OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTOR’S PROPOSED PAYMENT TO MEDLEY CAPITAL LLC FOR DEFERRED COMPENSATION PURSUANT TO THE FINAL ORDER (I) AUTHORIZING, BUT NOT DIRECTING, THE DEBTOR TO CONTINUE AND MAINTAIN ITS EXISTING CASH MANAGEMENT SYSTEM, BANK ACCOUNT AND BUSINESS FORMS, (II) AUTHORIZING THE CONTINUATION OF ORDINARYCOURSE INTERCOMPANY TRANSACTIONS, AND (III) GRANTING
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8. Pursuant to the Cash Management Order, prior to making any Intercompany Transactions in excess of $200,000, the Debtor is required to provide three business days prior notice of such transaction, in which it must provide certain detail with respect to the purpose and amount of the transaction to certain parties, including the U.S. Trustee, counsel to U.S. Bank,11 and Strategic Capital Advisory Services, LLC, and the Cash Management Order allows for emergency relief to be sought from the Court with respect such Intercompany Transactions. Id.
9. The Debtor has informed the Committee that it is now seeking to make an approximately $662,000 Intercompany Transaction to Medley Capital for the purpose of allowing Medley Capital to make deferred compensation payments to certain of its employees relating to work done prepetition (the “Deferred Compensation Payments”). To be certain that these payments are beneficial to the Debtor’s estate and its creditors, the Committee has requested that they be made contingent on the implementation of reasonable measures to ensure that the Medley Capital employees remain with Medley Capital through the wind-down and liquidation process of the Company. As of the filing of this Objection, the Debtor has refused this request.
OBJECTION
10. The Committee acknowledges that to preserve a debtor’s value, it may at times be appropriate to pay certain employees on account of their pre-petition claims in order to retain those employees to allow the debtor (and its affiliates) to continue operating in the ordinary course. However, such payments, whether by a debtor, or by a non-debtor affiliate using funds transferred from such debtor, should only be made when they provide actual value to a debtor’s estate. Indeed this is what is required by section 503 of the Bankruptcy Code, which allows for the payment of administrative expenses that are “actual, necessary costs and expenses of preserving the estate.”12
11. The terms of the Cash Management Order permit Intercompany Transactions to maximize the value of the Debtor’s estate while providing the Debtor’s creditors with certain important protections with respect thereto. Based on the Debtor’s representations, the Committee is willing to allow funds to be transferred from the Debtor to Medley Capital to, among other things, pay employees to ensure a smooth wind-down of the business operations of the Company. Accordingly, to ensure that such employees provide this benefit, the Committee proposed that the Deferred Compensation Payments not be made unless such payments are subject to disgorgement in the event that an employee does not remain with the Company for such time as the recipient employee is needed to help facilitate an orderly wind-down of the Company’s business.
12. In response, the Debtor contends that Medley Capital is not a debtor, and that the Deferred Compensation Payments, therefore, do not need to meet the requirements of an administrative claim. The Debtor also claims that making the Deferred Compensation Payments subject to potential disgorgement will affect morale and lead to employee departures.
13. The Committee does not believe that potential disgorgement, a reasonable and customary safeguard to help preserve the value of the Debtor’s estate, will cause a mass exodus or otherwise affect employee morale. Indeed, the Committee supports the proposed Deferred Compensation Payments and structured its request to avoid that risk by allowing the Deferred Compensation Payments to be made at this time. Allowing for potential disgorgement merely ensures that the Debtor’s estate and its creditors receive a benefit from payment of prepetition claims that the Debtor would otherwise have no authority to make.
14. Unfortunately, the rejection of the Committee’s request exemplifies an emerging pattern in this chapter 11 case. The Debtor is utilizing the relevant sections of the Bankruptcy Code to its advantage with respect to basic protections such as the automatic stay and plan exclusivity, but seeks to avoid its strictures with respect to the remainder of the Company by arguing that Medley Capital and its other subsidiaries, through which the Debtor conducts its business, are non-debtors. The Committee believes that if it countenances this behavior now by inaction, the Debtor will continue to interpret the Cash Management Order to avoid the Committee’s and this Court’s oversight.
15. The Debtor may not pick and choose when to apply the Bankruptcy Code. The Debtor should only be permitted to obtain the benefits of the Bankruptcy Code if it accepts the requisite burdens and obligations. Intercompany Transactions pursuant to the Cash Management Order that permit Medley Capital and other non-debtor subsidiaries to make postpetition payments should only be permitted to the extent that they could, if made by the Debtor, satisfy the standards necessary to qualify as administrative expenses claims. Here, that means demonstrating that the Deferred Compensation Payments are actually necessary to preserve the value of the Debtor’s estate.
16. Making prepetition wage payments will not benefit the Debtor’s estate if the employees to whom they are made do not remain with the Company throughout the wind-down and liquidation process. Accordingly, the Intercompany Transaction to Medley Capital for the purpose of making the Deferred Compensation Payments should only be permitted if subject to disgorgement in the event that a recipient employee leaves the Company prior to the conclusion of such employee’s required contributions with respect to the wind-down and liquidation process. This will ensure that the Deferred Compensation Payments will confer a concrete benefit to the Debtor’s estate by making certain that the Company will have the staff it needs to liquidate efficiently and effectively.
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Source;
Court Doc # 0219
https://www.kccllc.net/medley/document/list/5510
*Deferred Compensation payments in a bankruptcy (which are really just another unsecured claim) without the disgorgment clause is a crucial issue for the OUCC AND the Court..and rightfully so!
One reason why is the potential for fraudulent transfer(s)...which imo is always a possibilty in a bankruptcy case. It happens!
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