In re Blitz U.S.A. Inc., 11–13603 (PJW).

• Citation: 475 B.R. 209,56 Bankr.Ct.Dec. 202
• Decision Date: 09 July 2012
• Docket Number: No. 11–13603 (PJW).,11–13603 (PJW).
• Parties: In re BLITZ U.S.A. INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

475 B.R. 209

56 Bankr.Ct.Dec. 202

In re BLITZ U.S.A. INC., et al., Debtors.

No. 11–13603 (PJW).

United States Bankruptcy Court, D. Delaware.

July 9, 2012.

Daniel J. DeFranceschi, Michael J. Merchant, Julie A. Finocchiaro, Amanda R. Steele, Richards, Layton & Finger, P.A., Wilmington, DE, for Debtors and Debtors in Possession.

Francis A. Monaco, Jr., Kevin Mangan, Womble Carlyle Sandridge & Rice LLP, Wilmington, DE, Jeffrey Prol, Mary E. Seymour, Lowenstein Sandler PC, Roseland, NJ, for Official Committee of Unsecured Creditors.

MEMORANDUM OPINION

PETER J. WALSH, Bankruptcy Judge.

This opinion is with respect to the amended motion seeking authorization to make payments associated with an employee bonus plan (the “Motion”) by Blitz USA, Inc. (“Blitz”). (Doc. # 418.) For the reasons detailed below, I will grant the Motion.

Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding pursuant to 28 U.S.C. § 157(A), (M), and (O).

Background¹

Blitz manufactures portable consumer gas containers, which are distributed through various retailers. Prior to entering bankruptcy, Blitz spent millions of dollars to defend numerous product liability lawsuits alleging injuries sustained in the use of Blitz's gas cans. In part, the influx of litigation and rapidly escalating defense costs led Blitz to seek bankruptcy protection. In addition to the gas can business, the Blitz enterprise included F3 Brands LLC (“F3”), which constituted non-gas-can products. F3 was spun off from Blitz in October 2011.

On November 9, 2011, Blitz and several of its affiliates (collectively “Debtors”) filed for bankruptcy protection under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Debtors continue to operate as debtors in possession, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.

Debtors filed the Motion on May 5, 2012, seeking the Court's approval of an EBITDA ²-based employee bonus plan for Fiscal Year 2012 (the “Bonus Plan”). Debtors argue that the Bonus Plan is an ordinary course transaction that Debtors are authorized to make without notice and a hearing. In the alternative, Debtors assert that, even if it is not in the ordinary course of business, the Bonus Plan satisfies the stringent requirements of § 503(c)(3)³ of the Bankruptcy Code. The Official Committee of Unsecured Creditors (the “Committee”) filed an objection to the Motion, arguing that the Bonus Plan is not an ordinary course transaction and is not justified by the facts and circumstances of this case. (Doc. # 435.) The U.S. Trustee also filed an objection, taking issue with the amount of payments designated for certain insiders. (Doc. # 436.)

On May 31, 2012, after briefing from the Debtors, Committee, and the U.S. Trustee, the Court held an evidentiary hearing. Debtors presented testimony from Rocky Flick, President and CEO of Blitz, and Fernando Maddock, director at Zolfo Cooper, the Debtors' restructuring firm. Committee and U.S. Trustee called no witnesses. The Court asked the parties to submit post-hearing statements. Committee and Debtors submitted statements and supporting exhibits, and the issue is now ripe for decision.

Discussion

Creation of the Bonus Plan

The Court makes the following findings of relevant fact regarding the creation of the Bonus Plan:

• Since 1992, Blitz has offered an employee bonus plan as part of its compensation package. (Hr'g Tr. 16:4–5.)

• At its inception, the program paid a bonus based on Blitz's net income, but was changed to an EBITDA-based model in 2007. (Tr. 16:8–9.)

• Compensation, including bonuses, is set by a four-member Compensation Committee. (Tr. 6–8.) All members are Blitz employees who are eligible beneficiaries under the bonus plan. (Tr. 46:25–47:2.)

• The Compensation Committee meets biannually to review compensation, using yearly evaluations with employees and market-based data from Kenexa CompAnalyst (“Kenexa”). Kenexa, a subscription service, compiles data on salary broken down by job description and geographic region. The Compensation Committee reviews Kenexa data in comparing current Blitz salaries with benchmarks in the relevant market. (Tr. 8–11; Debtors' Ex. 1.)

• The FY ⁴ 2008 bonus plan—the first plan based on EBITDA—was designed by the Compensation Committee, who “worked with [Flick] and the Board [of Directors]” to implement it. (Tr. 17.) The Board is comprised of Flick and three outside directors who are not included in the bonus plans. (Tr. 48:7–9.)

• The FY 2008 plan was modeled on one of a number of plans designed by Springfield Remanufacturing, a group of companies offering books and seminars on compensation. (Tr. 33.)

• Springfield Remanufacturing's philosophy of “employees having a stake in the outcome and how important that is to get employees motivated” influenced the decision to implement the FY 2008 bonus plan. (Tr. 33:10–13.)

• The Compensation Committee sets the annual bonus targets. (Tr. 8, 35.)

• The Compensation Committee's recommendations regarding salary and bonus are approved by Flick and the Board of Directors in connection with the Board's approval of the yearly budget and business plan. (Tr. 15:10–13.)

• The plan designed for FY 2008 is essentially the same in structure as the current Bonus Plan. (Tr. 17:23–18:1, 35.)

Parameters of the Bonus Plan

The Court makes the following findings of fact regarding the details of the Bonus Plan:

• The Bonus Plan's parameters and targets were set prior to the commencement of FY 2012 and prior to the filing of the bankruptcy petition. (Tr. 60.)

• The Compensation Committee sets the EBITDA targets so that employee total compensation levels, on average, will be competitive with the market once three targets are hit. (Tr. 27:6–11.)

• In previous years (2008 through 2011), the first EBITDA target was $6 million. The second target was $9 million, and subsequent targets increased in $3 million increments. (Tr. 19:1–2.)

• In 2008, one EBITDA target was hit, and approximately $533,620 was paid to employees. Three targets were hit in each 2009 and 2010, for total payments of $1.6 million and $1.75 million, respectively. In 2011, none of the targets were met and so no bonuses were paid. (Debtors' Ex. 4.)

• In the Bonus Plan, the first EBITDA target is $5 million with $2.5 million incremental targets. (Tr. 19:2–4.)

• The 2012 targets were lowered due to the spinoff of F3 Brands. The bonus plans in 2008 through 2011 included F3 Brands, which made up roughly one-third of the combined company's sales. After F3 Brands was spun off, the Compensation Committee reduced the first EBITDA target for Blitz to $5 million, from the pre-spinoff level of $6 million. Although no written analysis was done to arrive at the reduced target, $5 million was chosen to reflect the loss in sales but account for Blitz's greater efficiency and better margins. (Tr. 20, 49–50.)

• All Blitz employees are eligible for the Bonus Plan. (Tr. 33:25–34:1.)

• As in previous years, the Bonus Plan divides employees into five levels, depending on their job functions. The Compensation Committee determines the levels, subject to the approval of Flick and the Board. (Tr. 30:12–31:1.) The levels determine each employee's bonus, as a percentage of his or her base salary. Level 1 employees would receive 4 percent of their base salary each time a bonus target is hit, while the sole Level 5 employee, Flick, would receive 67 percent of his base salary. (Tr. 31.)

• With the Motion, Debtors are seeking approval for the payments associated with meeting only the first two EBITDA targets. (Tr. 18:10–12.) Only the first target has been reached. (Tr. 27:18–28:5.)

• The achievement of each target would result in a total payout of approximately $427,000. (Debtors' Ex. 4.)

• Debtors' DIP lenders have not objected to the Motion, and indicated to Flick that “they would be in support of paying the first incentive.” (Tr. 42:18–22.) Maddock also testified that the lenders have expressed their approval. (Tr. 174:11–13.)

The Bonus Plan is an Ordinary Course Transaction

Debtors argue that the Bonus Plan is an ordinary course transaction and thus need only be evaluated under the business judgment standard applied in § 363.⁵ Committee,on the other hand, argues that the elevated standard prescribed in § 503(c)(3) should apply. Section 503(c)(3) requires that a payment out of the ordinary course of business be “justified by the facts and circumstances of the case.” Committee asserts that the Bonus Plan is not so justified here.

A number of cases addressing an employee incentive bonus plan first examine whether the plan is a transaction made in the ordinary course of business. See, e.g., In re Nellson Nutraceutical, Inc., 369 B.R. 787 (Bankr.D.Del.2007); In re Global Home Products, LLC, 369 B.R. 778 (Bankr.D.Del.2007); In re Dana Corp., 358 B.R. 567 (Bankr.S.D.N.Y.2006). In order to determine whether a transaction is in the ordinary course of business, the Third Circuit and other courts use a two-part inquiry. Nellson, 369 B.R. at 797;Dana, 358 B.R. at 580. First, the transaction must be examined on the “vertical” dimension, which “analyzes the transactions from the vantage point of a hypothetical creditor[,] and the inquiry is whether the transaction subjects a creditor to economic risk of a nature different from those he accepted when he decided to extend credit.' ” Nellson, 369 B.R. at 797 (quoting In re Roth Am., Inc., 975 F.2d 949, 953 (3d Cir.1992)). In other words, the vertical analysis looks at the “debtor's pre-petition business practices and conduct.” Id. Next, the court must look at the transaction from the “horizontal” dimension, that is, “ ‘whether from an industry-wide perspective, the transaction is of the sort commonly undertaken by companies in that industry.’ ” Id. (quoting Roth, 975 F.2d at 953).

Flick testified that Blitz has had some form of bonus plan since 1992 and an EBITDA-based plan since FY 2008. Although the...