## Facts

- Hawker Beechcraft, Inc. and affiliates filed Chapter 11 in May 2012 while operating an aircraft manufacturing and service business and carrying heavy secured and unsecured debt.
- Prepetition, the debtors entered a restructuring support agreement with key creditors contemplating a standalone reorganization converting funded debt to equity, while also pursuing a potential third-party sale.
- The debtors sought approval of two compensation programs: (1) a non-insider key employee retention plan (KERP) and (2) an insider key employee incentive plan (KEIP) for senior executives.
- The court approved the non-insider KERP from the bench after an evidentiary hearing and reserved decision on the insider KEIP.
- The proposed insider KEIP offered senior management bonuses up to 200% of salary, with payout tiers tied largely to consummation of a plan of reorganization or completion of a sale, including lower-tier thresholds based on timing and transaction value.
- The U.S. Trustee and the union objected, contending the KEIP functioned primarily to keep insiders in place rather than to reward measurable, difficult-to-achieve performance.

## Issues

1. Whether the proposed insider KEIP was a true incentive plan reviewable under 11 U.S.C. § 503(c)(3) or, in substance, an insider retention plan subject to the stricter limits of 11 U.S.C. § 503(c)(1).
2. If the plan was retentive in substance, whether the debtors satisfied § 503(c)(1)’s statutory prerequisites for insider retention payments.
3. Whether the debtors carried their burden to show that the insider payments were justified by the facts and circumstances of the case under § 503(c)(3).

## Decision

- The court denied approval of the insider KEIP without prejudice.
- The court found that, viewed as a whole, the KEIP set the minimum bonus threshold too low and operated primarily as a retention program for insiders.
- Because the plan was effectively retentive, it could not be approved absent compliance with § 503(c)(1), which the debtors did not establish.
- The court further determined that, even considered under § 503(c)(3), the debtors did not show the proposed payouts were justified given the modest performance hurdles and large potential bonuses.
- The previously approved non-insider KERP remained in effect and was not disturbed.

## Legal Principles

- In Chapter 11, courts evaluate executive “incentive” plans based on substance rather than labels; a plan that mainly induces insiders to remain is treated as a retention plan.
- Insider retention payments are sharply restricted by 11 U.S.C. § 503(c)(1) and require proof of statutory conditions, including a bona fide job offer at equal or higher compensation and compliance with statutory payment limits.
- Payments to insiders outside the ordinary course may be approved under 11 U.S.C. § 503(c)(3) only if justified by the facts and circumstances of the case; easily achievable triggers and outsized payouts weigh against approval.
- Performance goals that are highly likely to occur during the restructuring process indicate a plan is retentive rather than incentivizing.

## Conclusion

The bankruptcy court refused to approve an executive bonus plan where the lower-tier targets were readily attainable in light of an existing restructuring framework, concluding the program functioned as an insider retention arrangement that failed to satisfy § 503(c) and was not otherwise justified on the evidentiary record.


In re Hawker Beechcraft, Inc., 479 B.R. 308 (Bankr. S.D.N.Y. 2012)