Motion to Approve Key Employee Incentive and Retention Plans

This motion is for use by a Chapter 11 debtor in possession seeking approval of a key employee incentive plan (KEIP) and/or a key employee retention plan (KERP). This template includes practical guidance, drafting notes, and alternate and optional clauses. Section 503(c) of the Bankruptcy Code imposes restrictions on the allowance of administrative expenses for, and payment in respect of, retention, severance, and incentive plans. Section 503(c)(1) sets strict limits on payments made to insiders for the purpose of inducing them to remain with the debtor's business. To approve a retention plan for insiders, the court must find that: (1) the payment is necessary to retain the manager because the manager has a bona fide job offer from another business at the same or greater pay rate and (2) the manager's services are essential to the survival of the business. Even if these requirements are met, Section 503(c)(1) restricts the amounts that can be paid to retain the employee. Because these strict requirements are difficult to satisfy, retention plans for insiders are rare. The restrictions contained in Section 503(c)(1) do not apply to incentive plans (or retention plans for non-insiders). Those plans must satisfy Sections 363 and 503(c)(3). Section 503(c)(3) is a catch-all provision for outside of the ordinary course of business transactions. In determining whether Section 503(c)(3) is satisfied, some courts apply a business judgment standard (as with Section 363) while others apply a stricter standard and scrutinize the transaction more closely. Note that courts look beyond the title of the plan to determine whether a plan labeled as an incentive plan is, in effect, a retention plan. A plan labeled as an incentive plan but found to be a retention plan will typically need to be modified to be approved. Similarly, if the debtor is proposing a retention plan, and a particular employee is determined to be an insider for whom Section 503(c)(1) applies, the employee typically will need to be removed from the retention plan (and perhaps included in the incentive plan). This template assumes that the debtor will be seeking approval of both a KEIP and a KERP in the same motion. If the debtor is seeking approval of only a KEIP or only a KERP, the template should be revised accordingly. This motion uses the defined term "Key Executives" for participants in the KEIP and "Key Employees" for participants in the KERP. This template also contains bracketed language and optional and alternate clauses that assert that the KEIP is an ordinary course transaction and, therefore, bankruptcy court approval is unnecessary under Section 363(c)(1). Pursuant to Section 363(c)(1) (and absent a court order to the contrary), a debtor in possession generally may enter into transactions (including a sale of estate property) and use estate property, in each case, in the ordinary course of business and without notice and a hearing. The bracketed/optional/alternate language can be used to include Section 363(c)(1) as one of the reasons the court should grant the motion. Note that the case law cited in this template should be revised to cite to cases in the debtor's jurisdiction. For more information, see Executive Compensation and Severance Agreements in Bankruptcy. For a complete list of content when representing a debtor that is filing for Chapter 11, see Filing for Chapter 11 Bankruptcy Resource Kit. For additional resources on filing a Chapter 11 bankruptcy case, see Filing for Chapter 11 Bankruptcy Resource Kit.