In re Velo Holdings Inc.

• Decision Date: 06 June 2012
• Docket Number: No. 12–11384 (MG).,12–11384 (MG).
• Citation: 56 Bankr.Ct.Dec. 158,472 B.R. 201
• Parties: In re VELO HOLDINGS INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

472 B.R. 201

56 Bankr.Ct.Dec. 158

In re VELO HOLDINGS INC., et al., Debtors.

No. 12–11384 (MG).

United States Bankruptcy Court,

S.D. New York.

June 6, 2012.

Dechert LLP, By: Michael J. Sage, Esq., Shmuel Vasser, Esq., Davin J. Hall, Esq., New York, NY, for the Debtors.

Tacy Hope Davis, By: Paul Schwartzberg, Esq., New York, NY, for United States Trustee for Region 2.

Cooley LLP, By: Jeffrey L. Cohen, Esq., New York, NY, for the Official Committee of Unsecured Creditors.

Wilkie Farr & Gallagher LLP, By: Margot B. Schonholtz, Esq., Ana M. Alfonso, Esq., Marina I. Zelinsky, Esq., New York, NY, for Barclays Bank PLC, as First Lien Prepetition Agent and DIP Agent.

MEMORANDUM OPINION APPROVING THE DEBTORS' KEY EMPLOYEE INCENTIVE PLAN

MARTIN GLENN, Bankruptcy Judge.

The Debtors seek approval of a Key Employee Incentive Plan (the “KEIP”), which proposes to set aside approximately $2.875 million in incentive-bonus payments for a number of the Debtors' employees (including insiders) if the Debtors' businesses reach certain financial goals. Such plans have become commonplace in large bankruptcy cases. The United States Trustee (the “U.S. Trustee”) filed an objection to the Motion (defined below). In response to that objection, the Debtors filed a reply and additional declarations in support of the Motion, clarifying certain issues raised by the U.S. Trustee. After the hearing on May 29, 2012, the Debtors further amended the KEIP in light of the U.S. Trustee's remaining objections. All but two of the U.S. Trustee's objections have been resolved. For the reasons discussed below, the Court now overrules the U.S. Trustee's remaining two objections and grants the Motion approving the KEIP, as amended.

I. BACKGROUND

On April 2, 2012 (the “Petition Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. In December 2011, before the bankruptcy, with the assistance of their financial and legal advisors, the Debtors began a comprehensive marketing process attempting to sell all or parts of their business. Ultimately, the Debtors received three bids. After discussions with the advisors for Barclays Bank PLC (the “First Lien Agent”) and the majority of first lien lenders regarding the range of values and the terms of the bids, the Debtors determined that a financial restructuring supported by the majority of their first lien lenders would provide more value for the Debtors' estates than pursuing any of the bids that had been received. Before the Petition Date, General Electric Capital Corporation, Goldentree Asset Management LP, Chase Lincoln Financial Corporation, and Barclays Bank PLC, in their capacity as first lien lenders (collectively with the First Lien Agent, the “Lender Parties”), entered into a chapter 11 case protocol (the “Agreed Protocol”) outlining the terms of a proposed restructuring of the Debtors' business and financial affairs and a proposed sale of the Debtors' assets to the Lender Parties.

On May 8, 2012, the Debtors filed the Debtors' Motion for Entry of an Order Approving the Debtors' Key Employee Incentive Plan (the “Motion”) (ECF Doc. # 130) with the attached declaration of Lorraine DiSanto (the “DiSanto Declaration”). The U.S. Trustee filed an objection to the Motion (the “Objection”). (ECF Doc. # 145.) The Debtors filed a reply, addressing each of the issues raised by the U.S. Trustee. (ECF Doc. # 181.) The Debtors also filed the declarations of Robert A. Campagna Jr. (the “Campagna Declaration”) (ECF Doc. # 182) and Vincent DiBenedetto (the “DiBenedetto Declaration”). (ECF Doc. # 214.) ¹

A. The KEIP Program

In developing the Agreed Protocol, the Debtors discussed the design of the KEIP with their outside advisors and a majority of the Lender Parties (and their advisors). The KEIP includes earnings performance targets (the “Targets”) based on the applicable business or sale plan for each business unit. The term sheet for the originally proposed KEIP is attached to the Motion as Exhibit 2.

The KEIP was subsequently amended, and a revised term sheet was filed with the Court. (ECF Doc. # 218.) The amendments include modifications to the proposed service milestones for George Thomas, General Counsel of the Debtors, and the compensation terms for Vincent DiBenedetto, President of Coverdell & Company, Inc. The U.S. Trustee and the Official Committee of Unsecured Creditors (the “Committee”) have consented to these modifications.

The KEIP is separately tailored to three of the Debtors' businesses with specific incentive programs for the following Debtors: (1) FYI Direct, Inc., Brand Magnet, Inc. and Adaptive Marketing LLC, collectively with certain of their non-debtor affiliates (the “ACU Business”); ² (2) Coverdell & Company, Inc., and its non-debtor affiliates (“Coverdell”); and (3) Neverblue Communications, Inc., and certain its non-debtor affiliates (“Neverblue”).

1. The Key Employees

The Debtors estimate that approximately 63 employees would receive payments under the KEIP (the “Key Employees”), of whom five are insider directors or officers under the Bankruptcy Code. The identities of the non-insider KEIP participants were shared with the U.S. Trustee but are not identified in the Motion. These non-insider employee participants will be determined by management (and in the case of the ACU Business, participants will be determined by Alan Jacobs, the Chief Restructuring Officer (the “CRO”), in consultation with the Chief Executive Officer and the Chief Financial Officer). The “insiders” who are proposed KEIP recipients are: (i) Gary Johnson (the Debtors' Chief Executive Officer and a director of the Debtors); (ii) Lorraine DiSanto (the Debtors' Chief Financial Officer and Chief Operating Officer); (iii) George Thomas (the Debtors' General Counsel and a director of certain of the Debtors); (iv) Vincent DiBenedetto (a director and the President of Coverdell & Co.); and (v) Hakan Lindskog (the President of nondebtor affiliate Neverblue Media Company). All other employees who may receive payments under the plan are responsible for running the day-to-day business operations; they are subordinate employees who report to an officer or an intermediary who reports to an officer.³

2. The Targets and Payouts

The KEIP's base funding level for achieving the applicable Targets is $2.875 million, consisting of $2 million allocated to the ACU Business (the “ACU Target”); $700,000 to Coverdell (the “Coverdell Target”); and $175,000 to Neverblue (the “Neverblue Target”). (Mot. ¶ 18.) Depending on performance, Key Employees will have the ability to earn greater than 100% of the incentive pool Target.

a. The ACU Target

The ACU Target will be allocated to employees managing the Harvest of ACU through two separate pools: (i) $600,000 (the “Executive Pool”) for Gary Johnson, Lorraine DiSanto, and George Thomas (each, an “Executive Employee”) in the aggregate (i.e., $200,000 each); and (ii) $1.4 million for all other Key Employees required to maximize the value of the Harvest (the “Employee Pool”). The Employee Pool will be allocated by the CRO in collaboration with Gary Johnson and Lorraine DiSanto, who will continue to consult with the CRO on adjustments while they are employed by the Debtors. Payouts from the Executive Pool will be based on achieving defined milestones and providing transition services essential to the success of the Harvest. At a minimum, for Executive Employees to earn their KEIP payments, the Debtors must meet the net operating cash flow covenant in section 7.1(a)(ii) of the Debtors' postpetition credit agreement over the initial thirteen weeks of the Debtors' cases (the “DIP Budget”), and the Executive Employees must provide additional transitional services, as described in the Motion. (Mot. ¶ 25.)

Payouts for the rank and file Employee Pool will be distributed based on “Net Proceeds” ⁴ to creditors as follows:

b. The Coverdell Target

The $700,000 Coverdell Target will be allocated to Key Employees of Coverdell; amounts per employee will be determined at the discretion of Coverdell's management. (Mot. ¶ 28.) Participants include approximately 27 non-insider employees of Coverdell, as well as Coverdell's President, Vincent DiBenedetto (who also serves as a Director). ( Id.) Under the revised KEIP, in the event that Coverdell is sold to a third-party purchaser or the Lender Parties for more than $80 million, DiBenedetto's compensation is calculated as a percentage of the Coverdell Net Sale Proceeds; the percentage increases as the range of the Coverdell Net Sale Proceeds increases. Additionally, the U.S. Trustee negotiated an across-the-board $100,000 reduction in Mr. DiBenedetto's compensation under the KEIP.

With respect to the rank and file employees of Coverdell, one of two tests will apply to the allocation of the Coverdell Target. First, if the Lender Parties acquire Coverdell through an $80 million credit bid, or if the Debtors sell Coverdell for less than $80 million, then Coverdell would have to meet revenue and EBITDA targets for participants to receive KEIP compensation. Alternatively, if Coverdell is sold to a third party for $80 million or more, or if the Lender Parties acquire Coverdell under a credit bid in excess of $80 million, then a net sale proceeds calculation applies.⁵ Participants would also have the ability to earn more or less than the Coverdell Target based upon performance relative to the revenue and EBITDA targets or the Coverdell Net Sale Proceeds test.

c. The Neverblue Target

The $175,000 proposed allocation to Key Employees of Neverblue will be allocated to approximately eight non-insider employees; the exact participants and incentive amounts will be determined at the discretion of Neverblue's management. Similar to the Coverdell Target, the tests and allocation methods for Key Employees of Neverblue will depend on the facts and circumstances of these cases. First, if the Lender Parties acquire Neverblue through a $20 million...