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Lifland Rules

posted by Bob Lawless

Judge Lifland ruled against Dana Corporation yesterday. Floyd Norris continues his good reporting on this story in today's N.Y. Times. According to Mr. Norris, Judge Lifland said, "This compensation scheme walks like, talks like, and is a KERP." A "KERP" is a key employee retention plan, and if you are unfamiliar with this case, see my previous postings here and here.

If I ran the world, Judge Lifland would be right, but I am not sure the statute Congress passed supports his reasoning. The statute does not reach things that walk like, talk like, and look like KERPs. Rather, it reaches payments "for the purpose of inducing [a corporate insider] to remain with the debtor's business." Here, the payments were made for the purpose of inducing the corporate insider to reach certain performance benchmarks. They may have been easily met benchmarks, but they were still performance benchmarks. Yeah, one might say the benchmarks were so low that they were essentially done for the purpose of inducing the insider to remain with the company. That argument proves too much, however, as every bit of salary and benefit paid to an employee is done to induce the person to remain with the company. There is no indication that Congress intended courts to apply the new rules to all forms of compensation to corporate insiders.

In the end, this case comes down to the question of whether we apply the statute the way it was written or the way we think Congress wanted to write. (This is a pervasive question in statutory interpretation as I previously discussed.) I wish Congress had written the statute the way Judge Lifland interprets it, but I am not sure it did.

All of my comments on this case are based on Mr. Norris's reporting in the N.Y. Times. It will be interesting to see if a written opinion emerges to explain Judge Lifland's reasoning more fully. Until we can assess how broad this ruling might be, I wonder what it will mean for Manhattan as a venue choice for publicly traded companies filing bankruptcy.

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