Bankruptcy Lawyer Bryan W. Stone answers the question: “What is a small business bankruptcy ?”
No, the top executives for the bankrupted Sports Authority do not have the authority to give themselves $2.85 million in bonuses, the company’s U.S. bankruptcy judge has ruled.
The decision seems like a no-brainer. The proposed bonuses the dissolving company asked for were to be divided amongst four (4) executives—or $712,500 each if divided equally—who are responsible for overseeing the winding down of the national sporting good chain’s affairs after it filed for bankruptcy this March.
Despite the seemingly obvious ruling, bankrupt companies frequently receive court approval for special bonuses paid out to the top executives for hitting performance targets that are designed to maximize return value for the company’s creditors.
However, the U.S. Trustee, the government’s watchdog in bankruptcy matters, routinely opposes these payments. Former staffers of the bankrupt companies are also common protestors of such payouts, for obvious reasons.
The U.S. bankruptcy judge on the case agreed, deeming it “just inappropriate” that the executives would receive such bonus pay when the company’s 14,000 employees were losing their jobs.
The way Sports Authority went about asking for approval for the bonuses probably didn’t help. It claimed the extra pay would be necessary to ensure that the executives were able to squeeze as much value as possible out of the corporation’s remaining assets by sticking to a tight budget and preventing waste (the common justification for such bonus pay). Sports Authority then asked that the identities of the executives who would receive the proposed bonuses be kept secret under court seal in order to, it claimed, minimize detrimental effects on employee morale.
The former employees seemed to feel, understandably, that losing their source of income was what had a “detrimental effect” on their morale.
The sporting goods chain filed for Chapter 13 bankruptcy this spring, the standard type of reorganization bankruptcy for companies. Its unsecured creditors had requested that the case be converted to a Chapter 7 liquidation bankruptcy, which most commonly occurs when the debtor company can no longer afford to meet the Chapter 13 plan payments or decides to surrender certain property that the Chapter 13 plan was designed to save.
(Secured creditors are those with an interest in a debtor’s property, which the creditors can then sell if the creditor defaults. A common example of a secured creditor is a mortgage lender. Unsecured creditors, by contrast, own no such interest. Secured creditors are usually paid off first in bankruptcy proceedings.)
The same day she denied the bonus pay, U.S. bankruptcy judge Mary Walrath also approved a proposed settlement amongst Sports Authority and its creditors and lenders over the division of the company’s remaining legal claims and cash.
Under the deal, the lenders will give up claims they could have pursued against unsecured creditors such as suppliers, and the landlords involved will get most of the unpaid rent that accumulated during the bankruptcy. The unsecured creditors also agreed to drop their request to convert the case to a Chapter 7.
Dick’s Sporting Goods Inc., the largest U.S. sporting goods retailer, acquired the Sports Authority name and its intellectual property at an auction in June.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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