Among the more interesting civil cases that arose out of the Enron Corp. bankruptcy case are the various lawsuits that were filed to recover retention bonuses paid to former key Enron executives.
Retention bonuses are payments made to a company’s key executives immediately before the filing of the company’s bankruptcy for the purpose of retaining those key executives during the company’s bankruptcy case, particularly during the early stages of the case when risk of liquidation is high. The theory behind retention bonuses is that ensuring that key executives continue to work for a debtor-company is a reasonable hedge against the risk of liquidation, which generally results in greater loss of jobs and lesser dividends on creditors’ claims than if the debtor-company is reorganized.
Retention bonuses have always been controversial, primarily because they are made immediately prior to the company going into bankruptcy and, thus, are not subject to Bankruptcy Court approval as they would be if proposed after the company enters bankruptcy. Nevertheless, creditors have traditionally used the avoidance powers in bankruptcy cases — i.e., the power of the Bankruptcy Court to order the return to the debtor’s bankruptcy estate of certain pre-petition payments that prefer certain creditors over others or that constitute fraudulent transfers to third parties — to go after retention bonuses paid to a debtor-company’s former executives. In most cases, the core issue in such lawsuits is whether the debtor-company’s payment to the key executive was a reasonable price to pay for the executive’s services in helping the debtor-company reorganize.
Ruling against the Enron retention bonuses
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