. 08-10601 (CSS) (Bankr. D. Del. May 8, 2008) (Docket No. 255) (refusing to conclude that getting to a closing by a stalking horse bidder in and of itself was retentive.); Transcript of Hearing at 261, In re New Century TRS Holdings Inc. (explained that the timing of the request for relief and development of the sales, including putting a stalking horse in place prior to seeking approval of the plan was not reason alone to deny the relief and in fact was off the mark and wrong). 40. In sum, the KEIP was carefully crafted to ensure that the KEIP Participants are
incentivized to work toward several objectively verifiable goals intended to maximize the value of the Debtors estates for all creditors. As a result, the KEIP is an incentive plan and Bankruptcy Code section 503(c)(1) does not apply. B. 41. The KEIP Should be Approved under Bankruptcy Code Section 503(c)(3) Bankruptcy Code section 503(c)(3) governs incentive compensation plans like the
KEIP. In re Borders Group, Inc., 453 B.R. at 471 (concluding that a proposed KEIP was an incentive plan, thus alleviating the need for a section 503(c)(1) analysis, and instead analyzing the KEIP under section 503(c)(3)). Bankruptcy Code section 503(c)(3) precludes transfers or obligations that are outside of the ordinary course of business and not justified by the facts and 16
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circumstances of the case. . . 11 U.S.C. 503(c)(3). The facts and circumstances of the case, test in section 503(c)(3) is no different than the business judgment standard under section 363(b). In re Borders Group, Inc., 453 B.R. at 473; see also In re Velo Holdings Inc., slip. op. at 17; In re Mesa Air Group, Inc., 2010 WL 3810899, at **3 (Bankr. S.D.N.Y. Sept. 24, 2010). In determining whether a compensation proposal meets the requirements of Bankruptcy Code section 503(c)(3), courts consider several factors, including: Is there a reasonable relationship between the plan proposed and the results to be obtained, i.e., will the key employee stay for as long as it takes for the debtor to reorganize or market its assets, or, in the case of a performance incentive, is the plan calculated to achieve the desired performance? Is the cost of the plan reasonable in the context of the debtors assets, liabilities and earning potential? Is the scope of the plan fair and reasonable; does it apply to all employees; does it discriminate unfairly? Is the plan or proposal consistent with industry standards? What were the due diligence efforts of the debtor in investigating the need for a plan; analyzing which key employees need to be incentivized; what is available; what is generally applicable in a particular industry? Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the incentive compensation?
Dana II, 358 B.R. at 576-77 (emphasis in original); see also In re Borders Group, Inc., 453 B.R. at 474-77 (applying Dana II factors). The KEIP satisfies each of these requirements and should be approved pursuant to Bankruptcy Code section 503(c)(3). 42. Courts in this and other districts regularly approve incentive plans with features
similar to the KEIP. See, e.g., In re Velo Holdings, Inc., Case No. 12-11384 (MG) (June 6, 2012) (Docket No. 232) (approving sale related incentive plan based upon DIP budget goals); In re Borders Group, Inc., 453 B.R. at 465 (approving a key employee incentive plan covering fifteen key executives and their achievement of transactional and financial goals); In re Diamond 17
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Glass, Inc., No. 08-10601 (CSS) (Bankr. D. Del. June 6, 2008) (Docket No. 312) (approving sale incentive plan for twenty-one employees, including insiders, portion of plan pool funding upon consummation of a sale to the stalking horse prepetition lender); In re Allen Family Foods, Inc., No. 11-11764 (KJC) (Bankr. D. Del. July 13, 2011) (Docket No. 173) (same); In re New Century TRS Holdings Inc., No. 07-10416 (KJC) (Bankr. D. Del. May 29, 2007) (Docket No. 896) (approving a sale incentive plan payable for consummating a sale to a stalking-horse bidder at the stalking horse bid). 43. First, the KEIP is calculated to align the interests of the KEIP Participants and the
Debtors stakeholders. Greenspan Decl. 17. As described above, the Debtors believe that including both (i) objective Asset Sale related and (ii) financial and operations milestones in the KEIP strikes the proper balance between encouraging the KEIP Participants to expeditiously work toward a sale and also providing the KEIP Participants with an incentive to seek to obtain higher and better offers to maximize the value of the estates for the benefit of all creditors. Moreover, the KEIP is critical to keeping the KEIP Participants motivated and maintaining morale by providing them with the opportunity to replace the prepetition BCIP plan. 44. Second, the cost of the KEIP is reasonable and consistent with (or even below)
industry standards, particularly when compared with the Debtors revenues and the aggregate of the stalking horse bids for the Asset Sales. In total, the Debtors propose to pay a maximum of $7 million under the KEIP, or 0.18% of expected proceeds from the Asset Sales, which is well below the 0.68% cost/proceeds average for comparable programs. Report at 4. Indeed, the total potential KEIP award, as a percentage of sales proceeds, falls well below the 25th percentile of KEIP plans in comparable bankruptcy cases. See Dempsey Decl. 19; Report at 4. Additionally, Target Sales Awards are reasonable as compared to comparable KEIP plans. They
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range from 52% to 117% of base salary, with an average target award of $241,353. Greenspan Decl. 34. 45. In sum, the Debtors believe that despite the limited precedent for transactions of
the size and complexity presented here, they have designed a compensation structure that is reasonable and well within market standards for the industry and companies in Chapter 11. 46. Third, the scope of the KEIP is fair and reasonable, as it applies to the 17 senior
executives (excluding the CEO, President and Chief Capital Markets Officer) out of an employee population of over 3,600. The Debtors have identified these individuals as the primary decisionmakers whose decisions affect the direction of the Debtors businesses and that are therefore, critical to achieving the objective of closing the Asset Sales. Greenspan Decl. 17. The KEIP Participants represent only 0.4% of the prepetition employee population, and are critical to keeping the staff motivated and engaged. Janiczek Decl. 13. Additionally, Purchasers of the Debtors assets have expressed their opinion that they are impressed by the Debtors management team. Greenspan Decl. 20. As a result, losing these critical senior employees could result in bidders negatively adjusting their purchase prices. Dempsey Decl. 7. 47. Fourth, the KEIP was devised after extensive due diligence. FTI assisted the
Debtors in devising the KEIP after carefully reviewing incentive plans instituted by comparable companies in Chapter 11 and compensation plans of executives both in and out of bankruptcy. The Debtors and their professionals also conducted extensive analyses of incentive-based plans in complex Chapter 11 cases. Ultimately, after reviewing the results of the due diligence produced by FTI and Mercer, the compensation committee of the Debtors board of directors determined that the KEIP was appropriate, reasonable in cost and scope, and reasonably calculated to achieve the Debtors goals.
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48.
Finally, in addition to consulting with FTI and Mercer, the Debtors engaged
counsel in discussions regarding the need for the KEIP, its scope, and its terms and tapped into counsels experience in negotiating and devising incentive plans on behalf of both debtors and official creditors committees. 49. In sum, the KEIP is necessary to encourage each of the KEIP Participants to work
toward the Debtors ultimate goal maximizing the estates value for the benefit of the Debtors stakeholders through a sale of the Debtors businesses as a going concern. Accordingly, the KEIP is justified by the facts and circumstances of these Chapter 11 cases and should be approved under section 503(c)(3). II. THE KERP SHOULD BE APPROVED UNDER BANKRUPTCY CODE SECTION 503(C)(3) 50. The KERP is a pay-to-stay retention program structured to retain the Key
Employees through the closing of the going concern Asset Sales. This Court has recognized that, as an initial matter, the Court must determine whether each eligible key employee under a key employee plan is an insider within the meaning of section 101(31). In re Borders Group, Inc., 453 B.R. at 467. Should a court determine that an employee is an insider, the employee may be prevented from participating in a retention plan such as the KERP. See id. However, to the extent that a key employee plan applies only to non-insiders, courts analyze the propriety of the plan under Bankruptcy Code section 503(c)(3). Id. at 473. A. 51. The KERP Participants are Not Insiders Under the Bankruptcy Code The term insider is defined in Bankruptcy Code section 101(31)(B) to include,
among others: officers, directors, and persons in control of a corporate debtor. However, insider status can also be determined on a case-by-case basis from the totality of the circumstances, including the degree of an individuals involvement in a debtors affairs. In re
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Velo Holdings, slip op. at 10. In such cases, insiders must have at least a controlling interest in the debtor or . . . exercise sufficient authority over the debtor so as to unqualifiably dictate corporate policy and the disposition of corporate assets. Id. (citation omitted) 52. Neither officer nor director is defined in the Bankruptcy Code. However, this
Court has concluded that with respect to Bankruptcy Code section 101(31)(b)(i) director means an individual who sits on the board of directors of a corporation. In re Borders Group, Inc., 453 B.R. at 468. The term officer in Bankruptcy Code section 101(31) includes those persons elected or appointed by the board of directors to manage the daily operations of a corporation, such as the CEO, president, secretary, or treasurer. Id. (quoting BLACK'S LAW DICTIONARY 1193 (7th ed.1999)). However, an individuals title, by itself, is insufficient to establish that an individual is a director or officer. In re Borders Group, Inc., 453 B.R. at 46869. Instead, courts must look at the role of the employees on a case-by-case basis to determine if, for instance, the employee has the authority to implement company policy or whether the employee reports directly to a companys board of directors. See Id. at 469. 53. While developing the KEIP and KERP, the Debtors extensively reviewed their
critical employees to determine who would constitute insiders under the Bankruptcy Code and excluded those employees from the KERP. As described further in the Janiczek Declaration, the Debtors analysis concluded that although a number of Key Employees held officer titles for client-facing purposes, the Key Employees functional title was a more accurate reflection of their overall responsibilities within the mortgage operations business segment. Janiczek Decl. 18. For example, many loan officers have the title of Vice President or higher in order to compete for business, but do not, in fact, possess any management or business policy-making authority. Janiczek Decl. 18. Likewise, these individuals have little, if any, ability to dictate
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overall company policy. Janiczek Decl. 18. Accordingly, the Debtors submit that none of the Key Employees is an insider within the meaning of Bankruptcy Code section 101(31). See In re Borders Group, Inc., 453 B.R. at 469 (noting that companies often give employees the title director or director-level, but do not give them decision-making authority akin to an executive and concluding that certain director-level employees in that case were not insiders); Transcript of Hearing at 67-68, In re New Century TRS Holdings, Inc., Case No. 07-10416 (Bankr. D. Del. Apr. 24, 2007) (acknowledging the debtors argument, in the bankruptcy of another mortgage servicer, that every bank has enumerable Assistant Vice Presidents, Vice Presidents who have very limited authority and concluding that these employees were not insiders). Under this analysis, the Key Employees are not insiders. B. 54. The KERP is Justified by the Facts and Circumstances of the Case Because none of the Key Employees is an insider under the Bankruptcy Code,
the Bankruptcy Court need only determine whether the KERP satisfies section 503(c)(3) of the Bankruptcy Code. See In re Borders Group, Inc., 453 B.R. at 473. For the same reasons set forth above regarding the KEIP, as well as those described below, the KERP satisfies each of the Dana II factors, and the Debtors therefore submit that the facts and circumstances of the case justify that the KERP be approved. 55. The Key Employees represent a critical sub-set of the employee population who
are each necessary to ensure an efficient bankruptcy sale process and transition phase to the new operating entity. Janiczek Decl. 14. The KERP provides for the Key Employees retention payments based upon closing of the Asset Sales, with awards vesting as they are earned upon a closing of the respective Asset Sale. As such, the KERP awards provide an essential motivation to the Key Employees to refrain from seeking alternative employment prior to the completion of the Asset Sales. 22
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56.
The Debtors workforce has already been reduced by almost two-thirds over the
past four years. Janiczek Decl. 11. The Key Employees are critical to the Debtors ability to maintain stable operations throughout the sale and transition of the business. The Key Employees have unique and vital knowledge of the Debtors business operations that are critical to the businesses long-term success. Janiczek Decl. 14. The Debtors business operates in a highly competitive market. If the Key Employees were to resign, the loss of their experience during this critical time would result in an overall diminution in value of the Debtors businesses. Dempsey Decl. 7. Moreover, at least two factors will almost certainly render replacing the Key Employees exceedingly difficult, including: (i) the degree of training necessary to process loan files in accordance with regulatory frameworks in place and (ii) increased hiring by competitors to staff for (a) record loan production volume resulting from low interests and (b) loan file reviews required under governmental settlements. Janiczek Decl. 14. Accordingly, the KERP will assist the Debtors in achieving their overarching goal of preventing the Key Employees from seeking alternative employment options, which could result in the loss of valuable institutional knowledge and thereby place additional hurdles in the Debtors ability to execute the Asset Sales. 57. Additionally, the KERP is reasonable in cost and in relation to market,
particularly when compared with the Debtors revenues and sale price. In total, the Debtors propose to pay approximately $10.8 million under the KERP,16 or 0.28% of expected sales proceeds, which is below the median of 0.67% cost/proceeds average for comparable programs (when normalized for size). Report at 5. As with the KEIP, the total cost of the KERP falls well below the 25th percentile of KERP plans in comparable bankruptcy cases. Dempsey Decl. 22.
16
Notwithstanding the results of this analysis, the Debtors have requested authority to add participants to the extent employees resign.
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58.
In addition, the scope of the KERP is also fair and reasonable. It applies to only
174 of 3,625 employees, which falls within the range of market practice, especially given the large size of the Debtors operations and the wide range of business functions served by the Key Employees. Report at 5. 59. Finally, the Debtors utilized and performed the same careful and thorough
analysis, with the same assistance and counsel of their professionals, in developing the KERP as they did with the KEIP. See Greenspan Decl. 13. 60. Accordingly, the Debtors respectfully submit that the KERP is justified by the
facts and circumstances of the Debtors Chapter 11 cases, and that implementation of the KERP is in the best interests of the Debtors, their estates, creditors, and all other stakeholders. III. THE KEIP AND KERP REPRESENT AN EXERCISE OF THE DEBTORS SOUND BUSINESS JUDGMENT AND SHOULD BE APPROVED UNDER SECTION 363(B)(1) OF THE BANKRUPTCY CODE 61. To the extent applicable, the KEIP and the KERP should also be approved under
Bankruptcy Code section 363(b)(1). Bankruptcy Code section 363(b)(1) provides that a debtorin-possession, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. . . 11 U.S.C. 363(b)(1). Use of estate property outside the ordinary course of business is entrusted to the sound business judgment of a debtor. See e.g. Official Comm. of Unsecured Creditors v. LTV Corp. (In re Chateaugay), 973 F.2d 141, 143 (2d Cir. 1992); In re Borders Group, Inc., 453 B.R. at 473. The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the company. Official Comm. of Subordinated Bondholders v. Integrate Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)). 24
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62.
The business judgment rule applies in Chapter 11 cases and shields a debtors
management from judicial second-guessing. See Integrated Res., 147 B.R. at 656; see also, e.g., In re Quigley Co., 437 B.R. 102, 157 (Bankr. S.D.N.Y. 2010) (citing In re Metaldyne Corp., 409 B.R. 661, 667-68 (Bankr. S.D.N.Y. 2009). Indeed courts are loath to interfere with corporate decisions absent a showing of bad faith, self-interest, or gross negligence. In re Quigley Co., 437 B.R. at 157 (quoting In re Integrated Res., Inc., 147 B.R. at 656). Consequently, a debtors business decision should be approved by the court unless it is shown to be so manifestly unreasonable that it could not be based upon sound business judgment, but only on bad faith, or whim or caprice. In re Aerovox, Inc., 269 B.R. 74, 80 (Bankr. D. Mass. 2001) (internal quotations omitted); cf. In re Global Grossing Ltd., 295 B.R. 726, 742 (Bankr. S.D.N.Y. 2003) (citing Aerovox with approval). Moreover, parties opposing the proposed exercise of a debtors business judgment have the burden of rebutting the presumption of validity. In re Integrated Res., Inc., 147 B.R. at 656. 63. As set forth above, the Debtors decision to implement the KEIP and KERP is a
valid exercise of their business judgment. The scope of the KEIP and KERP is fair, reasonable, and narrowly tailored to include only those employees most critical to achieving a closing of the Asset Sales and administration of these Chapter 11 proceedings. The Key Employees and KEIP Participants have been working in a difficult environment with uncertainty surrounding the Debtors future prospects and will continue to do so during the Debtors Chapter 11 cases. Additionally, the KEIP is specifically designed to encourage the KEIP Participants to continue their day-to-day responsibilities while making a substantial additional time commitment to maximizing the value received in the Asset Sales for the benefit of the Debtors estates.
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64.
Accordingly, the Debtors have determined, in their business judgment, that the
KEIP and KERP are necessary, appropriate, and reasonable in terms of both scope and cost. NOTICE 65. The Motion is being served in a manner consistent with the Courts Case
Management Procedures Order [Docket No. 141]. NO PRIOR MOTION 66. No previous motion requesting the relief sought herein has been made to this or
any other Court. CONCLUSION The Debtors respectfully submit that the KEIP and KERP are justified by the facts and circumstances of these cases, represent a valid exercise of their business judgment, and are necessary and in the best interest of the Debtors, their creditors, and their estates. Accordingly, the KEIP and KERP should be approved, along with any obligations arising thereunder, pursuant to section 503(c)(3) of the Bankruptcy Code and, to the extent applicable, Bankruptcy Code section 363(b). Dated: July 17, 2012 New York, New York
/s/ Larren M. Nashelsky Larren M. Nashelsky Gary S. Lee Jamie A. Levitt Jordan A. Wishnew MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Counsel for the Debtors and Debtors in Possession 26
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) ) ) ) ) ) )
ORDER (I) APPROVING THE DEBTORS KEY EMPLOYEE RETENTION PLAN FOR CERTAIN NON-INSIDERS AND KEY EMPLOYEE INCENTIVE PLAN FOR CERTAIN INSIDERS AND (II) PAYMENT OF ANY OBLIGATIONS ARISING THEREUNDER AS ADMINISTRATIVE EXPENSES Upon consideration of the Debtors motion (the Motion) 1 for entry of an order approving the implementation of a key employee retention plan for certain non-insiders (the KERP), a key employee incentive plan for certain insiders (the KEIP) and the treatment of the payment of any obligations arising thereunder as administrative expenses; and jurisdiction existing for the Court to consider the motion; and after due deliberation thereon; and the relief requested therein being a core proceeding pursuant to 28 U.S.C. 157(b); and venue being proper before this Court pursuant to 28 U.S.C. 1408 and 1409; and it appearing that notice of the Motion was adequate and proper under the circumstances of these cases and that no further or other notice need be given; and the Court having found that good and sufficient cause exists for granting the Motion; and upon consideration of the Janiczek Declaration, the Greenspan Declaration and the Dempsey Declaration; and upon the files and records in these cases; and upon the arguments and statements in support of the Motion presented at the hearing before the
Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion.
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Court; and it appearing that the relief requested is in the best interests of the Debtors estates, their creditors, and other parties-in-interest; it is hereby: ORDERED that the Motion is granted; and it is further ORDERED that, pursuant to Bankruptcy Code sections 363(b)(1) and 503(c)(3), the KERP and the KEIP are approved in their entirety and the Debtors are authorized to implement the KERP and the KEIP upon the terms described in the Motion and to make payments contemplated thereunder; and it is further ORDERED that the authorization granted hereunder to make payments to the KEIP Participants under the KEIP and the Key Employees under the KERP shall not create any obligation on the part of the Debtors or their officers, directors, attorneys or agents to make payments under the KEIP or the KERP unless the KEIP Participants and the Key Employees meet the necessary milestones as described in the Motion; and it is further ORDERED that the Debtors are authorized to change the KERP to adjust individual budgeted awards and to add/remove employees due to attrition or otherwise; provided, however, that the Debtors shall provide reasonable notice to the Office of the U.S. Trustee and the Creditors Committee of the identity of any employees added to or removed from the KERP; and is further ORDERED that the Debtors are authorized to take all actions necessary to effectuate the relief granted pursuant to this Order in accordance with the Motion; and it is further ORDERED that the terms and conditions of this Order shall be immediately effective and enforceable upon entry of this Order; and it is further ORDERED that notwithstanding anything herein to the contrary, this Order shall not modify or affect the terms and provisions of, nor the rights and obligations under, (a) the Board
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of Governors of the Federal Reserve System Consent Order, dated April 13, 2011, by and among Ally Financial Inc., Ally Bank, Residential Capital LLC, GMAC Mortgage, LLC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, (b) the consent judgment entered April 5, 2012, by the District Court for the District of Columbia, dated February 9, 2012, (c) the Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as amended, dated February 10, 2012, and (d) all related agreements with Ally Financial Inc. and Ally Bank and their respective subsidiaries and affiliates; and it is further ORDERED that this Court shall retain jurisdiction over all matters arising from or related to the interpretation and implementation of this Order. Dated: August __, 2012 New York, New York THE HONORABLE MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE
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Filed 07/17/12 Entered 07/17/12 22:41:21 of John Dempsey Pg 1 of 26
Declaration
DECLARATION OF JOHN DEMPSEY IN SUPPORT OF DEBTORS MOTION FOR AN ORDER PURSUANT TO SECTIONS 105(a), 363(b)(1) AND 503(c)(3) OF THE BANKRUPTCY CODE AUTHORIZING (I) IMPLEMENTATION OF (A) A KEY EMPLOYEE RETENTION PLAN FOR CERTAIN NON-INSIDERS AND (B) A KEY EMPLOYEE INCENTIVE PLAN FOR CERTAIN INSIDERS AND (II) PAYMENT OF ANY OBLIGATIONS ARISING THEREUNDER AS ADMINISTRATIVE EXPENSES I, John Dempsey, hereby declare that the following is true and correct to the best of my knowledge, information and belief: 1. I am a Partner at Mercer (US) Inc. (Mercer). My business address is 155 North
Wacker Drive, Suite 1500, Chicago, Illinois 60606. Mercer is a global professional compensation services firm that was engaged by the above-captioned debtors and debtors in possession (the Debtors). 2. I respectfully submit this declaration (the Declaration) in support of the
Debtors Motion for an Order Pursuant to Sections 105(a), 363(b)(1) and 503(c)(3) of the Bankruptcy Code Authorizing (I) Implementation of (A) a Key Employee Retention Plan for Certain Non-Insiders and (B) a Key Employee Incentive Plan for Certain Insiders and (II) Payment of Any Obligations Arising Thereunder as Administrative Expenses, filed contemporaneously herewith.
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Background Information and Qualifications 3. I joined Mercer following my graduation from Yale University, and have worked
in the firms Chicago, Cleveland and London offices. I received an MBA in 1992 from the Ohio State University. I have been a Principal or Partner at Mercer for approximately 12 years. 4. I have extensive experience advising organizations undergoing major financial
transitions (including bankruptcies, IPOs, LBOs, and acquisitions) regarding compensation issues, and also have extensive experience with designing annual and multi-year incentive programs, change in control arrangements, and employment agreements. My recent bankruptcyrelated engagements include Borders Group, Nortel Networks, Tribune Company, Aleris, Charter Communications, Masonite, CIT Group, Capmark, Fairpoint, Caraustar, Adelphia Communications (Creditors Committee), R.H. Donnelley, Freedom Communications, Stallion, Dana, Owens Corning, Kaiser Aluminum, Solutia, Oglebay Norton, Citation, Intermet, Venture Holdings, Alterra, EaglePicher, Allied Holdings, Mesaba Aviation, and FLAG Telecom. I have also worked on restructuring issues with Georgia Gulf, ABN AMRO, US Foodservice, Barrick Gold, Manulife, CareMark Rx, Archipelago, and Sky Financial. 5. Additionally, I published an article entitled Bankruptcy Blues: Retaining Key
Employees During a Financial Crisis with Michael Siebenhaar in the February 2002 issue of Workspan, and an update, The New Challenge of Chapter 11, with Elizabeth Stephens in August 2008. I have been frequently quoted on issues relating to effective transitional compensation practices in such publications as HR Magazine, Cox News, and the Atlanta Journal Constitution. In addition, I have been quoted in the Dallas Morning News, the Chicago Tribune, and the Milwaukee Journal Sentinel. I have also presented at the National Meeting of the Conference Board, the National Association of Stock Plan Professionals, and the National Center for Employee Ownership. 2
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6.
I testified as an expert in connection with (i) a renewal of the KERP of Owens
Corning on September 8, 2004, (ii) the approval of Citation Corporations KERP on November 4, 2004, (iii) the approval of Intermet Corporations KERP on December 22, 2004, (iv) the approval of Venture Industries KERP on March 10, 2005, (v) the approval of Allied Holdings KERP on October 11, 2005, and (vi) Nortel Networks KERP on February 5, 2009. In addition, my testimony was proffered, or submitted by declaration, and accepted in connection with (i) the approval of Olgebay Nortons KERP in 2004; (ii) the approval of EaglePichers KERP on August 9, 2005, (iii) the approval of Danas director compensation program in 2006, (iv) the approval of the continuation of Mesabas Incentive and Severance plans in 2006, and (v) the approval of the Borders Group KEIP and KERP in 2011. In 2010, my testimony was proffered and accepted in connection with the approval of Nortels Special Incentive Plan and Tribunes 2010 Management Incentive Plan. On March 11, 2011, my testimony was proffered and accepted during Tribunes confirmation hearing. B. Overview of the Plans 7. As a result of the ongoing bankruptcy proceedings and the financial uncertainty of
Residential Capital, LLC and its debtor subsidiaries (the Debtors or the Company) both before and during the bankruptcy process, employees of the Debtors have assumed responsibilities above their normal duties, as well as have been subjected to extraordinary stress, pressure, and uncertainty as to the security of their jobs. These factors are above and beyond the normal scope of these employees positions with the Company and have resulted in employees of all levels leaving the Company for other opportunities. Given the importance of the Companys workforce to the success and value of the Company, retaining and motivating these employees has surfaced as a paramount concern of the Debtors. A loss of key talent would not only jeopardize the ability of the Company to function effectively and succeed, but it would also have 3
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a tangible negative impact on the value of the Company being assumed by interested parties in the sale process and thus the value the Company is able to deliver to the creditors. Furthermore, given the companys current status and the uncertainty surrounding its future, it would be near impossible to recruit a similar caliber of talent to replace any lost employees. In light of this important issue, the Debtors have, in coordination with counsel and an outside professional consulting firm, designed and propose to put in place two key employee plans aimed at retaining and incentivizing the key members of the Company. The first of these plans is the Key Employee Incentive Plan (the KEIP), which is an incentive-based plan for 17 insiders of the company excluding the Chief Executive Officer, President and Chief Capital Markets Officer. The second of these plans is the Key Employee Retention Plan (the KERP), which is a retention-based plan for 174 employees across all key functions of the Company. It is my belief that these plans as currently designed will effectively serve the purpose of retaining and motivating the key talent upon which the Company relies, and thus preserve the value of the Company for the benefit of the creditors. 8. The possible payouts under the KEIP and the KERP are below, as expressed as a
percentage of the applicable employees base salaries. For the purposes of determining plan eligibility, participating employees were classified into four tiers based on level in the organization and criticality to the organization. Tier I employees are included in the KEIP, while Tier II IV employees are included in the KERP. Tier Plan Number of Executives 17 68 96 10 191 4
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KEIP KERP KERP KERP -
KEIP/KERP Target (average % of base salary) 80% 54% 39% 13% 52%
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C.
The KEIP 9. The KEIP provides potential performance incentives for seventeen (17) of the
Debtors key executives (collectively, the KEIP Participants), in the event they achieve specific financial/operational and sale-related goals. It is noteworthy that the Debtors Chief Executive Officer, President and Chief Capital Markets Officer are not among the KEIP Participants. Mercer reviewed the cost and terms of the Debtors proposed KEIP in aggregate and by participant in the context of the anticipated performance to ensure conformity with the market. 10. The KEIP includes potential awards (the KEIP Awards) in connection with five
milestones, generally falling within two categories. The first two, accounting for 70% of each KEIP Participants target award, is the Sales Milestone. The 70% Sales Milestone is divided among the two simultaneous sales of the Debtors assets, in proportion to their respective sizes: 42% to the Nationstar Sale Metric and 28% to the Berkshire Sale Metric. For each of the Sales Milestones, each KEIP Participant will receive the greater of (i) 90% of the target Sales Milestone KEIP Award upon a closing of a sale of substantially all of the Debtors assets (the Closing), (ii) 100% of the target Sales Milestone KEIP Award upon a Closing after an auction, and (iii) 200% of the target Sales Milestone KEIP Award upon a Closing in which the sale proceeds realized through the auction process exceed the Purchase Price by up to three percent (3%). 11. The second category of milestones includes Financial and Operational
Performance Milestones. The KEIP provides awards amounting to 10% of each KEIP Participants target award for meeting each of three Financial and Operational Performance Milestones, including: (i) a DIP Covenant Milestone achieved by maintaining compliance with 5
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the 20% cash flow variance covenant described in section 5.02(b) of the DIP Agreement attached as Exhibit B to the Debtors Motion for Interim and Final Orders Pursuant to 11 U.S.C. 105, 362, 363(b)(1), 363(f), 363(m), 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e) and Bankruptcy Rules 4001 and 6004 (i) Authorizing the Debtors to (A) Enter into and Perform Under Receivables Purchase Agreements and Mortgage Loan Purchase and Contribution Agreements Relating to Initial Receivables and Mortgage Loans and Receivables Pooling Agreements Relating to Additional Receivables, and (B) Obtain Postpetition Financing on a Secured, Superpriority Basis, (ii) Schedule a Final Hearing Pursuant to Bankruptcy Rules 4001(b) and 4001(c) and (iii) Granting Related Relief [D.I. 13] through the date of a Closing; (ii) achieving a year-to-date Top 3 Fannie Mae servicer ranking, measured as of the earlier of (a) a Closing or (b) December 31, 2012, and (iii) achievement of an Effective performance rating for all applicable organizational goals in the period leading up to a Closing, with such goals and performance approved and assessed by the compensation committee of the Debtors Board of Directors. 12. Assuming target performance, the KEIP will cost approximately $4.1 million,
with a maximum cost of approximately $7 million. The amount of the KEIP Awards would be determined upon the date that each milestone is achieved and vests. The KEIP Awards would be paid upon the earlier of (i) a Closing and (ii) a KEIP Participants termination. Notwithstanding the preceding provisions, payment of 40% of the vested awards will be deferred until the Effective Date of the Plan of Reorganization, or its equivalent. 13. However, the KEIP Awards are subject to several limiting conditions if the KEIP
Participant leaves prior to a Closing. First, KEIP Participants terminated for cause will not receive a KEIP Award. Next, KEIP Participants terminated without cause will receive any
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vested KEIP Award, and will forfeit any unvested portions of the KEIP Award. Finally, KEIP Participants resigning prior to the Closing will receive any vested KEIP Award but will forfeit any unvested portion. D. The KERP 14. The KERP provides retention incentives for approximately one-hundred seventy
four (174) employees who are critical to the Debtors reorganization and to ongoing business (the Key Employees), and who are of high talent and would be difficult, if not impossible, to re-recruit in the current market, given the Debtors current circumstances. The Key Employees consist of (i) approximately 68 critical manager and director level employees across all key functions of mortgage operations (Tier II Employees), (ii) 96 critical employees supporting key functions throughout the organization (Tier III Employees) and (iii) 10 critical employees supporting key processes or systems throughout the organization (Tier IV Employees). 15. The Debtors estimate that the total maximum aggregate payout under the KERP
will be approximately $10.8 million, consisting of approximately $6.3 million for the Tier II Employees, $4.4 million for the Tier III Employees and $0.1 million for the Tier IV Employees. The Key Employees have been broken down into three tiers with pre-determined proposed individual award ranges as follows: o Tier II- between 20% and 93% of base salary, o Tier III- between 12% and 86% of base salary, and o Tier IV- between 12% and 14% of base salary 16. The Debtors have informed me that the KERP is intended to incentivize the Key
Employees to remain with the Debtors and to achieve a successful sale of the Debtors businesses in these Chapter 11 cases. To that end, the Debtors developed a KERP that provides for the vesting of payments (the KERP Awards) only upon the closing of a sale of substantially 7
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all of the Debtors assets. The payments would be made upon the earlier of (i) the Closing or (ii) termination of the Key Employees employment with the Debtors. However, Key Employees terminated or resigning prior to a Closing will be subject to the same restrictions as KEIP Participants who are terminated or resign prior to a Closing. E. Mercers Analysis of the KEIP and the KERP 17. The Debtors engaged Mercer to analyze the KEIP and KERP programs and advise
them on how the plan compares to the market. In accordance therewith, Mercer participated in multiple meetings and discussions with the Debtors management team and restructuring advisors, FTI Consulting, Inc., regarding the Debtors businesses, operational history, restructuring goals, existing base salaries, and incentive compensation programs. This enabled Mercer to evaluate the KEIP and KERP with appropriate consideration of the Debtors specific and reasonable goals and objectives. 18. In assessing the reasonableness of the KEIP and KERP, Mercer conducted a
market study that compared the KEIP and KERP to market practice in terms of design features (e.g. eligibility, metrics and payout timing), payout levels and total cost. Additionally, Mercer performed a benchmarking analysis, considering the current compensation of the KEIP Participants and Key Employees relative to market compensation. Exhibit 1, attached hereto, contains Mercers analysis of the KEIP and the KERP. 19. To assess the reasonableness of the KEIP and KERP in the context of market
practice, the proposed plans were compared to the retention and incentive plans implemented by twenty one (21) companies that filed for bankruptcy after January 1, 2009, underwent a section 363 sale of their asset base and implemented an incentive plan which incentivized key employees based on this asset transaction. Eight of these companies also implemented a non-insider key employee retention plan. To assess the reasonableness of the proposed plans in the context of 8
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market practice, Mercer compared the aggregate cost of the KEIP and KERP to the cost of programs implemented by the 21 comparator companies. To assess competitiveness, the Debtors plans are compared to the market percentiles1. The results of our KEIP and KERP analyses can be found in Tables 1 and 2, below. As Table 1 outlines, although the dollar amount of the maximum payout of the KEIP is relatively large ($7 million, compared with a market 75th percentile of approximately $3.4 million), as expressed as a percentage of the expected asset sale proceeds it falls well below the 25th percentile of companies analyzed. The total maximum cost of a plan is one of the most commonly used metrics to assess the reasonableness and impact of the plan, and is most appropriate in a sale situation such as this, where the cost of these plans must be justified in the context of the value generated in the sales. Expressing the plan costs as a percentage of expected sale proceeds takes into account the size and complexity of the transaction and the increased workload, manpower and diligence necessary to successfully execute the transaction to the benefit of creditors. Table 1: KEIP Compared to Market
Max Cost of KEIP % Sale Proceeds
Proposed KEIP 75th Percentile 50th Percentile 25th Percentile
$7,000,000 Market Data: $3,444,000 $1,404,000 $852,688
0.18% 2.28% 1.04% 0.68%
20.
Mercer also analyzed the cost of the KEIP in comparison to the cost of KEIPs of
the four companies in the database with sale proceeds greater than $500 million (the Large
1
The 25th percentile is defined as, given a set of numbers, the number which is greater than 25% of the numbers in the set; the median (50th percentile) is greater than 50% of the numbers; the 75th percentile is greater than 75% of the numbers
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Companies2). In dollar terms, the KEIP fell in the middle of this subset of Large Companies (larger than two and smaller than two). However, as a percentage of sale proceeds, the KEIP is positioned smaller than all four of these Large Companies. 21. Furthermore, Mercer also analyzed the KEIP in the context of plan design, payout
metrics, and payout timing. From its market study, Mercer found that market practice for KEIPs is to base plan payouts on either deal completion / timing (completing a deal by a certain date) or sale proceeds (triggered by achieving certain proceeds targets). Mercer also found that KEIP payouts are either a fixed pool (with 57% prevalence) or are variable based on sale proceeds (52% prevalence). Thus, the proposed KEIP is consistent with market practice since plan payouts are earned based in large part on deal completion and maximum payouts are based on deal price appreciation. It is noteworthy that if the contemplated deals are not consummated, participants will lose the opportunity to earn 80% of their target awards. Mercer also found that 95% of companies analyzed for this review paid KEIP payments immediately after deal completion, which includes effective date and closing of the sale transaction, which is consistent with the proposed KEIP design. Given the Debtors large size and the complexity of the bankruptcy process, we find this reasonable in the context of market practice. 22. As Table 2 (below) outlines, similar to the KEIP, although the maximum cost of
the proposed KERP is above the 75th percentile of companies analyzed in Mercers study, the proposed KERP falls below the 25th percentile as a percentage of sale proceeds.
These companies are: Nortel Networks, TerreStar Networks, Borders Group and BearingPoint
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Table 2: KERP Compared to Market

Max Cost of KERP % Sale Proceeds
Proposed KERP 75th Percentile 50th Percentile 25th Percentile
$10,800,000 Market Data: $7,543,750 $1,195,375 $549,877
0.28% 1.19 % 0.67% 0.38%
23.
Mercer also analyzed the cost of the KERP in comparison to the cost of KERPs of
the Large Companies. Three out of the four companies implemented a KERP in addition to a KEIP. In dollar terms, the KERP is smaller than two of the Large Companies and larger than one. As a percentage of sale proceeds, the KERP is positioned in the middle of these companies (smaller than one, larger than one, and roughly equal to one). 24. Consistent with the methodology used to assess the KEIP in the context of market
practice, Mercer also analyzed the reasonableness of the KERP in terms of plan design, metrics, and payout timing. From this study, Mercer found that market practice for KERPs in this bankruptcy context is to base KERP payouts solely on continued employment through certain time-based milestones (for example, through deal close or for 6 months or 1 year after deal close). No companies analyzed as part of this review included performance contingencies in KERP payouts. Thus, Mercer found the proposed KERP is consistent with market practice by making fixed payouts based on retention of key talent through pre-specified milestones. Mercer also found that market practice for KERPs is to make plan payments upon time-based milestones
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in the bankruptcy process (for example, upon auction, sale closing, plan confirmation, 1 year after deal closing). Therefore, the proposed KERP is consistent with market practice by calibrating payments to pre-specified bankruptcy milestones. 25. Lastly, Mercer compared the combined total cost of the KEIP and KERP with the
combined total cost of incentive and retention plans implemented by the 21 comparator companies. The result of this analysis can be found in Table 3 below. Consistent with the proposed KEIP and KERP, the maximum cost of these plans is above the 75th percentile of the maximum cost of combined KEIPs and KERPs in Mercers analysis; however, taking the size of the transaction into account and expressing the cost as a percentage of sale proceeds, the combined maximum cost of the KEIP and KERP are well below the market 25th percentile. Table 3: Total Cost Compared to Market
Max Cost of KEIP + KERP
% Sale Proceeds
Proposed Plans 75th Percentile 50th Percentile 25th Percentile
$17,800,000 Market Data: $3,750,000 $1,445,177 $855,375
0.46% 2.62 % 1.31 % 0.73%
26.
Mercer also analyzed the aggregate cost of the KEIP and KERP in comparison to
the cost of KEIPs and KERPs of the Large Companies. Three out of the four Large Companies implemented a KERP in addition to a KEIP. In dollar terms, the aggregate cost of the KEIP and KERP is smaller than two of the Large Companies and larger than two. However, as a
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percentage of sale proceeds, the aggregate cost of the KEIP and KERP is smaller than all four of the Large Companies. 27. Concurrent to the analysis of the KEIP and KERP in the context of current market
practice, Mercer also conducted a compensation benchmarking analysis of several key employees included in the KEIP and KERP. Mercer analyzed the current compensation and target KEIP or KERP amounts for thirty seven (37) positions at the Debtors by comparing them to market compensation levels. This includes the 17 KEIP participants, with the remainder of the individuals included in the study being included in the KERP. Mercer was also given access to benchmarking analyses previously performed by the Debtors, which were reviewed by Mercer; including these positions Mercer can comment on the competitiveness of a total of one hundred fifteen (115) positions. 28. To conduct Mercers analysis, incumbents positions at the Debtors were first
matched to the appropriate survey benchmark position which takes into account the positions roles, responsibilities, reporting relationship, and organizational importance. Next, the benchmark positions were scoped by industry (Finance & Banking) and asset size (using a target asset size of $15 billion) to reflect the market for talent of the positions; where available, mortgage servicing-specific survey data was used. This analysis results in competitive market compensation ranges (represented by market percentiles) for each of the benchmark positions; these percentiles represent the range of compensation for a particular position in a particular industry, and is what the incumbents would expect to be paid if they took the same position in another company similar to the Debtors. This data is compared with current compensation to assess competitiveness to market. The results of our benchmarking analysis and those performed by the Debtors can be found below in Table 4. This table displays the variance (percent
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difference) between the aggregate compensation of the Debtors (base salary and KEIP/KERP target compensation), by tier, and aggregate market total compensation. A positive variance implies that compensation is above a particular percentile, and a negative variance implies compensation is below the applicable percentile; for instance, a variance of 5% at the 75th percentile means that the incumbent compensation is 5% above the market 75th percentile. Overall, Mercer found compensation was positioned above the median and below the 75th percentile, which I consider to be reasonable and competitive given the increased responsibilities assumed in the bankruptcy process as well as the increased importance of retention for these key employees. Table 4: Benchmarking Results Tier I II III IV Aggregate Variance from Compensation Target3 -39.3% -23.3% 7.3% n/a 4 -21.4%
29.
Based upon my analysis, knowledge, and experience, I believe that the design and
structure of the KEIP and the KERP, and proposed payouts to be made thereunder, are generally in line with market standards and practice. 30. Based upon my analysis, knowledge, and experience, I believe that the KEIP and
the KERP would serve to align the interests of the Debtors, their key employees and their
The market 75th percentile is shown as the compensation target since this has been the Debtors historical target pay positioning. Mercer did not perform nor was made available to benchmarking analyses for incumbents in Tier IV therefore cannot comment on market competitiveness.
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financial stakeholders, in order to best achieve the Debtors specific restructuring-related goal, achieving an expeditious and value maximizing Closing. I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge. Executed on the 17th day of July, 2012.
/s/ John Dempsey John Dempsey
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EXHIBIT 1
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Filed 07/17/12 Entered 07/17/12 22:41:21 of Ronald Greenspan Pg 1 of 19
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DECLARATION OF RONALD GREENSPAN IN SUPPORT OF DEBTORS MOTION FOR AN ORDER PURSUANT TO SECTIONS 105(a), 363(b)(1) AND 503(c)(3) OF THE BANKRUPTCY CODE AUTHORIZING (I) IMPLEMENTATION OF (A) A KEY EMPLOYEE RETENTION PLAN FOR CERTAIN NON-INSIDERS AND (B) A KEY EMPLOYEE INCENTIVE PLAN FOR CERTAIN INSIDERS AND (II) PAYMENT OF ANY OBLIGATIONS ARISING THEREUNDER AS ADMINISTRATIVE EXPENSES I, Ronald Greenspan, hereby declare that the following is true and correct to the best of my knowledge, information and belief: 1. I am a senior managing director in the Corporate Finance/Restructuring practice
of FTI Consulting, Inc. (FTI)1. My business address is 633 West 5th Street, Suite 1600, Los Angeles, CA 90071-2027. 2. I respectfully submit this declaration (the Declaration) in support of the
Debtors Motion for an Order Pursuant to Sections 105(a), 363(b)(1) and 503(c)(3) of the Bankruptcy Code Authorizing (I) Implementation of (A) a Key Employee Retention Plan for Certain Non-Insiders and (B) a Key Employee Incentive Plan for Certain Insiders and (II) Payment of Any Obligations Arising Thereunder as Administrative Expenses. The Debtors have duly authorized me to do so.
On June 27, 2012, the above-captioned debtors and debtors in possession (collectively, the Debtors) submitted an application to the Court seeking an order authorizing the engagement of FTI as financial advisor to the Debtors [Docket No. 526].
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A.
Background Information and Qualifications 3. I earned my B.A degree in economics summa cum laude from University of
California, Los Angeles and my J.D magna cum laude from Harvard Law School. FTI is the successor to the Corporate Finance and Restructuring Practice of PricewaterhouseCoopers LLP (PwC), which I joined in 1991 and since then have led its Global Real Estate and Real EstateSecured Debt Restructuring Practice. Prior to that, I held senior management positions at several real estate and financial services companies: I was the chief operating officer of Los Angeles Land Companies, the executive vice president of Brookside Savings & Loan Association and the executive vice president of The Heritage Group. 4. In my over twenty years at FTI and its predecessor PwC, I have provided
consulting services regarding compensation issues to a number of debtors in possession and creditors of debtors in possession in the mortgage, housing and financial services industries; including, in several cases, incentive and retention plans similar to those proposed by the Debtors. In particular, FTI provided compensation-related consulting in the bankruptcies of ResMae Mortgage Corp.; American Home Mortgage Corp.; Mortgage Lenders Network USA; Capmark Financial Group, Inc.; People's Choice Home Loan Inc.; Credit-Based Asset Servicing & Securitization LLC; Fairfield Residential LLC; and Orleans Homes, amongst others. 5. I have also provided such services in significant bankruptcies outside of the real
estate and mortgage industries, too, including US Airways and Peregrine Systems Inc. I provided expert testimony regarding the chapter 11 employee incentive plans in Peregrine Systems, Inc., and the employee emergence compensation plans in US Airways. 6. I co-authored an article entitled KERPs Are Out, But Incentives Are In with
Matthew Pakkala, published shortly after the adoption of BAPCPA in the August 2006 issue of
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the Turnaround Management Associations Journal of Corporate Renewal. In addition, I have authored numerous articles and given dozens of speeches regarding issues related to the real estate, banking and financial services industries. 7. I am a Certified Insolvency and Restructuring Advisor, Fellow of the American
College of Bankruptcy and past-President and Member of the Board of Directors of the Los Angeles Bankruptcy Forum. B. FTIs Engagement as Financial Advisor 8. FTI has provided financial advice regarding numerous aspects of the Debtors
businesses as it pertains to the preparation of filing for chapter 11. Throughout its engagement, FTI developed a comprehensive understanding of the Debtors businesses through our assistance in the preparation of the first day motions and such key analyses, amongst others, as the following: bottoms-up cash flow projections; profitability of business lines; assessment of key contractual relationships; evaluation and negotiation of shared services and transition services arrangements with affiliates; development of communication plans for customers, vendors and employees; general assistance in connection with the sale process (the Sale Process) and in securing debtor-in-possession financing. Such projects spanned the year leading up to these chapter 11 proceedings, which has resulted in FTI possessing substantial institutional knowledge regarding the specific facts and circumstances surrounding these cases. 9. As discussed in further detail below, the Debtors concluded that it was necessary
to enlist FTI, in coordination with Mercer (US) Inc. as compensation consultant, to advise on the creation of (i) a Key Employee Incentive Plan (the KEIP) to ensure that certain insider-level employees (the KEIP Participants) are incentivized to work toward an expeditious, value maximizing sale of the Debtors businesses and (ii) a Key Employee Retention Plan (the
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KERP, together with the KEIP, the Plans) in an effort to ensure that non-insider employees critical to the Sale Process (the Key Employees) remain with the company through the conclusion of the Sale Process. 10. As of the Petition Date, the Debtors employed approximately 3,625
employees, of whom approximately 3,575 are full-time employees and approximately 50 are part-time employees. The Debtors also employ approximately 250 employees who earn wages primarily in the form of commissions and utilize the services of approximately 375 contract workers. C. Need for the KEIP and the KERP 11. The Debtors enter the auctions with an offer to purchase their businesses as a
going concern for approximately $2.45 billion (the Nationstar Bid or the Platform Sale) in addition to the sale of other assets for approximately $1.44 billion (the Berkshire Bid or the Legacy Sale) (collectively, the Stalking Horse Bids).2 The Debtors require the continued services of some of their most critical employees in order to continue driving and supporting the sale efforts, with the possibility of increasing value beyond the Stalking Horse Bids, and efficiently achieving closings for the sale of substantially all of the Debtors assets (the Closings). Furthermore, a hearing approving the sales will not be scheduled before early November 2012 with the Closings likely not to occur before December 2012. 12. Firms in the financial service industry, including the Debtors, derive much of their
value from their employees. It is my experience that losing their most valuable employees could reduce the value of the Debtors businesses and endanger the Debtors sale and reorganization efforts. Beginning in early calendar year 2012, retaining and incentivizing some of the Debtors most valuable employees became increasingly difficult. The need to retain and incentivize their
2
Amounts are based on figures in the Debtors February 29, 2012 Balance Sheet.
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employees is particularly acute in light of the well-known fate of many mortgage industry businesses that filed for bankruptcy in recent years. In many of those cases, the debtors were forced to sell their businesses piecemeal in Chapter 11 or forced into Chapter 7 (or 11) liquidation cases, resulting in lay-offs of thousands of employees. 13. In connection with FTIs role in advising the Debtors regarding the KEIP and the
KERP, FTI engaged in numerous discussions with the Debtors management regarding its needs and objectives in implementing the Plans. It is my understanding that the KEIP Participants and Key Employees are critical to maintaining the Debtors customer base and business relationships and continuing to adhere to government-sponsored-entity standards, all despite the uncertainty of continued employment. 14. The KEIP and KERP are necessary in order to: (i) ensure that critical employees
are properly incentivized to assist in maximizing value during the greater than seven month long Sale Process, (ii) reward employees for the significant additional responsibilities they have undertaken in the past several months, both because of the disentangling of the businesses of the Debtors and their parent, Ally Financial Inc. (AFI), and the immense amount of ongoing work required to market and sell the Debtors assets to multiple bidders while keeping the business operating as a going concern, and (iii) reduce potential employee attrition that would otherwise result from the uncertainty created by the bankruptcy and sale process and cessation of the prebankruptcy employee retention program. 15. In addition, I understand that, on average, Discretionary Variable Pay historically
comprised more than 50% of the KEIP Participants total annual compensation. In addition to having to defer a significant portion of prior years compensation, this 50% (and sometimes more) of each KEIP Participants potential total annual compensation is at risk as a result of the
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Debtors filing for bankruptcy protection because the Discretionary Variable Pay Plans are just that, discretionary. Awards for the 2012 award year may not be determined until after the closing of a sale transaction. 16. Consequently, the only guaranteed compensation for the KEIP Participants is
their base salary. Yet, the Debtors are asking them to take on additional responsibilities with significant time commitments in order to consummate the sale of the Debtors businesses with virtually no upside in return for their efforts. Thus, approving the KEIP is extremely important to ensuring the KEIP Participants remain motivated to commit the extraordinary time and effort required to close the sale and achieve the maximum potential value for the benefit of the Debtors estates and their creditor constituencies. i. 17. The KEIP and KERP are Necessary to Properly Incentivize Critical Employees
The design of the KEIP and KERP payment opportunities appropriately align the
interests of key stakeholders with the KEIP Participants and Key Employees. The efforts of the KEIP Participants and Key Employees through the Closing are essential to maximize sale value for the benefit of key stakeholders (i.e., secured and unsecured creditors, employees, equity holders). Such efforts have been undertaken, and will continue to be, without any certainty with regard to the KEIP Participants and Key Employees roles, or employment, once the assets have been sold to third parties. 18. The Nationstar Bid provides for the assumption of certain employee obligations to
the extent such employees are hired by Nationstar. There is clearly no guarantee on which employees would be hired to the extent the Nationstar Bid is ultimately deemed to be the highest and best bid. Additionally, if the highest and best bid is not Nationstar, there is certainly no guarantee that the winning bid will include provisions to hire employees or provide for the 6
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assumption of certain employee-related obligations. The Berkshire Bid does not contain any provisions with respect to hiring employees or assuming employee related obligations as part of that sale. 19. Due to the uncertainty regarding their continued employment, as well as the
Debtors request that the KEIP Participants take on a significant number of additional roles and responsibilities as further described below, the KEIP is necessary to align the interests of the KEIP Participants with key stakeholders and to incentivize the KEIP Participants to work towards closing value-maximizing sales of the Debtors businesses. 20. The Key Employees also face uncertainty regarding their compensation and
continued employment. The Key Employees serve important roles that are critical to the achievement of a smooth sale process and transition of the Debtors businesses to a buyer or buyers. They possess significant talent and organizational knowledge that would be difficult, if not impossible, to re-recruit in the current market, given the Debtors current circumstances and tightness in the industrys talent pool. Additionally, I understand that the potential Purchasers of the Debtors assets have expressed their opinion that they are impressed by the Debtors management team. Accordingly, it is critical to retain these employees and management designed the KERP in furtherance of this goal. 21. Finally, with respect to the Nationstar Bid, the ultimate consent of the sale to be
provided by the government-sponsored-entities will hinge not only on the wherewithal and capabilities of the buyer, but also on the continuity of the employees charged with operating the platform. The Plans are critical to ensuring this continuity is maintained through the Closings. ii. 22. Employees Enhanced Daily Responsibilities
Historically, the Debtors have operated, with their affiliates, as an integrated
organization under the supervision and oversight of AFI. Recently, the Debtors began to
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separate their businesses from those of AFI and its other affiliates. Such separation positions the Debtors businesses as stand-alone operations, which is a key aspect of maximizing value for the estate pursuant to the Sale Process. As a result of the separation, which is ongoing, certain employees are taking on responsibility for functions that had previously been the responsibility of AFI employees, inter alia, treasury, audit, the accounting of certain significant activities; IT systems infrastructure; communications; compliance activities; and certain human resource management functions. 23. In addition to the augmented responsibilities imposed upon management and
other employees as a result of the separation of the ResCap and AFI entities, the Debtors employees have also borne the heavy burden of carrying on a marketing and Sale Process in an attempt to effectuate the sale of substantially all of the Debtors assets as well as to maintain the necessary financing to support an effective marketing and sale process. Additional responsibilities include, but are not limited to, preparing for and participating in diligence sessions with interested parties; researching and responding to diligence requests from interested parties; participating in asset purchase agreement negotiations; participating in discussions with key constituents such as the government-sponsored-entities, creditors, key investors and other regulatory agencies; participating in negotiations and driving analyses in an effort to secure debtor-in-possession financing; and, with respect to the Berkshire Bid, having completed approximately $200 million of soft credit modifications on the whole loan portfolio as a condition precedent to the Closing. 24. Finally, the Debtors employees daily work responsibilities have been further
burdened by the additional workload brought on by the chapter 11 filing, including: assisting in drafting and preparation of motions, applications and declarations; preparing for and
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participating in testimony and depositions; participating in negotiations with key stakeholders regarding provisions of certain motions; preparing required court reporting (e.g., statements of assets and liabilities, schedules of financial affairs, monthly operating reports); and responding to various chapter 11 specific data requests. 25. Accordingly, it is necessary to compensate the Debtors critical employees for
taking on significant additional responsibilities beyond what has been asked of them in the ordinary course. iii. 26. Employee Attrition
Since the beginning of calendar year 2012, the Debtors have faced many
questions from their employees regarding the future of their businesses and the press coverage about a potential bankruptcy filing. In an effort to combat this uncertainty and stem any resulting attrition, the Debtors took a proactive approach and implemented the Business Continuity Incentive Program (the BCIP) during the first quarter of 2012 when it was unclear whether the restructuring / sale of the Debtors would occur within chapter 11. The BCIP was intended to provide a supplemental monetary award to the employees for their efforts in effectuating the Debtors out-of-court restructuring efforts in 2012. The Debtors are not seeking to assume the BCIP within these cases; rather, the KEIP and KERP replace and supersede the BCIP and provide an alternate structure through which to deliver substantially similar economic benefits to the employees. The KEIP Participants and Key Employees are substantially identical to the actual or intended participants under the BCIP. 27. As shown in the tables below, in the past few months, despite considerable
turmoil and uncertainty surrounding the Debtors, there has been relatively modest variation from the prior year in turnover rates, a fact management largely attributes to the timely implementation of the BCIP.
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28.
However, even with the BCIP, the Debtors have suffered an uptick in resignations
within the Global Functions group. This group is vitally important given its role in supporting the Sale Process and heightened uncertainty with respect to post-sale employment on account of potential redundancies of their positions within a buyers organization. Additionally, employees within the Global Functions group may be targeted by competitors not involved in the Sale Process given their experience in developing certain aspects of the Debtors servicing platforms and the market demand for such skill sets. As such, the Plans are very inclusive of employees within the Global Functions group. 29. Furthermore, I understand the industry is experiencing tightness in its talent pool
given the high production volumes under the low interest rate environment, degree of training / human capital investment necessary for building out loan files with minimal governmentsponsored entity put-back risk, and increased hiring efforts by the government-sponsored entities. These factors make it all the more critical for the Debtors to retain their key talent.
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2011 ResCap Anualized Voluntary Turnover % Capital Markets Consumer Lending Global Function O & S Administration Servicing Jan 0.0% 24.3% 7.9% 0.0% 14.6% Feb 0.0% 25.5% 5.9% 0.0% 13.5% Mar 7.7% 21.3% 6.6% 0.0% 12.2% Apr 11.6% 24.6% 7.4% 6.7% 12.4% May 9.3% 24.7% 7.1% 5.1% 12.4%
2012 ResCap Annualized Voluntary Turnover % Capital Markets Consumer Lending Global Function O & S Administration Servicing Jan 0.0% 14.3% 7.1% 0.0% 9.7% Feb 0.0% 20.9% 6.2% 0.0% 9.1% Mar 15.2% 18.8% 7.2% 0.0% 11.4% Apr 16.8% 19.8% 7.6% 0.0% 11.6% May 20.0% 22.0% 9.3% 0.0% 12.6%
2012 vs. 2011 ResCap Annualized Voluntary Turnover [favorable/(unfavorable)] Headcount May 2012 Jan Feb Mar Apr Capital Markets 113 0.0% 0.0% (7.4)% (5.2)% Consumer Lending 610 10.0% 4.6% 2.4% 4.8% Global Function 641 0.9% (0.3)% (0.6)% (0.2)% Origination & Servicing A 108 0.0% 0.0% 0.0% 6.7% Servicing 2,164 4.9% 4.4% 0.9% 0.9% Note: Variances above are calculated as the absolute % change in the underlying statistic May (10.7)% 2.7% (2.2)% 5.1% (0.2)%
D.
Development of the Plans 30. In assisting the Debtors with the development of the KEIP and KERP, FTI relied
upon its extensive industry expertise and its review of the structure of employee incentive plans implemented and approved in other chapter 11 sale scenarios. Specifically, FTI reviewed courtapproved plans implemented in cases that announced the launching of a sale process between January 1, 2010 and May 22, 2012 within the Southern District of New York and Delaware for Bankruptcy Auctions in excess of $25 million as reported by the Deal Pipeline (www.thedealpipeline.com). Based on this criterion, and after removing certain instances that would not be comparable (e.g., single asset real estate transactions, non-profit organizations, banking institutions taken over by the FDIC), over 50 cases were identified, of which 20 implemented employee incentive and retention plans. 11
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31.
The Debtors selection process for determining the Key Employees and KEIP
Participants was narrowly focused on those employees that are critical in leading, or supporting, key functions, processes or systems throughout the organization. Participants were selected based on feedback from each functional business unit leader and through discussions with the senior human resources team. A particular focus was placed on those employees within Global Functions given their necessary interaction with, and support of, each of the Debtors businesses. Furthermore, leaders of functional groups were targeted for inclusion in the Plans to maintain continuity of such groups and mitigate the risk of attrition by employees excluded from the Plans. The list of employees identified to participate in the Plans was then reviewed and approved by the CEO, the President, and the Debtors Board Compensation Committee. E. The KEIP 32. The KEIP provides potential performance incentives for 17 KEIP Participants, in
the event they achieve specific sale and financial / operational performance goals. The KEIP Participants include several members of the senior leadership team across each of the following critical functional areas: Compliance / Risk, Consumer Lending, Treasury / Finance, Human Resources, IT, Legal, Origination and Servicing Administration, Primary Servicing, and Global Capital Markets. 33. However, the Debtors CEO, President, and Chief Capital Markets Officer are not
among the KEIP Participants because of restrictions under the TARP regulations prohibiting their involvement in such a program. 34. Assuming target-level performance, the payments under the KEIP (the KEIP
Awards) will total approximately $4.1 million, with the maximum cost of approximately $7.0 million, assuming sale value increases beyond the Stalking Horse Bids. The KEIP Awards range
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from 52% to 117% of base salary, with an average target award of $241,353. Target awards are payable contingent upon achievement of five result-driven metrics (the KEIP Metrics), which are broken into two categories Sale Metrics and Financial and Operational Performance Metrics, as follows: a. Platform Sale Metric (42% of Target Award )
90% of the Platform Sale Metric (or 37.8% of the Target Award) is achieved upon the Platform Sale Closing at the negotiated stalking horse price; 100% of the Platform Sale Metric (or 42% of the Target Award) is achieved upon an auction being held in connection with the Sale Process, followed by the Platform Sale Closing at a higher and better offer approved by the Court; and Up to 200% of the Platform Sale Metric (or 84% of the Target Award) can be achieved if the sale value increases 3% above the stalking horse bid. To the extent sale value increases less than 3% above the stalking horse bid, the payout to KEIP Participants will be determined through interpolation (i.e., award level will be proportionate to the percentage of the potential 3% sale price increase actually achieved).
b.
Legacy Sale Metric (28% of Target Award )3
90% of the Legacy Sale Metric (or 25.2% of the Target Award) is achieved upon the Legacy Sale Closing at the negotiated stalking horse price; 100% of the Legacy Sale Metric (or 28% of the Target Award) is achieved upon an auction being held in connection with the Sale Process, followed by the Legacy Sale Closing at a higher and better offer approved by the Court; and Up to 200% of the Legacy Sale Metric (or 56% of the Target Award) can be achieved if the sale value increases 3% above the stalking horse bid. To the extent sale value increases less than 3% above the stalking horse bid, the payout to KEIP Participants will be determined through interpolation (i.e., award level will be
In the event that the Platform Sale closing occurs prior to the closing of the Legacy Sale, KEIP Participants will still be eligible to earn the Legacy Sale award if they accept employment with the buyer in the Platform Sale and leave the Debtors employ prior to the closing of the Legacy Sale.
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proportionate to the percentage of the potential 3% sale price increase actually achieved). c. Financial and Operational Performance Metrics (30% of Target Award )
Barclays DIP Covenant (10%) The Barclays DIP Covenant Milestone is "achieved" and a KEIP Participant will earn 10% of his/her Target Award provided the Debtors meet the 20% Cash Flow Variance covenant as such term is defined in section 5.02 of the Barclays DIP Agreement attached as Exhibit B to the DIP Financing Motion4, as measured through the earlier of (i) the Platform Sale Closing or (ii) Barclays DIP payoff.
GSE Adherence (10%) The GSE Adherence Milestone is "achieved" and a KEIP Participant will earn 10% of his/her Target Award provided the Debtors achieve a year-to-date Top 3 Fannie Mae servicer ranking, as measured as of the earlier of (i) the Platform Sale Closing or (ii) December 31, 2012.
Performance Rating (10%) The Performance Rating Milestone is "achieved" and a KEIP Participant will earn 10% of his/her Target Award provided such participant achieves an Effective performance rating for all applicable organizational goals as determined by the compensation committee of the Debtors board of directors through consultation with each Participants supervisor. The Performance Rating Milestone will be measured as of the earlier of (i) the Platform Sale Closing or (ii) December 31, 2012.
35.
KEIP awards will vest upon the achievement of each KEIP Milestone and
payments will be made upon the earlier of (i) a sale closing and (ii) termination of the KEIP Participants employment. Namely, KEIP Participants terminated for cause will not receive any
Debtors Motion for Interim and Final Orders Pursuant to 11 U.S.C. 105, 362, 363(b)(1), 363(f), 363(m), 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e) and Bankruptcy Rules 4001 and 6004 (i) Authorizing the Debtors to (A) Enter into and Perform Under Receivables Purchase Agreements and Mortgage Loan Purchase and Contribution Agreements Relating to Initial Receivables and Mortgage Loans and Receivables Pooling Agreements Relating to Additional Receivables, and (B) Obtain Postpetition Financing on a Secured, Superpriority Basis, (ii) Schedule a Final Hearing Pursuant to Bankruptcy Rules 4001(b)( and 4001(c) and (iii) Granting Related Relief [D.I. 13]
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KEIP Award and KEIP Participants who resign or are terminated without cause will receive only their vested KEIP Awards, forfeiting any unvested portion. Notwithstanding the preceding provisions, payment of 40% of the vested awards (the KEIP Holdback) will be deferred until the Effective Date of the Plan of Reorganization, or its equivalent. 36. For example, assuming the following: (i) target KEIP Award of $100,000; (ii) all
five KEIP Metrics vest at target levels; (iii) Legacy Sale Closing date of 11/30/12; (iv) Platform Sale Closing date of 12/31/12; and (v) Effective Date of Plan of Reorganization of 4/30/13, KEIP Award payments would be made as follows: (i) on or about 11/30/12, the payment of the Legacy Sale Metric of $16,800 (60% * 28% * $100,000) would be made; (ii) on or about, 12/31/12 the payments of the (1) Platform Sale Metric of $25,200 (60% * 42% * $100,000), (2) the Barclays DIP Covenant metric of $6,000 (60% * 10% * $100,000), (3) the GSE Adherence metric of $6,000 (60% * 10% * $100,000), and (4) the Performance Rating metric of $6,000 (60% * 10% * $100,000) would be made; and (iii) on or about 4/30/13 the payment of the KEIP Holdback of $40,000 (40% * $100,000) would be made. 37. Further, in order to illustrate the interpolation calculation to the extent sale value
is higher than the Stalking Horse Bids, see the following example: (i) assume the Platform Sale closes at 1.5% higher than the Nationstar Bid for illustrative purposes, (ii) assume a target KEIP Award of $100,000, (iii) the vested Platform Sale Metric award would be $63,000 [((1.5% / 3.0%) * (200% - 100%) + 100%) * 42% * $100,000]. F. The KERP 38. The KERP provides performance and retention incentives for 174 of the Debtors
non-insider employees. Among the Key Employees are 68 critical manager and director level employees across all key functions of the Debtors operations (the Tier II Employees).
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Additionally, there are 96 key employees supporting key functions throughout the organization (the Tier III Employees) and 10 employees supporting key processes or systems throughout the organization (the Tier IV Employees). 39. The Tier II5 Employees include 68 non-insider directors and managers. Although
certain of these managers are provided with the title of Director, these employees are nonexecutive managers that provide critical supervisory and professional support services for the Debtors but, as described below, do not possess the decision-making authority to implement company policies or strategies to render them insiders. Tier II KERP awards range from 20% to 93% of a Key Employee's base salary with an average award of $93,273. 40. The Tier III Employees include 96 non-insider supervisory and professional
support employees that perform critical functions that are key to maintaining client satisfaction during these cases as well as ensuring a smooth transaction to a buyer of the Debtors businesses. Tier III KERP awards range from 12% to 86% of a Key Employees base salary with an average award of $45,972. 41. The Tier IV Employees include 10 mortgage origination operations support staff
in Consumer Lending Operations to ensure that the Debtors retain certain mortgage origination and operational capabilities that are critical to maintaining enterprise value for the benefit of any new owner. Tier IV KERP awards range from 12% to 14% of a Key Employees base salary with an average award of $6,054. 42. The total aggregate maximum payout under the KERP will be approximately
$10.8 million, consisting of approximately $6.3 million, $4.4 million and $61 thousand for the Tier II, Tier III and Tier IV Employees, respectively, if all remain with the Debtors through the vesting date. The KERP is designed to provide incentives to the Key Employees to remain with
5
The KEIP Participants are designated as Tier I employees under the Debtors categorization scheme.
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the Debtors to effectuate successful Closings. Accordingly, the payments under the KERP (the KERP Awards) will vest upon the closing of the Stalking Horse Bids: (i) 60% vesting upon closing the Nationstar Bid and (ii) 40% vesting upon closing of the Berkshire Bid. The KERP Awards will be paid upon the earlier of (i) a Closing (the later of the Platform or Legacy Closings) or (ii) the Key Employees termination, subject to the following conditions: (a) Key Employees terminated for cause will not receive any KERP Award; (b) Key Employees terminated without cause will receive any vested and unvested KERP Awards, and (c) Key Employees resigning prior to the Closings will receive any vested KERP Award but will forfeit any unvested portion. G. The Reasonableness of the Plans 43. Based on FTIs research and my experience, the structure of these programs is
consistent with those adopted under similar sale scenarios and properly incentivizes the KEIP Participants and Key Employees to maximize value. Furthermore, it is my belief that the KEIP and the KERP proposed by the Debtors are reasonable in light of their goals of preventing attrition and incentivizing employees to effectuate a value-maximizing Closing, while continuing to carry the heavy burden of additional responsibilities associated with the Debtors separation from AFI and bankruptcy-related workloads. 44. The KEIP was carefully crafted to motivate the KEIP Participants and ensure that
the Debtors businesses continue to operate as efficiently as possible, while also working toward a value maximizing Closing. The Financial and Operational Performance Metrics are intended to ensure that the KEIP Participants promote the efficient operation of the Debtors businesses while maintaining the necessary regulatory compliance and support to ensure that a purchaser will be provided with a turn-key operation upon Closing. Simultaneously, the Sale Metric
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motivates the KEIP Participants to not only complete a sale of their businesses, but also bring additional bidders to the table and obtain the best possible price for the businesses by permitting them a small share in any overbid. 45. The KEIP Participants are critical to the Sale Process and the success of the
Debtors businesses after a Closing as a result of their relationships with governmental regulators and familiarity with the relevant regulatory schemes. Should any member of this team choose to leave, it would be extremely difficult, if not impossible, to replace him/her during the bankruptcy cases, leaving significant functional leadership and talent gaps. 46. Likewise, the services of each of the Key Employees are necessary to ensure that
the Debtors businesses continue to run smoothly and retain their value through a Closing. The KERP attempts to achieve this goal by providing the Key Employees with retention payments vesting in two tranches, with the majority payable only upon achievement of the ultimate goal a Closing. 47. Without the KEIP and the KERP, employee morale would likely continue to
suffer, particularly in light of the discontinuation of the pre-petition BCIP, and could lead to a further loss of the Debtors most critical employees, endangering the Companys ability to maximize value for its key stakeholders and ultimately, consummate a reorganization plan.
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I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge. Executed on the 17th day of July, 2012.
/s/ Ronald F. Greenspan Ronald F. Greenspan
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DECLARATION OF ANNE JANICZEK IN SUPPORT OF DEBTORS MOTION FOR AN ORDER PURSUANT TO SECTIONS 105(a), 363(b)(1) AND 503(c)(3) OF THE BANKRUPTCY CODE AUTHORIZING (I) IMPLEMENTATION OF (A) A KEY EMPLOYEE RETENTION PLAN FOR CERTAIN NON-INSIDERS AND (B) A KEY EMPLOYEE INCENTIVE PLAN FOR CERTAIN INSIDERS AND (II) PAYMENT OF ANY OBLIGATIONS ARISING THEREUNDER AS ADMINISTRATIVE EXPENSES I, Anne Janiczek, hereby declare that the following is true and correct to the best of my knowledge, information and belief: I am the Chief Human Resources Officer for the Mortgage Division at Debtor1
1.
Residential Capital LLC and its affiliates (ResCap). I submit this Declaration in support of the Debtors Motion for an Order Pursuant to Sections 363(b)(1) and 503(c)(3) of the Bankruptcy Code Authorizing (i) Implementation of (a) a Key Employee Retention Plan for Certain NonInsiders and (b) a Key Employee Incentive Plan for Certain Insiders and (ii) Payment of Obligations Arising Thereunder as Administrative Expenses (the Motion).2 2. I have been at ResCap for 13 years, the last 4 in my current position. In my
current position, I am responsible for leading and managing a team that supports the business in all aspects of human resources, including: management and executive development; investing
1
Capitalized terms not otherwise defined herein shall have the definitions ascribed to them in the Motion. I am a proposed recipient under the KEIP.
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and preserving critical talent acquisition; learning and development; employee relations; performance management, planning and appraisal; oversight of incentive, long-term and executive compensation plans; diversity; organizational design and effectiveness; and succession planning. Except as otherwise indicated, all statements in this Declaration are based upon: my personal knowledge; information supplied or verified by personnel in departments within the Debtors various business units; my review of the Debtors books and records as well as other relevant documents; my discussions with other members of the Debtors management team; information supplied by the Debtors consultants; or my opinion based upon experience, expertise, and knowledge of the Debtors operations, financial condition and history. In making my statements based on my review of the Debtors books and records, relevant documents, and other information prepared or collected by the Debtors employees or consultants, I have relied upon these employees and consultants to accurately record, prepare, collect, and/or verify any such documentation and other information. If I were called to testify as a witness in this matter, I would testify competently to the facts set forth herein. 3. Since ResCap began making plans for a possible restructuring, I have been
involved with the full human capital strategy for the transition process. In that role, I have worked with ResCap leadership to strategically design or enhance key functions to support an independent organizational structure. As part of my responsibilities, I manage critical tasks including organizational design, function responsibilities, staffing models, compensation design, such as the Business Continuity Incentive Plan (the BCIP), assigning individuals to their roles during the transition period, making sure that our human resources are properly allocated, and overseeing the design of the KEIP and KERP on behalf of the Debtors. I have also become
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aware of the roles that ResCap employees play in the transition process and in maintaining the value of the assets and business of the Debtors estate. A. 4. The Debtors Variable Pay Plans As of the Petition Date, the Debtors employed approximately 3,625 employees, of
whom approximately 3,575 are full-time employees and approximately 50 are part-time employees. The Debtors also employ approximately 250 employees who earn wages primarily in the form of commissions and utilize the services of approximately 375 contract workers. 5. Prior to the Petition Date, the vast majority of the Debtors employees (the
Employees) received a portion of their annual compensation in the form of variable pay awarded based on company, unit and individual performance targets established by management and approved by the compensation committee (the Compensation Committee) of the Debtors board of directors (the Discretionary Variable Pay). On average, Discretionary Variable Pay historically comprised more than 50 percent of the KEIP Participants total annual compensation. Tying a portion of the Employees salaries to discretionary pay plans is typical in the financial services industry and, therefore, the Employees generally view these programs as part of their base compensation and expect that they will receive some portion of incentive compensation. 6. As a result of AFI having received support under the federal governments
troubled asset relief program (TARP), the Debtors (as indirect wholly-owned subsidiaries) have been required to adhere to specific compensation rules administered by the special paymaster appointed by the United States Treasury (the "Special Paymaster"). Since 2009, the compensation for those Employees that fall within AFIs next 753 most highly-compensated
3
Under TARP, the Special Paymaster oversees the compensation structure for employees of a company that previously received TARP funds but has not yet repaid such funds. The Next 75 refers to employees whose total compensation ranks them amongst the 26-100 highest-paid employees at Ally Financial Inc. an its subsidiaries, including the Debtors.
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employees must have their compensation structure reviewed and approved by the Special Paymaster.4 The pay structure approved by the Special Paymaster requires 50 percent of
Discretionary Variable Pay to be in the form of equity that must be deferred for three years. Furthermore, of the 50 percent of Discretionary Variable Pay that is payable in cash, fifty percent is typically deferred for one year (i.e., twenty-five percent of overall Discretionary Variable Pay). Over the past few years, the TARP restrictions have not allowed the KEIP Participants to immediately receive the full amount of their annual compensation. 7. When paid, Discretionary Variable Pay is generally paid in cash, with certain
Employees receiving a portion of Discretionary Variable Pay in restricted AFI stock. Certain Employees receive a portion of their Discretionary Variable Pay through participation in the Ally Financial Inc. Long-Term Equity Compensation Plan (the AFI LTECIP) and the Residential Capital, LLC (ResCap) Annual Incentive Plan (the ResCap AIP). Approximately 76 of the Debtors Employees are current participants in the AFI LTECIP. 8. AIP. Historically, the Debtors participated in the Ally Financial Inc. Annual
Incentive Plan (the AFI AIP). As of March 8, 2012, ResCap adopted the ResCap AIP effective from and after January 1, 2012, which reflects substantially all of the terms of the AFI AIP. Approximately 2,800 Employees participate in the ResCap AIP. 9. The ResCap AIP ties a portion of an employees compensation to annual
performance benchmarks established by management and company performance benchmarks as approved by the Compensation Committee. The total size of the ResCap AIP award pools are subject to approval by the Debtors Compensation Committee, together with AFI Compensation Committee. If awarded by management, ResCap AIP award payments are paid during the first
Nine of the Debtors employees fall within AFIs 75 next most highly-compensated employees.
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quarter of each year based on performance for the prior year and considered on a corporate, business unit, function and individual bases. 10. AFI LTECIP. Additionally, certain of the Debtors employees receive a portion
of their variable pay under the AFI LTECIP because their compensation exceeds a predetermined monetary threshold. The AFI LTECIP awards are in the form of restricted stock grants in AFI common stock generally awarded by AFI in the first quarter of each year. The value of the award is based on the appraised value of AFI common stock at the time of payment. All payments to participants are made in cash and are generally paid in the first quarter of each year. However, the Debtors do not control the awards that AFI grants under the AFI LTECIP. B. 11. Managing Employee Attrition Over the past four years, the Debtors workforce has already been reduced by
almost two-thirds, in large part, because as part of the Debtors ongoing restructuring efforts, specific business lines have closed and there has been a corresponding reduction in force. Since the beginning of calendar year 2012, the Debtors have faced many questions from their employees regarding the future of their businesses and the press coverage about a potential bankruptcy filing. In an effort to combat this uncertainty and stem any resulting attrition, the Debtors took a proactive approach and implemented the BCIP during the first quarter of 2012 when it was unclear whether the restructuring / sale of the Debtors would occur within Chapter 11. In formulating a restructuring strategy, employee and management stability was paramount. The BCIP provides a supplemental monetary award to the employee for their efforts in effectuating the Debtors out-of-court restructuring efforts in 2012.
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12.
The Debtors are not seeking to assume the BCIP within these cases; rather, the
KEIP and KERP5 replace and supersede the BCIP and provide an alternate structure through which to deliver substantially similar economic benefits to the employee. The KEIP Participants and Key Employees are substantially similar to the actual or intended participants under the BCIP. 13. I firmly believe that the Debtors employees are their most valuable assets. The
KEIP Participants are primary decision-makers whose decisions affect the direction of the Debtors businesses and are critical to achieving the objective of selling the Debtors businesses as a going concern. The KEIP Participants represent only 0.4% of the prepetition employee population, and are critical to keeping the staff motivated and engaged. The KEIP is needed to motivate the KEIP Participants and ensure that the Debtors can effectively work toward their collective goal of effectuating the Asset Sales. The incentive the Debtors propose are designed to motivate the KEIP Participants by tying incentive payments to the sale price achieved in the Asset Sales and certain financial and operational goals. Based on my experience in the human resources sector, it is my belief that without the proper incentives to motivate the KEIP Participants to perform their innumerable additional restructuring related tasks in addition to addressing their day-to-day obligations, the Debtors face a substantial risk that they could lose one or more of the KEIP Participants, to the detriment of the Debtors businesses. 14. With respect to the KERP, the Key Employees are critical to the Debtors ability
to maintain stable operations throughout the sale and transition of the business. The Key Employees represent a critical sub-set of the employee population who are each necessary to
5
The target payments total $14.9 million; however, as noted herein, should new participants need to be added to the KEIP or KERP because of interim changes in the employee population, then the target payments would not exceed $15.9 million, which would be anticipated to be allocated $4.6 million to the KEIP and $11.3 million to the KERP.
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ensure an efficient bankruptcy sale process and transition phase to the new operating entity. The Key Employees have unique and vital knowledge of the Debtors business operations that are critical to the businesses long-term success. If the Key Employees were to resign, the Debtors fear that the loss of their experience during this critical time would result in an overall diminution in value of the Debtors businesses. Moreover, at least two factors will almost certainly render replacing the Key Employees exceedingly difficult, including: (i) the degree of training necessary to process loan files in accordance with regulatory frameworks in place and (ii) increased hiring by competitors to staff for (a) record loan production volume resulting from low interests and (b) loan file reviews required under governmental settlements. The KERP will assist the Debtors in achieving their overarching goal of preventing the Key Employees from seeking alternative employment options, which could result in the loss of valuable institutional knowledge and thereby place additional hurdles in the Debtors path to executing the Asset Sales. C. 15. Identification of Insiders In order to ensure that the KERP did not include insiders (as that term is defined
in section 101(31) of the Bankruptcy Code), the Debtors undertook an analysis to identify the Debtors officers. The Debtors human resources personnel, with guidance from its legal and financial advisors, conducted a thorough review of the Debtors businesses and each Key Employees job function. 16. It is my understanding that the Debtors identified which officers are statutory
insiders by using the following criteria: (a) they reviewed the functional job titles of employees, the reporting structure for each business unit and operational area, the process for making important business and legal decisions and identified those persons who were responsible for reporting to the Debtors senior executive leadership that have the authority to approve
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significant business decisions, (b) they identified the persons who oversee important aspects of the Debtors businesses, (c) they considered whether the employee is entitled an officer under bylaws, and/or appointed or elected by the board of directors, and (d) they reviewed the processes for reviews and compensation within the business units and the operational areas and identified the persons responsible for each process. Based on this analysis, the Debtors identified 20 insiders, including myself, and placed those individuals into the KEIP (excluding the three senior executives who are not eligible because of TARP restrictions). 17. The Key Employees who are a part of the KERP run the Debtors day-to-day
operations, but they do not possess the decision-making authority to implement company policies or strategy. None of the Key Employees is appointed or elected by the board of directors. The Key Employees are tiered in the KERP in a manner consistent with the manner in which the Debtors ordinarily rank their employees. As a matter of practice, the Debtors employees are assigned a grade, which is driven by the employees seniority and degree of responsibility within the organization. 18. Moreover, to the extent that an employee may have director in his or her title or
have an officer-like title, it is my understanding that it is the Debtors' ordinary business practice to provide certain individuals with such titles in order to enable them to sign documents on the company's behalf, which is common in the mortgage industry; however, such titles do not equate to the level of authority given to that person. The analysis concluded that although a number of Key Employees held officer titles for customer-facing purposes, the Key Employees functional title was a more accurate reflection of their overall responsibilities within the servicing segment. For example, several servicing employees have the title of Director or higher (e.g., Vice President, Senior Vice President, Senior Director, Executive Director) in order to
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compete for business, but do not, in fact, possess any ability to dictate overall company policy or strategy. Additionally, the Key Employees do not report directly to ResCaps boards of directors, but instead report to an officer or other employees who report up to the Debtors officers. 19. For the foregoing reasons, and in order to ensure that the Debtors continue to
operate smoothly pending sales of the Debtors businesses, the Debtors, in their business judgment determined that the KEIP and KERP are reasonable, appropriate and in the best interests of the Debtors, their estates, and their stakeholders.
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Executed on July 17, 2012, at Fort Washington, Pennsylvania. /s/ Anne Janiczek Anne Janiczek
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ResCap Key EE Motion

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12-12020-mg

Filed 07/17/12 Entered 07/17/12 22:41:21 Pg 1 of 36

In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.

Case No. 12-12020 (MG) Chapter 11 Jointly Administered

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In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.

Case No. 12-12020 (MG) Chapter 11 Jointly Administered

Filed 07/17/12 Entered 07/17/12 22:41:21 Pg 5 of 36 TABLE OF CONTENTS

The KERP ............................................................................................................ 12

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On average, Discretionary Variable Pay historically comprised more than 50

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Bankruptcy Code section 503(c)(1) restricts payments made to insiders of the

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) ) ) ) ) ) )

In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.

Case No. 12-12020 (MG) Chapter 11 Jointly Administered

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ) ) ) ) ) ) )

In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.

Case No. 12-12020 (MG) Chapter 11 Jointly Administered

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I testified as an expert in connection with (i) a renewal of the KERP of Owens

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KEIP KERP KERP KERP -

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Proposed KEIP 75th Percentile 50th Percentile 25th Percentile

$7,000,000 Market Data: $3,444,000 $1,404,000 $852,688