Thanks to Tom Kirkendall for his post on his Houston’s Clear Thinkers blog to a 102 page opinion (available here also) issued by Dallas’ Bankruptcy Judge Robert McGuire in a case that challenged the grant (and funding) of over $100 million in retention bonuses to approximately 300 highly-coveted energy traders and related management employees on the eve of Enron’s bankruptcy filing in December 2001.
Tom K. says that BAPCPA’s “recent amendments to the Bankruptcy Code limit the precedential value of the decision [because] [u]nder those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case.” Let me add two qualifications to this comment:

First, while Tom K. is right that Bankruptcy Court approval is now needed for all proposed postpetition payments of retention bonuses (even if the bonuses were authorized prepetition), BAPCPA’s amendments to new Code Section 548(a)(1)(B)(ii)(IV) do not presume that prepetition retention bonuses payments are voidable. Rather, such payments are voidable under the new Code section only to the extent that (i) the debtor “received less than a reasonably equivalent value in exchange,” and (ii) the transfers were made to “an insider,” “under an employment contract,” and “not in the ordinary course of business.” Notably, the new law does not appear to shift the burden of proof, which remains with the plaintiff/trustee as to all elements.
Second, the case has significant precedential value for a bankruptcy litigator because of the Court’s analysis (often extensive) of such bread and butter issues for a bankruptcy litigator as:

  • when an “antecedent debt” arises for preference purposes (pp. 38-43);
  • whether the “new value” defense applies (pp. 43-48);
  • whether the “ordinary course” defense applies to the preference action [N.B.: discussion of what constitutes “ordinary course” for purposes of an affirmative defense to a preference action may well become the standard in future litigation under new Code section 548(a)(1)(B)(ii)(IV) regarding whether a prepetition payment under an employee contract was in the “ordinary course”] (p.48);
  • whether the debtor “was insolvent” at the time of the transfer (both from a “balance sheet” and “equitable” perspective and from a “going concern” vs. “liquidation” perspective) (pp. 48-79);
  • whether, applying the doctrine of Moore v. Bay (the case I love to hate), there existed at least one pre-existing creditor with standing to avoid the transaction (pp. 82-84);
  • whether the bonuses, being on the eve of bankruptcy, were intentional fraudulent transfers (pp. 86-88);
  • whether the bonuses were accepted for value and in good faith under Code section 548(c) (pp. 89-94);
  • whether “reasonably equivalent” value was given in exchange (pp. 94-97).

This matter was initiated by the “Official Employment-Related Issues Committee of Enron Corporation (the “Employment Committee”), an official committee formed by the US Trustee in Enron’s bankruptcy case primarily to investigate these challenged payments and to commence avoidance litigation regarding them, as appropriate. Initially, over 300 defendants were sued, 40 of whom went to trial to defend their right to the bonuses (several of whom, the record suggests, apparently were unaware of the saying that “one who represents himself has a fool for a client and an idiot for a lawyer”).
With extensive references to the voluminous record (which included over 1,000 documentary exhibits), Judge McGuire methodically ruled that:

(i) the payments were preferential as they were made on account of an “antecedent debt” while the debtor was “insolvent, and were not subject to valid “new value,” “ordinary course,” or “contemporaneous exchange” defenses;
(ii) the Enron debtors were not only insolvent, but “on their deathbeds,” at the time of the grants;
(iii) Moore v. Bay remains good law, and voidable as to one means it’s voidable as to all (at least in this case, unlike in the Campbell Soup case discussed here, the value of the prepetition debts exceeded the amounts sought to be recovered);
(iv) the bonuses were intentional fraudulent transfers made with intent to hinder, delay, and defraud Enron’s creditors;
(v) the bonuses were constructive fraudulent transfers in that “reasonably equivalent value” was not provided in exchange given that Enron was on its deathbed at the time of the grant;
(vi) there was insufficient evidence that the transfers were taken in “good faith” under Bankruptcy Code section 548(c).

All in all, a most interesting read (particularly, at pp. 68-76, the 38 enumerated conclusions of government reports regarding the pervasiveness of the Enron debtors’ financial shenanigans and the complicity of their banks and advisors in the same).
Thanks to Tom K. for being the first to share it with us all.
© Steve Jakubowski 2005