You are on page 1of 12

In re:

IN THE UNITED STATES BANKRUPTCY COURT


DISTRICT OF DELAWARE
Chapter 11
ALLIED SYSTEMS HOLDINGS, INC., et
al.,
1
Case No. 12-11564 (CSS)
(Jointly Administered)
Debtor.
Hearing Date: Sept. 28 at 11:00 a.m.
Objection Deadline: Sept. 24 at 12:00 p.m.
(Extended for the Committee)
Re: Docket No. 420
LIMITED OBJECTION OF THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS TO DEBTORS' MOTION PURSUANT TO
11 U.S.C. 363(b)(l) AND 503(c)(3) SEEKING AN ORDER AUTHORIZING
THE DEBTORS TO IMPLEMENT KEY EMPLOYEE RETENTION PLAN
The Official Committee of Unsecured Creditors (the "Committee") appointed in
the above-captioned chapter 11 cases of Allied Systems Holdings, Inc. ("Allied"), Allied
Systems, Ltd. (L.P.) ("Systems") and their U.S. and Canadian subsidiaries (collectively, the
"Debtors"), by and through its proposed undersigned counsel, hereby submits this limited
objection (the "Limited Objection") to the Debtors' Motion Pursuant to 11 US. C. 363(b)(l)
and 503(c)(3) Seeking an Order Authorizing the Debtors to Implement Key Employee Retention
Plan [Docket No. 420] (the "KERP Motion").
2
In support thereof, the Committee respectfully
represents as follows:
3
The Debtors in these cases, along with the federal tax identification number (or Canadian business number
where applicable) for each of the Debtors, are: Allied Systems Holdings, Inc. (58-0360550); Allied Automotive
Group, Inc. (58-2201081); Allied Freight Broker LLC (59-2876864); Allied Systems (Canada) Company (90-
0169283); Allied Systems, Ltd. (L.P.) (58-1710028); Axis Areta, LLC (45-5215545); Axis Canada Company
(87568828); Axis Group, Inc. (58-2204628); Commercial Carriers, Inc. (38-0436930); CT Services, Inc. (38-
2918187); Cordin Transport LLC (38-1985795); F.J. Boutell Driveaway LLC (38-0365100); GACS
Incorporated (58-1944786); Logistic Systems, LLC (45-4241751); Logistic Technology, LLC (45-4242057);
QAT, Inc. (59-2876863); RMX LLC (31-0961359); Transport Support LLC (38-2349563); and Terminal
Services LLC (91-0847582). The location of the Debtors' corporate headquarters and the Debtors' address for
service of process is 2302 Parklake Drive, Bldg. 15, Ste. 600, Atlanta, Georgia 30345.
Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Rothschild
Application.
Counsel to the Committee and counsel to the Debtors have been in communication regarding the Debtors'
KERP in order to attempt to resolve the concerns raised by the Committee. While no agreement had been
reached prior to the objection deadline, the Committee will continue to work towards a consensual resolution of
these issues, if possible.
INTRODUCTION
1. While the Committee is not opposed to the Debtors seeking to induce the
retention of employees critical to the Debtors' operation, the Debtors have failed to meet their
evidentiary burden of proof because, among other things, the KERP Motion is unsupported by
any evidence that (i) there will be a "mass exodus of key employees" if the proposed KERP (the
"Debtors' KERP") is not approved, (ii) the Debtors' KERP "comports with industry standards,"
(iii) the Debtors' KERP does not unfairly discriminate, and (iv) it is fair and reasonable. Indeed,
while the Debtors make numerous blanket statements that a KERP is necessary and justified in
these cases, they have failed to provide sufficient evidence to warrant relief under section 503(c)
of the Bankruptcy Code.
2. As a result of information that the Debtors provided to the Committee
after the KERP Motion was filed, the Committee is satisfied that employees covered by the
Debtors' KERP are not insiders. However, even though it appears that the covered employees
are non-insiders, the Debtors have neglected to present sufficient proof to back up any of their
conclusory statements that the Debtors' KERP satisfies section 503(c)(3) of the Bankruptcy
Code. Indeed, despite correctly stating the Dana II test, the Debtors' proclamations that each
factor under that test is met is not sufficient to grant relief. There must be sufficient evidence to
support their claims - and there simply is not. Most fundamentally, the Debtors have failed to
demonstrate that the covered employees as a whole are critical to the Debtors' operations and
that there is a risk that any purportedly key employees will leave the Debtors if the Debtors'
KERP is not approved. It should be noted that the Committee is not stating or signaling that it
opposes KERP programs for rank and file employees; rather, the Committee is simply not
satisfied that the Debtors' KERP was properly-formulated, does not discriminate or that it is
even necessary at this point in time.
2
3. In sum, the Debtors have failed to meet their burden, and accordingly, the
KERP Motion must be denied.
4
BACKGROUND
4. On May 17, 2012 (the "Petition Date"), involuntary petitions were filed by
Black Diamond CLO 2005-1 Ltd., BDCM Opportunity Fund II, LP and Spectrum Investment
Partners, L.P. (collectively, the "Petitioning Creditors"), prepetition lenders (the "First Lien
Lenders") to the Debtors against Allied and its subsidiary Systems under chapter 11 of title 11 of
the United States Code (the "Bankruptcy Code") in this Bankruptcy Court (the "Court"). See
Statement of Petitioning Creditors in Support of the Involuntary Chapter 11 Petitions Filed
Against Allied Systems Holdings, Inc. and Allied Systems, Ltd. (L.P.) [Docket No. 9]
("Petitioning Creditors Statement").
5. On June 10, 2012 (the "Consent Date"), the remaining Debtors filed
voluntary petitions in this Court, and, in connection therewith, Allied and Systems consented to
the involuntary petitions filed against them. The chapter 11 cases commenced thereby are,
collectively, the "Chapter 11 Cases."
6. The Debtors have continued in possession of their property and have
continued to operate and manage their businesses as debtors in possession pursuant to sections
1107(a) and 1108 of the Bankruptcy Code. On June 11, the Court entered an order jointly
administering the Chapter 11 Cases pursuant to Rule 1015(b) of the Federal Rules ofBankruptcy
Procedure (the "Bankruptcy Rules") for procedural purposes only.
7. On September 7, 2012, the KERP Motion was filed. Prior to the KERP
Motion being filed, the Committee sought information from the Debtors relating to the Debtors'
KERP provided to the Committee in draft form on August 31, 2012. To date, the Debtors have
provided partial responses to these requests. The Debtors contend the purpose of the Debtors'
KERP is to retain seventy-nine (79), non-insider employees (collectively, the "Employees,"
4
Notwithstanding this Limited Objection, the Committee is not opposed to working collectively with the Debtors
in devising a KERP for critical employees to be presented to the Court at the appropriate time.
3
individually an "Employee") in Canada and the United States in order to "stern the tide of further
employee attrition" by covering employees "critical to the functioning of the Debtors' ongoing
operations." KERP Motion ~ 7. The Debtors have provided the Committee with the name,
proposed bonus amount, job title and location of each Employee, as well as additional
information regarding the responsibilities and reporting duties of certain "director" level
Employees (collectively, the "Described Employees"). The Debtors' KERP will pay a bonus to
the 79 Employees in the aggregate amount of $799,523.95 (collectively, the "Bonuses,"
individually a "Bonus"), which is comprised of a bonus paid to each employee in amount equal
to 15% of their annual salary. See KERP Motion ~ 8. The bonus would become payable if an
Employee remains employed by the Debtors through and including the effective date of a chapter
11 plan or such later date as the board of Allied may specify in the Employee's notice of
participation (the "Participation Notice"), or an Employee incurs a Qualifying Termination of
Employment (as defined in the Debtors' KERP). See KERP Motion, Ex. A 5.02. A
Qualifying Termination of Employment includes termination of employment with the Debtors
"by reason of a Partial Sale of the Company's Business or a Sale of the Company's Assets, ...
by the Company without Cause; or ... as otherwise specifically set forth in the [Participation
Notice]." KERP Motion, Ex. A 2.18.
LIMITED OBJECTION
8. Courts interpreting KERPs have unanimously required debtors to meet the
burden of provmg that section 503(c) of the Bankruptcy Code is satisfied, including
demonstrating (i) whether the employees to be covered under the proposed KERP are "insiders,"
(ii) if any such employees are insiders, whether the requirements of sections 503(c)(1) and (2), as
applicable, are satisfied, and (iii) for all non-insiders, whether the requirements of section
503(c)(3) are satisfied for any non-ordinary course KERP. See In re Pilgrim's Pride Corp., 401
B.R. 229, 236-237 (Bankr. N.D. Tex. 2009) (holding that the debtor has the burden of satisfying
the requirements of section 503(c)(3)); In re Fieldstone Mortg. Co., 427 B.R. 357 (Bankr. D. Md.
201 0) (declining to approve an insider KERP where the debtor failed to demonstrate that the
4
proposed KERP satisfied section 503(c)(1)); In re Global Aviation Holdings Inc., 2012 WL
3018064 (Bankr. E.D.N.Y. Jul. 24, 2012) (finding that the debtors satisfied their burden of
showing that the covered employees are not "insiders" as used in sections 503(c)(1) and (2)); see
also In re Dana Corp., 358 B.R. 567 (Bankr. S.D.N.Y. 2006) ("Dana II"); In re Borders Group,
Inc., 453 B.R. 459 (Bankr. S.D.N.Y. 2011); In re Global Home Products, LLC, 369 B.R. 778
(Bankr. D. Del. 2007); In re Nobex Corp., 2006 WL 4063024, at *3 (Bankr. D. Del. Jan. 19,
2006); In re Dewey & LeBoeuf LLP, 2012 WL 3065275 (Bankr. S.D.N.Y. Jul. 30, 2012); In re
Foothills Texas, Inc., 408 B.R. 573 (Bankr. D. Del. 2009).
9. The Committee objects to the KERP Motion because even though the
Employees are non-insiders, the Debtors have not met their burden to demonstrate that the
Debtors' KERP satisfies the requirements of section 503(c)(3) of the Bankruptcy Code. The
Debtors' KERP makes a Bonus payable to an Employee if, among other things, the Participation
Notice so specifies or if the Employee incurs a Qualifying Termination of Employment (which
includes events specifically set forth in the Participation Notice). See KERP Motion, Ex. A
2.18, 5.02. Thus, while the Bonuses are apparently intended to keep the Debtors' key employees
from departing before a sale or plan is consummated (see KERP M o t i o n ~ 8), there could be
other triggering events contained within the Participation Notice. However, the Committee has
not received the form of the Participation Notice.
10. Accordingly, as set forth below, in light of the failure of the Debtors to
provide sufficient evidence that the Debtors' KERP satisfies section 503(c) of the Bankruptcy
Code, this Court respectfully must deny the KERP Motion in its entirety.
I. The Debtors Have Failed to Provide Sufficient Evidence that the Debtors' KERP
Satisfies the Standard of Review Set Forth in Section 503( c) of the Bankruptcy Code
11. Section 503(c)(3) bars "transfers or obligations that are outside the
ordinary course of business and not justified by the facts and circumstances of the case. This
provision, along with section 503(c)(1) and (2), were added in 2005 to take "specific aim at
Congressional concern over what is viewed as KERP abuses" and impose "a set of challenging
5
standards debtors must meet to have 'stay' bonuses approved." Global Horne Products, 369 B.R.
778, 784. The purpose was to "severely restrict[]" KERPs and other programs intended to retain
employees. Id. at 785. Thus, KERP proponents have had to prove to courts that a series of the
following factors have been met before a court would be satisfied that a KERP outside the
ordinary course ofbusiness
5
is "justified by the facts and circumstances of the case" (11 U.S.C.
503(c)(3)):
1. Whether the plan has a reasonable relationship to the results to be obtained;
11. Whether the cost is reasonable in light of the debtor's assets, liabilities, and
earnings potential;
111. Whether the scope of the plan is fair and reasonable or discriminates unfairly;
1v. Whether the plan comports with industry standards;
v. Whether the debtor undertook due diligence in investigating the need for a plan,
the employees that should be incentivized, market standards; and
v1. Whether the debtor received independent counsel in performing due diligence in
creating and authorizing the incentive compensation.
Global Aviation, 2012 WL 3018064, at *6; Dana II, 358 B.R. 567, 576-77; Global Horne
Products, 369 B.R. at 786; Borders, 453 B.R. 459, 474. But as set forth below, the Debtors have
failed to meet their burden to provide sufficient evidence to show that the Debtors' KERP even
satisfies one of the six Dana II factors.
A. The Debtors Have Failed to Show the Debtors' KERP Has a Reasonable
Relationship to the Results to be Obtained
12. The Debtors claim that they are paying the Bonuses in order to ensure the
Employees rernam with the Debtors because employee attrition must be curbed, and the
Employees are necessary for the Debtors to continuing operating as a business. See KERP
M o t i o n ~ ~ 15-16. However, they provide no evidence to support any of their claims that (a)
The Debtors concede that the Debtors' KERP is outside the ordinary course of business. See KERP M o t i o n ~
11.
6
"[t]he Debtors were short staffed before the commencement of the Chapter 11 Cases and have
already suffered the additional loss of a number of key employees during the pendency of these
Chapter 11 Cases" (KERP M o t i o n ~ 15), and (b) "[t]he non-insider [Employees] are critical to
the functioning of the Debtors' ongoing operations." KERP M o t i o n ~ 7.
13. The KERP Motion only provides figures for the number of employees the
Debtors had as of the Petition Date, with nothing suggesting how the Debtors were short staffed
prior to the Petition Date, and no figures as to the Debtors' employee attrition rate. See KERP
M o t i o n ~ 5 (stating that the Debtors had 2,048 employees as of the Petition Date); Declaration of
Scott D. Macaulay in Support of Chapter 11 Petitions and First Day M o t i o n s ~ 9 [Docket No. 80]
(declaring that the Debtors "employs about 1,835 people"). Moreover, the KERP Motion
provides no evidence or explanation as to why these Employees were selected as critical to the
Debtors' operations. For the most part, the Committee has only seen a list of the Employees'
names, proposed bonus, job title and location, with no supporting explanation as to why the
Employees are critical.
6
14. As such, the Debtors have failed to demonstrate that there is a risk that the
Employees would likely leave the Debtors in the absence of the Bonuses, given that there is no
evidence of substantial employee attrition and similarly have failed to show that replacing the
Employees would be "substantially detrimental to the Debtors' estates" (KERP M o t i o n ~ 16), as
there is no evidence that all the Employees are indeed key employees. Unlike other cases, the
Debtors provide only conclusory allegations that these are the case, and have given no concrete
evidence of these claims either in the KERP Motion, the Blount Declaration, or informal
correspondence with the Committee. Compare id. ~ ~ 15-18; KERP Motion, Ex. B ~ 9 ("Blount
Declaration") with Global Aviation, 2012 WL 3018064, at *6-7 (finding KERP had a reasonable
relationship with its objectives, as it was intended to retain five employees critical to obtaining
6
The only exception are the small subset of Employees- the Described Employees- for which the Debtors have
provided some information regarding the roles of such Employees, but even though it appears that these
Described Employees are critical to the Debtors' businesses, the Debtors have not supplied any evidence that
there is a risk that the Described Employees would leave the Debtors in the absence of the Bonuses.
7
FAA approval of a central part of the debtors' restructuring, and that the debtors' belief that there
was a risk that one of the key employees would leave was justified because of the fact that one of
its airliners had lost 45% of its work force since the petition date); Borders, 453 B.R. at 465, 474-
75 (finding that the was KERP properly constructed to retain non-insiders critical to the debtors'
operations because of the disruptive effect and cost of replacing such employees and the
significant exodus of corporate employees - 4 7 senior corporate employees had left post-
petition, and the debtors' workforce had dropped from around 16,000 as of the petition date to
11,000 at the time of the hearings on the motion - which the debtors have temporarily replaced
with personnel from the debtors' restructuring advisors at costly rates). Consequently, the
Debtors have failed to show that the Debtors' KERP is reasonably related to the goal of retaining
key employees necessary to the Debtors' continuing operations.
B. The Debtors Have Failed to Show the Cost of the Debtors' KERP Is Reasonable
15. Although the relative cost of the Debtors' KERP is not out of proportion
to the cost of other KERPs approved by courts in recent years, the cost of the Debtors' KERP
cannot be considered reasonable because the Debtors again have provided no evidence that the
Debtors' KERP will result in any gain whatsoever- there is no evidence of an unusually high
employee attrition or that the Employees as a whole are indeed key. Compare KERP Motion ,-r
18 with Global Aviation, 2012 WL 3018064, at *8 (finding cost of KERP, $137,031, was
reasonable because it was a small cost relative to the debtors' revenue to ensure the debtors could
achieve significant cost savings associated with the relocation of one of its airliners).
C. The Debtors Have Failed to Show the Debtors' KERP Does not Discriminate
Unfairly
16. While the Debtors claim that the Debtors' KERP focuses on the 79 mid-
ranking employees that are key to the Debtors' operations (see KERP Motion ,-r 19), the Debtors
have not sufficiently explained their selection criteria. Thus, the Committee cannot assess
whether the Debtors have discriminated against other employees who may fall within the
8
Debtors' description of a "key" employee. By contrast, in other cases, debtors have "'carefully
selected' the pool of bonus recipients." Global Aviation, 2012 WL 3018064, at *9 (KERP
covering only five employees necessary for the specific objective of relocating an airliner);
Borders, 453 B.R. at 466-67, 476 (25 employees under the KERP were selected from the
debtors' 11,000 employees as those that performed "a variety of critical functions that are of
paramount importance to the Debtors' reorganization effort" that the debtors "carefully
selected").
17. To the extent the Debtors targeted its "non-bargaining employees" in the
Debtors' KERP (KERP 20; Blount 10), the Debtors almost certainly have
discriminated unfairly against its unionized employees - which the Debtors claim comprise
approximately 63% of the Debtors' workforce in Canada and the United States- some of whom
must certainly be key to the Debtors' operations, given the relatively broad coverage of the
Debtors' KERP to 79 Employees.
D. The Debtors Have Failed to Show the Debtors' KERP Comports with Industry
Standards
18. The Debtors further provide no justification for claiming the Debtors'
KERP comports with industry standards, and have given no examples of other KERPs approved
by courts, or other bonus programs adopted in its industry, including in its own past practices.
Indeed, where no such examples are given, courts have only found KERPs to be consistent with
industry standards if the debtor offered evidence that such bonus programs were "nearly identical
to the bonus plan that the [debtors] had in place prepetition." See Global Aviation, 2012 WL
3018064, at *9, citing In reVelo Holdings, 472 B.R. 201, 213 (Bankr. S.D.N.Y. 2012); Borders,
453 B.R. at 464-65. Here, the Debtors acknowledge that no similar retention plan was in place
prepetition. See KERP Motion 11 ("the Debtors did not have a similar retention plan in place
for those employees proposed to be covered under the Retention Plan prior to the
commencement of the Chapter 11 Cases").
9
19. More fundamentally, courts only find KERPs to comport with industry
standards where such programs are shown to be necessary to retain key employees - which the
Debtors have failed to demonstrate. See Borders, 453 B.R. at 476 (holding that the KERP was
structured in a manner consistent with other retention plans implemented by other corporate
chapter 11 debtors, as it was "necessary given attrition in the ranks, reasonable in amount and
scope and only applies to non-insiders.").
E. The Debtors Have Failed to Show the Debtors Exercised Due Diligence in
Formulating the Debtors' KERP and Received Sufficient Counsel in Developing the
Debtors' KERP
20. Additionally, the Debtors have not demonstrated that they have performed
sufficient due diligence in investigating the need for a KERP and in determining which
employees should be eligible for a bonus. The Debtors claim that they only engaged in a poll of
department heads concerning which of their employees were critical to the Debtors' continued
operations and undertook consultation with their advisors to narrow the scope of the Debtors'
KERP. See KERP M o t i o n ~ 21. Yet the Debtors have given the Committee little information as
to precisely what that entailed, and the Committee lacks the details necessary to determine if the
Debtors did indeed exercise due diligence and receive sufficient counsel in developing the
Debtors' KERP.
21. Accordingly, the KERP Motion fails to sufficiently allege any of the six
Dana II factors, and this Court respectfully must deny the KERP Motion even if the Employees
are non-insiders.
10
CONCLUSION
WHEREFORE, the Committee respectfully requests that the Court deny the KERP
Motion on the grounds set forth herein, and grant such other further relief as is just and proper.
Dated: Wilmington, Delaware
September 24, 2012
SULLIVAN HAZELTINE ALLINSON LLC
William D. Sullivan (No. 282
William A. Hazeltine (No. 32
901 N. Market St., Suite 1300
Wilmington, DE 19801
Telephone: (302) 428-8191
Facsimile: (302) 428-8195
- and -
SIDLEY AUSTIN LLP
Michael G. Burke
Brian J. Lohan
Dennis Kao
787 Seventh Avenue
New York, NY 10019
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
Matthew A. Clemente
One South Dearborn Street
Chicago, IL 60603
Telephone: (312) 853-7000
Facsimile: (312) 853-7036
Counsel for the Official Committee of Unsecured
Creditors
11
CERTIFICATION OF SERVICE
I, William A. Hazeltine, do hereby certify I am not less than 18 years of age and that on
this 24
111
day of September 2012, I caused a copy ofthe within Limited Objection OfThe Official
Committee Of Unsecured Creditors To Debtors' Motion Pursuant To 11 US. C. 363(B)(1)
And 503(C)(3) Seeking An Order Authorizing The Debtors To Implement Key Employee
Retention Plan to be served upon the parties listed below via U.S. Mail, First Class, postage pre-
paid and Facsimile.
Mark D. Collins, Esq.
Christopher M. Samis, Esq.
Marisa A. Terranova, Esq.
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, DE 19801
Fax: (302) 651-7701
Jeffrey W. Kelley, Esq.
Ezra H. Cohen, Esq.
Carolyn P. Richter, Esq.
TROUTMANSANDERSLLP
Bank of America Plaza
600 Peachtree Street, Suite 5200
Atlanta GA 30308-2216
Fax: (404) 885-3900
Under penalty of perjury, I declare the foregoing to be true and correct.
September 24, 2012
Date
Is/ William A. Hazeltine
William A. Hazeltine