Since the early 1990s, key employment-retention plans (KERPs) have been commonplace in Chapter 11 bankruptcy cases. These plans, which often provide hefty compensation to induce managers to remain with the struggling company, historically have been approved under �363 and �105 of the U.S. Bankruptcy Code. In the absence of a statute directing a specific standard for review of KERPs, courts applied the general �363 standard and looked to whether a sound business purpose justified the plan, and/or whether the debtor properly exercised its business judgment. See, e.g., In re Montgomery Ward Holding Corp., 242 B.R. 147 (D. Del. 1999). Various courts have approved KERPs when they were fair and reasonable under the circumstances. See In re Georgetown Steel Co., 306 B.R. 549, 555-56 (Bankr. D.S.C. 2004) (collecting cases).
It has been suggested that Congress believed that judges had too much discretion in this area. With the recently passed Bankruptcy Abuse Prevention and Consumer Protection Act, Congress now has attempted to specifically delineate the magnitude of retention and severance payments that may be made to “insiders” — typically, officers and other senior management employees with significant decision-making authority. New �503(c) is a limitation on the allowance or payment of a transfer “for the purpose of inducing [an insider] to remain with the debtor’s business;” severance payments to insiders; or “other transfers or obligations outside the ordinary course” to, among others, insiders.
