In re Dana Corp.

• Decision Date: 30 November 2006
• Docket Number: No. 06-10354 (BRL).,06-10354 (BRL).
• Citation: 358 B.R. 567
• Parties: In re DANA CORPORATION, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

358 B.R. 567

In re DANA CORPORATION, et al., Debtors.

No. 06-10354 (BRL).

United States Bankruptcy Court, S.D. New York.

November 30, 2006.

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Jones. Day, New York, NY by Corinne Ball, Heather Lennox, George T. Manning, for the Debtors and Debtors in Possession.

Kramer Levin Naftalis & Frankel LLP, New York, NY by Thomas Moers Mayer, Matthew J. Williams, for the Official Committee of Unsecured Creditors of Dana Corp., et al.

Fried, Frank, Harris, Shriver & Jacobson LLP, New York, NY by Gary Kaplan, Brian Pfeiffer, for the Official Equity Committee of Dana Corp., et al.

Stroock & Stroock & Lavan LLP, New York, NY by Kristopher M. Hansen, Shannon Lowry Nagel, for the Ad Hoc Committee of Dana Noteholders.

Cohen, Weiss And Simon LLP, New York, NY by Babette A. Ceccotti, for UAW and USW.

International Union, UAW, by Niraj R. Ganatra, Esq., Detroit, MI.

United Steelworkers, Pittsburgh, PA by David R. Jury, for USW.

Stahl Cowen Crowley LLC, Chicago, IL by Trent Cornell, Jon D. Cohen, for the Official Committee of Non-Union Retirees of Dana Corp. et al.

MEMORANDUM OPINION APPROVING, IN PART, DEBTORS' MOTION FOR AUTHORIZATION TO ASSUME EMPLOYMENT AGREEMENTS, FOR APPROVAL OF A LONG TERM INCENTIVE PLAN AND RELATED RELIEF

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion (the "Executive Compensation Motion") of Dana Corporation ("Dana" or collectively with its affiliated debtors, the "Debtors"), pursuant to sections 105(a), 363(b), 365, 502 and 503(c) of title 11 of the United States Code (the "Bankruptcy Code"), for an order authorizing Debtors' assumption of the prepetition employment agreements (the "Employment Agreements") of Michael J. Burns, its President and Chief Executive Officer (the "CEO"),, and senior executives of the core management team (the "Senior Executives"), as modified; allowing certain general unsecured claims against Debtors' estate under certain circumstances; approving a longterm performance based incentive plan (the "LTIP") for the CEO and Senior Executives; and Debtor's Motion for Clarification and Reconsideration, Pursuant to Rules 9023 and 9024 of the Federal Rules of Bankruptcy Procedure, of Order Denying Executive Compensation Motion (the "Motion to Reconsider"). The Hearing on the Executive Compensation Motion and the Motion to Reconsider was held on November 21, 2006 (the "Hearing").

This is the Debtors' second effort to obtain approval of an executive compensation package for the CEO and Senior Executives. At the first hearing for such approval this Court found that the executive compensation plan proposed (the "Initial Compensation Motion") was wanting as an acceptable "incentive" plan. See In re Dana Corp., 351 B.R. 96, 2006 WL 2563458 (Bankr.S.D.N.Y. September 5, 2006) (the "September 5 Order").

Following the September 5 Order denying the Debtors' motion to approve the Initial Compensation Motion, the Debtors negotiated with the official committee of unsecured creditors (the "Creditors' Committee") and official committee of equity security holders (the "Equity Committee") in an effort to reach a consensus on an acceptable compensation package. The Debtors assert, and the Committees agree, that the Executive Compensation Motion currently before this Court is a true incentivizing package for senior management and is wholly different than the initial proposal.

The Creditors' Committee and the Equity Committee filed statements in support of the Executive Compensation Motion, but maintained that the Court need not determine the Motion to Reconsider. The United States Trustee (the "U.S. Trustee"), the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (the "USW")¹ and United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (the "UAW")² (collectively the "Unions"), and the committee of non-union retirees (the "Non-Union Retiree Committee") oppose both the Executive Compensation Motion and the Motion to Reconsider. Generally, courts take a holistic view of and measure acceptability of compensation packages through the prism of several factors including:

- whether the amount of cost or expense is reasonable and in the best interest of the estate;

- whether the services to be provided are likely to enhance a successful reorganization or liquidation of the debtor;

- whether the debtor exercised appropriate business judgment in implementing any application for continuing, resuming, or retaining the executive.

Recognizing the potential limitations of section 503(c) of the Bankruptcy Code as it applies to those employee retention provisions that are essentially "pay to stay" key employee retention programs ("KE RPs"), yet viewing compensation packages holistically,³ a true incentive plan may not be constrained by 503(c) limitations. I noted in the September 5 Order that merely because a plan has some retentive effect does not mean that the plan, overall, is retentive rather than incentivizing in nature.

As set forth below, the plan before this Court is substantially watered down and modified from the original employment agreements and from the Initial Compensation Motion. Accordingly, subject to the limitations or conditions set forth herein, the plan before this Court is consistent with section 503(c), is within the fair and reasonable business judgment of the Debtors and thus within the zone of acceptability.

BACKGROUND

On March 3, 2006 (the "Petition Date"), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. The Debtors are leading suppliers of modules, systems and components for original equipment manufacturers and service customers in the light, commercial and off-highway vehicle markets. The products manufactured and supplied are used in cars, vans, sport-utility vehicles, light, medium and heavy trucks, and a wide range of off-highway vehicles. As disclosed in Dana's Form 10-K filed on April 27, 2006, for the year ended December 31, 2005, the Dana Companies recorded revenue of more than $8.6 billion and had assets of approximately $7.4 billion and liabilities totaling $6.8 billion. As of the Petition Date, the Dana Companies had approximately 44,000 employees. After the cases were commenced, the U.S. Trustee appointed the Creditors' Committee, the Equity Committee, and the Non-Union Retiree Committee.

On June 29, 2006, the Debtors filed the Initial Compensation Motion seeking authority to assume the employment agreements of the CEO and Senior Executives. Objections to the Initial Compensation Motion were filed by the U.S. Trustee, the Creditors' Committee, the Equity Committee, the Ad Hoc Noteholders' Committee and the Unions on the basis that the relief being sought violated section 503(c) of the Bankruptcy Code. The opposition, while general in form, focused primarily on the benefits proposed for the CEO. At the September 5, 2006 hearing, this Court denied the Initial Compensation Motion, finding that the plan presented to the Court was not an incentive plan, and that it violated section 503(c). However, as noted, this Court also opined that incentivizing plans with some components that arguably have a retentive effect do not necessarily violate section 503(c). See September 5 Order.

THE MOTION TO RECONSIDER

The Debtors' stated purpose in filing the Motion to Reconsider was to maintain flexibility while they negotiated with their stakeholders over the terms of a new plan. The Debtors have revamped their proposals and a new package is now before the Court. As such, the Executive Compensation Motion will be considered—standing alone—on its own merits. Moreover, as the Initial Compensation Motion was holistically denied by this Court, it serves no purpose to revisit portions of that plan when the new proposal will be considered de novo. Accordingly, the Motion to Reconsider is moot.⁴

EXECUTIVE COMPENSATION MOTION

In addition to base salary and an annual incentive plan (the "AIP"), the Employment Agreements of the CEO and Senior Executives, as modified, include the following terms:⁵

PENSION BENEFITS

Dana proposes to assume one hundred percent of the Senior Executives' pension plans (ranging between $999,000 and $2.7 million) and sixty percent of the CEO's pension plan (60% of $5.9 million), with the remaining forty percent being allowed as a general unsecured claim. Assumption would take place upon emergence from bankruptcy or the Senior Executives' involuntary termination without cause, and with respect to the CEO, voluntary termination for good reason. The pension benefits would only be assumed on the condition that the salaried and bargaining unit defined benefit pension plans of Dana employees have not been terminated.

To the extent not assumed, one hundred percent of the pension benefits of CEO and Senior Executives would be treated as allowed general unsecured claims in their vested amount as of the Petition Date, with all postpetition accruals and credits allowed as administrative claims.

SEVERANCE

Should the need arise, the Debtors propose to pay the CEO and Senior Executives severance in an amount that complies with section 503(c)(2) of the Bankruptcy Code. To quell the fears of objecting parties, the Debtors agreed to submit a statement, upon the termination of the CEO or Senior Executive, detailing a calculation of the severance payment for which they are eligible, and allow sufficient notice⁶ of such payment.

NON-DISCLOSURE AGREEMENT AND PRE-EMERGENCE OR POST-EMERGENCE CLAIM

In consideration for the assumption of their Employment Agreements and receipt of payments under the LTIP, the Senior Executives would execute a new non-compete, non-solicitation, non-disclosure and non-disparagement agreement (collectively, the "NDA Agreements") that would prohibit the Senior Executives from accepting a position with a competitor of...