In re Global Aviation Holdings Inc.

• Decision Date: 24 July 2012
• Docket Number: No. 12–40787(CEC).,No. 12–40789(CEC).,No. 12–40790(CEC).,No. 12–40786(CEC).,No. 12–40788(CEC).,No. 12–40783 (CEC).,No. 12–40782(CEC).,No. 12–40785(CEC).,No. 12–40784(CEC).,12–40783 (CEC).,12–40782(CEC).,12–40784(CEC).,12–40785(CEC).,12–40786(CEC).,12–40787(CEC).,12–40788(CEC).,12–40789(CEC).,12–40790(CEC).
• Parties: In re GLOBAL AVIATION HOLDINGS INC., et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

478 B.R. 142

In re GLOBAL AVIATION HOLDINGS INC., et al., Debtors.

Nos. 12–40783 (CEC), 12–40782(CEC), 12–40784(CEC), 12–40785(CEC), 12–40786(CEC), 12–40787(CEC), 12–40788(CEC), 12–40789(CEC), 12–40790(CEC).

United States Bankruptcy Court,

E.D. New York.

July 24, 2012.

Jonathan Henes, Esq., Michael B. Slade, Esq., Ryan Bennett, Esq., Christopher T. Greco, Esq., Kirkland & Ellis LLP, New York, NY, for Debtors.

Jason Teele, Esq., Sharon Levine, Esq., Cassandra M. Porter, Esq., Lowenstein Sandler PC, Roseland, NJ, for Official Committee of Unsecured Creditors.

Andrea B. Schwartz, Esq., U.S. Department of Justice, New York, NY, for Tracy Hope Davis, United States Trustee for Region 2.

DECISION

CARLA E. CRAIG, Chief Judge.

This matter comes before the Court on the motion (the “Motion”) of Global Aviation Holdings, Inc. and its affiliated debtors (collectively, the “Debtors”) for the entry of an order approving a key employee retention plan (the “KERP”) pursuant to §§ 363(b) and 503(c)(3) of Title 11 of the United States Code (the “Bankruptcy Code”).¹ The United States Trustee for Region 2 (the “UST”) and the Official Committee of Unsecured Creditors (the “Committee”) filed objections to the Motion, arguing that the Debtors are improperly seeking to pay bonuses (i) to insiders without satisfying the requirements set forth in § 503(c)(1) or (ii) to the extent the KERP recipients are non-insiders, without establishing that the proposed bonus payments are “justified by the facts and circumstances of the case” as required by § 503(c)(3). An evidentiary hearing was held on July 11, 2012. For the reasons set forth below, the employees eligible to receive compensation under the KERP are not insiders of the Debtors, and because the Debtors have established that the KERP is “justified by the facts and circumstances of the case,” the objections of the UST and the Committee are overruled and the Motion is granted in its entirety.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1996. This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(B) and 157(b)(2)(M). This Decision constitutes the Court's findings of fact and conclusions of law to the extent required by Rule 7053 of the Federal Rules of Bankruptcy Procedure.

BACKGROUND

On February 5, 2012 (the “Petition Date”), the Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code. The Debtors operate two airlines: North American Airlines, Inc., (“North American”) and World Airways, Inc. (“World”). North American's headquarters is currently located at JFK International Airport in Jamaica, New York, while World's headquarters is located in Peachtree City, Georgia. The Debtors, as part of their reorganization strategy, have decided to consolidate their operations by relocating North American's operations from JFK International Airport to Peachtree City, Georgia. According to the Debtors, their business plan contemplates the completion of this relocation process by August 31, 2012.

On June 15, 2012, the Debtors filed the Motion ² seeking Court approval of the KERP under which the Debtors would pay bonuses to five employees of North American: 1) the Director of Safety; 2) the Vice President of Operations; 3) the Chief Pilot; 4) the Senior Director of Maintenance; and 5) the Chief Inspector (collectively, the “KERP Employees”). The proposed bonus payments under the KERP are structured as a percentage of each KERP Employee's base salary and in accordance with the Debtors' pre-petition annual bonus plan. The proposed payouts are intended to ensure that each of the KERP Employees remains with the Debtors through the relocation of North American's operations to Peachtree City. Set forth below is the amount of the bonus that each KERP Employee will receive upon the approval by the Federal Aviation Administration (the “FAA”) of the transfer of North American's operations to Georgia:

• Director of Safety: $18,050

• Vice President, Flight Operations: $50,696

• Chief Pilot: $29,355

• Senior Director of Maintenance: $15,750

• Director, Quality Assurance and Projects: $23,180

In the aggregate, the Debtors seek to pay the KERP Employees bonuses totaling $137,031.

In support of the Motion, the Debtors filed the declaration of William A. Garrett, the Executive Vice President and Chief Financial Officer of the Debtors. In his declaration, Mr. Garrett explains that the relocation of North American is contingent on the FAA making a determination that North American's operations, maintenance, and safety departments are functioning consistently in Peachtree City as they were functioning at JFK International Airport. (Dec. at ¶ 5.) ³ Mr. Garrett asserts that the retention of the KERP Employees is critical to securing FAA approval because the KERP Employees oversee the operations, maintenance, and safety departments of North American. ( Id. at ¶ 6.) The Debtors point out that the FAA regulations, codified at 14 C.F.R. § 119.65, specifically mandate that a commercial airplane operator “have qualified personal serving full time” in each of the five positions filled by the KERP Employees. ( Id. at ¶ 5.) Because the FAA considers the tenure of the employees who fill these positions and the extent and nature of their preexisting relationships with the FAA in determining if the personnel are qualified, the Debtors believe that if even one of the KERP Employees were to leave North American in the coming weeks, FAA approval of the relocation would be delayed beyond August 31, 2012. ( Id. at ¶ 6.) The Debtors point out that the lease costs alone at the JFK International Airport location amount to $132,000 per month, approximately the total amount of the proposed payments under the KERP. (Supp. Dec. at ¶ 9.) Any delay, therefore, will result in a loss of cost savings that exceeds the proposed bonuses to be paid to the KERP Employees.

On July 3, 2012, the Committee filed an objection to the Motion.⁴ The Committee's objection is two-fold. First, the Committee disputes the Debtors' characterization of the KERP Employees as “non-insiders.” The Committee asserts that the KERP Employees have oversight authority over areas of North American's corporate policy consistent with the status of insiders. The Committee contends that these proposed bonuses must therefore be reviewed under § 503(c)(1), which requires evidentiary showings that the Debtors have not made. Second, the Committee argues that even if the KERP Employees are determined not to be insiders, the Debtors have still not met the standard for permissible bonus payments outside the ordinary course of business set forth in § 503(c)(3).

The UST also filed an objection to the Motion on July 3, 2012.⁵ The UST argues that the Debtors have failed to provide sufficient evidence to establish that one of the KERP Employees—the Director of Safety—is not an insider of the Debtors. The UST further argues that, whether or not the Director of Safety is an insider of the Debtors, the Debtors have not carried their burden of proof to demonstrate that the proposed bonuses to the KERP Employees are permissible under § 503(c)(3).

On July 9, 2012, in response to the Committee and the UST's objections, the Debtorsfiled an omnibus reply ⁶ arguing that, under applicable case law, the KERP Employees are not insiders and that the decision to proceed with the KERP is within their business judgment. With the omnibus reply, the Debtors also filed a supplemental declaration by Mr. Garrett.

On July 11, 2012, a hearing was held on the Motion, at which Mr. Garrett testified in further support of the Motion.

DISCUSSION

The Motion must be evaluated under the standards set forth in § 503(c), as enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109–8, 119 Stat. 23. The threshold inquiry is whether all, or any, of the KERP Employees are insiders of the Debtors such that the proposed bonus payments under the KERP fall within the purview of § 503(c)(1).

A. Insider Analysis

If a KERP Employee is an insider of the Debtors, then he or she is precluded from receiving a retention bonus unless the strict requirements outlined in § 503(c)(1) are met. That section prohibits the payment of a retention bonus to an insider unless: (i) the insider has a bona fide job offer that pays at least the same rate of compensation, (ii) the insider performs “services ... [that] are essential to the survival of the business,” and (iii) the proposed amount of bonus for the insider is (x) not greater than an amount equal to 10 times the mean amount of any bonuses paid to nonmanagement employees during the current calendar year or (y) if no such bonuses were paid to nonmanagement employees during the current calendar year, not greater than an amount equal to 25 percent of the amount of any bonuses paid to the insider in the preceding calendar year. 11 U.S.C. § 503(c)(1).

Congress has built by design “a set of challenging standards” and “high hurdles” for the payment of retention bonuses to insiders. In re Global Home Prods., LLC, 369 B.R. 778, 784–85 (Bankr.D.Del.2007). Here, the Debtors concede that none of the KERP Employees has a bona fide job offer. (Tr. 147: 9–12.) ⁷ Accordingly, a finding that the KERP Employees are insiders would be fatal to the Motion. If, on the other hand, the KERP Employees are not insiders, the proposed bonuses under the KERP must be evaluated under § 503(c)(3), which prohibits payments to employees outside the ordinary course which are “not justified by the facts and circumstances of the case.”

With respect to a debtor that is a corporation, the Bankruptcy Code's definition of an “insider” includes a:

(i) director of the debtor;

(ii) officer of the debtor;

(iii) person in control of the debtor;

(iv) partnership in which the debtor is a general partner;

(v) general partner of the...