How can unsecured creditors protect their interest in a business bankruptcy?
In June, we reported on how the bankruptcy proceedings of Sports Authority would impact a sponsorship contract between the company and the Milwaukee Brewers. The case recently took a curious turn as the company recently revealed plans to pay key, unnamed executives $2.85 million in bonuses. Now, a U.S. bankruptcy judge has blocked the bonuses to four executives for overseeing winding down the sporting goods chain.
The US Trustee and Sport’s Authority’s creditors pushed back against the compensation plan which they deemed to be “outside the course of ordinary business.” They also argued about the secrecy of the payout to the unidentified executives, claiming the bonus program was “quid pro quo” for a deal that will payout $71 million to senior creditors. The company’s position was that the bonuses were an incentive to keep the executives on board and prevent competitors from hiring these key players away.
In these cases, it is not unusual for the court to approve special bonus payments such as an incentive for executives to maximize creditor value. At the same time, these schemes are usually opposed by the trustee when the bonuses are not fully disclosed. In this case, the defunct company did not name the executives involved.
The trustee and the creditors committee argued the bonuses were not performance incentives, but rather a means to circumvent unsecured creditor claims. This is not about protecting morale, they said, since top management was not in charge of the liquidation proceedings. In sum, the court sided with the trustee and the creditors.
“I think it’s just inappropriate to pay senior executives a bonus when all the employees are losing their jobs,” said Judge Mary Walrath.
While the bankruptcy of Sports Authority is almost a done deal, this case highlights the complexities of creditor claims in a business bankruptcy. The best way for creditors to protect their interests is by engaging the services of an experienced bankruptcy attorney.