mew Doc 384 Filed 09/04/15 Entered 09/04/15 15:19:32 Main Document Pg 1 of 18. UNITED STATES BANKRUPTCY COURT Hearing Date: 9/17/15

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1 Pg 1 of 18 UNITED STATES BANKRUPTCY COURT Hearing Date: 9/17/15 SOUTHERN DISTRICT OF NEW YORK Hearing Time: 11:00 a.m X In re : Chapter 11 1 RELATIVITY FASHION, LLC, et al., : Case No (MEW) X Debtors. : (Jointly Administered) OMNIBUS OBJECTION OF THE UNITED STATES TRUSTEE TO DEBTORS MOTIONS FOR ORDERS APPROVING DEBTORS KEY EMPLOYEE INCENTIVE PLAN AND EMPLOYEE RETENTION PROGRAM WILLIAM K. HARRINGTON United States Trustee for Region 2 Federal Office Building 201 Varick Street, Room 1006 New York, New York By: Serene K. Nakano Susan D. Golden Trial Attorneys (212) The Debtors in these Chapter 11 cases are set forth on page (i).

2 Pg 2 of 18 The Debtors in these Chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Relativity Fashion, LLC (4571); Relativity Holdings LLC (7052); Relativity Media, LLC (0844); Relativity REAL, LLC (1653); RML Distribution Domestic, LLC (6528); RML Distribution International, LLC (6749); RMLDD Financing, LLC (9114); 21 & Over Productions, LLC (7796); 3 Days to Kill Productions, LLC (5747); A Perfect Getaway P.R., LLC (9252); A Perfect Getaway, LLC (3939); Armored Car Productions, LLC (2750); Best of Me Productions, LLC (1490); Black Or White Films, LLC (6718); Blackbird Productions, LLC (8037); Brant Point Productions, LLC (9994); Brick Mansions Acquisitions, LLC (3910); Brilliant Films, LLC (0448); Brothers Productions, LLC (9930); Brothers Servicing, LLC (5849); Catfish Productions, LLC (7728); Cine Productions, LLC (8359); CinePost, LLC (8440); Cisco Beach Media, LLC (8621); Cliff Road Media, LLC (7065); Den of Thieves Films, LLC (3046); Don Jon Acquisitions, LLC (7951); DR Productions, LLC (7803); Einstein Rentals, LLC (5861); English Breakfast Media, LLC (2240); Furnace Films, LLC (3558); Gotti Acquisitions, LLC (6562); Great Point Productions, LLC (5813); Guido Contini Films, LLC (1031); Hooper Farm Music, LLC (3773); Hooper Farm Publishing, LLC (3762); Hummock Pond Properties, LLC (9862); Hunter Killer La Productions, LLC (1939); Hunter Killer Productions, LLC (3130); In The Hat Productions, LLC (3140); J & J Project, LLC (1832); JGAG Acquisitions, LLC (9221); Left Behind Acquisitions, LLC (1367); Long Pond Media, LLC (7197); Madaket Publishing, LLC (9356); Madaket Road Music, LLC (9352); Madvine RM, LLC (0646); Malavita Productions, LLC (8636); MB Productions, LLC (4477); Merchant of Shanghai Productions, LLC (7002); Miacomet Media LLC (7371); Miracle Shot Productions, LLC (0015); Most Wonderful Time Productions, LLC (0426); Movie Productions, LLC (9860); One Life Acquisitions, LLC (9061); Orange Street Media, LLC (3089); Out Of This World Productions, LLC (2322); Paranoia Acquisitions, LLC (8747); Phantom Acquisitions, LLC (6381); Pocomo Productions, LLC (1069); Relative Motion Music, LLC (8016); Relative Velocity Music, LLC (7169); Relativity Development, LLC (5296); Relativity Film Finance II, LLC (9082); Relativity Film Finance III, LLC (8893); Relativity Film Finance, LLC (2127); Relativity Films, LLC (5464); Relativity Foreign, LLC (8993); Relativity India Holdings, LLC (8921); Relativity Jackson, LLC (6116); Relativity Media Distribution, LLC (0264); Relativity Media Films, LLC (1574); Relativity Music Group, LLC (9540); Relativity Production LLC (7891); Relativity Rogue, LLC (3333); Relativity Senator, LLC (9044); Relativity Sky Land Asia Holdings, LLC (9582); Relativity TV, LLC (0227); Reveler Productions, LLC (2191); RML Acquisitions I, LLC (9406); RML Acquisitions II, LLC (9810); RML Acquisitions III, LLC (9116); RML Acquisitions IV, LLC (4997); RML Acquisitions IX, LLC (4410); RML Acquisitions V, LLC (9532); RML Acquisitions VI, LLC (9640); RML Acquisitions VII, LLC (7747); RML Acquisitions VIII, LLC (7459); RML Acquisitions X, LLC (1009); RML Acquisitions XI, LLC (2651); RML Acquisitions XII, LLC (4226); RML Acquisitions XIII, LLC (9614); RML Acquisitions XIV, LLC (1910); RML Acquisitions XV, LLC (5518); RML Bronze Films, LLC (8636); RML Damascus Films, LLC (6024); RML Desert Films, LLC (4564); RML Documentaries, LLC (7991); RML DR Films, LLC (0022); RML Echo Films, LLC (4656); RML Escobar Films LLC (0123); RML Film Development, LLC (3567); RML Films PR, LLC (1662); RML Hector Films, LLC (6054); RML Hillsong Films, LLC (3539); RML IFWT Films, LLC (1255); RML International Assets, LLC (1910); RML Jackson, LLC (1081); RML Kidnap Films, LLC (2708); RML Lazarus Films, LLC (0107); RML Nina Films, LLC (0495); RML November Films, LLC (9701); RML Oculus Films, LLC (2596); RML Our Father Films, LLC (6485); RML Romeo and Juliet Films, LLC (9509); RML Scripture Films, LLC (7845); RML Solace Films, LLC (5125); RML Somnia Films, LLC (7195); RML Timeless Productions, LLC (1996); RML Turkeys Films, LLC (8898); RML Very Good Girls Films, LLC (3685); RML WIB Films, LLC (0102); Rogue Digital, LLC (5578); Rogue Games, LLC (4812); Roguelife LLC (3442); Safe Haven Productions, LLC (6550); Sanctum Films, LLC (7736); Santa Claus Productions, LLC (7398); Smith Point Productions, LLC (9118); Snow White Productions, LLC (3175); Spy Next Door, LLC (3043); Story Development, LLC (0677); Straight Wharf Productions, LLC (5858); Strangers II, LLC (6152); Stretch Armstrong Productions, LLC (0213); Studio Merchandise, LLC (5738); Summer Forever Productions, LLC (9211); The Crow Productions, LLC (6707); Totally Interns, LLC (9980); Tribes of Palos Verdes Production, LLC (6638); Tuckernuck Music, LLC (8713); Tuckernuck Publishing, LLC (3960); Wright Girls Films, LLC (9639); Yuma, Inc. (1669); Zero Point Enterprises, LLC (9558). The location of the Debtors corporate headquarters is: 9242 Beverly Blvd., Suite 300, Beverly Hills, CA i-

3 Pg 3 of 18 TABLE OF CONTENTS Page Table Of Authorities iii Preliminary Statement Background Objection A. General Principles B. The Proposed KEIP Plan Fails To Satisfy Section 503(c)(1) And Should Not Be Approved In Its Present Form The KEIP Plan s Primary Purpose Is To Retain The Executives Even If The KEIP Plan Were Governed By Sections 503(c)(3) And 363, It Is Still Deficient C. The KERP Plan Is Deficient Conclusion ii-

4 Pg 4 of 18 Table Of Authorities Cases Pages In re Borders Group.,Inc., 453 B.R. 459 (Bankr. S.D.N.Y. 2011) , 7, 10, 11 In re Dana Corp., 351 B.R. 96 (Bankr. S.D.N.Y. 2006) , 9, 10 In re Dana Corp., 358 B.R. 567 (Bankr. S.D.N.Y. 2006) , 11 In re Foothills Texas, Inc., 408 B.R. 573 (Bankr. D. Del. 2009) In re Georgetown Steel Co., 306 B.R. 549 (Bankr. D.S.C. 2004) In re Global Aviation Holdings, Inc., 478 B.R. 142 (Bankr. E.D.N.Y. 2012) In re Global Home Prods., LLC, 369 B.R. 778 (Bankr. D. Del. 2007) , 7 GT Advanced Tech. Inc, 2015 WL (D.N.H. July 21, 2015) In re Hawker Beechcraft, Inc., 479 B.R. 308 (Bankr. S.D.N.Y. 2012) , 6, 7 In re Residential Capital LLC, 478 B.R. 154 (Bankr. S.D.N.Y. 2012) , 7, 8, 9, 11 In re Velo Holdings, Inc., 472 B.R. 201 (Bankr. S.D.N.Y. 2012) , 6, 7, 10,11 Statutes 11 U.S.C. 101(31)(B) , U.S.C , U.S.C passim 11 U.S.C U.S.C iii-

5 Pg 5 of 18 William K. Harrington, the United States Trustee for Region 2 (the United States Trustee ), respectfully submits this omnibus objection to the Debtors motions (the Motions ) for orders approving their key employee incentive plan (ECF No. 281) (the KEIP Plan ) and employee retention plan for non-insider employees (ECF No. 282) (the KERP Plan ). In support thereof, the United States Trustee represents and alleges as follows: Preliminary Statement The United States Trustee objects to the approval of Debtors KEIP and KERP Plans in their present form. The Debtors have not met their burden to show how the KEIP Plan is not a retention plan governed by Section 503(c)(1) of the Bankruptcy Code. Moreover, the sales-driven benchmarks described in the KEIP Motion as incentivizing to the Executives (as defined below) may be achieved imminently or may have already been met by the stalking horse bid. There is also no evidence that the Executives would not perform the work necessary to maximize the sale irrespective of the proposed bonuses. Nor can the KEIP Plan be approved under Section 503(c)(3). The KEIP Plan is not calculated to achieve the Executives' desired performance because the benchmarks are set too low. In addition, the Debtors have not shown that the KEIP Plan is consistent with industry standards. The KERP Plan is likewise deficient. The Debtors seek to compensate several Employees (as defined below) holding the titles of President, Executive Vice-President and Senior Vice- 1

6 Pg 6 of 18 President, which officers are presumptive "insiders" within the meaning of the Bankruptcy Code and whose bonuses must also be governed by Section 503(c)(1). Finally, both the KEIP and the KERP bonuses are be paid at the sole discretion of the Board of Directors with no enumerated criteria. The Motions fail to disclose what factors the Board will consider or whether, in the case of the KERP, similarly-situated Employees qualify for the same percentage bonus. Background 1. On July 30, 2015 (the Petition Date ), each of the Debtors filed a voluntary petition pursuant to Chapter 11 of the Bankruptcy Code. 2. On the Petition Date, the Debtors filed a motion seeking authority to sell substantially all of their assets through an auction and sales process (ECF No. 25). In the event qualified bids are received, an auction is scheduled for October 1, 2015 (ECF No ). The stalking horse bid is $250 million (ECF No. 25, Exh. B, pg 3 of 15). In addition, the stalking horse bidder proposes to pay an additional $3.171 million for a film and to pay other consideration not quantified in the stalking horse agreement, making the stalking horse floor at least $ million (ECF No. 348, Art. 3.1, pg. 32 of 341). 3. On August 24, 2015, the Debtors filed their Motions seeking approval of the KEIP and KERP Plans. 2

7 Pg 7 of The KEIP Plan seeks to compensate five insiders (the Executives ) who, pre-petition, took aggregate salary reductions of $795,000 (KEIP Motion, ECF No ) at a cost of $314,868 excluding employer contribution taxes (id. 20). The size of the KEIP is based upon a calculation of the aggregate of the employee s salary reduction and a sliding scale percentage of an amount equal to 12.5% of the employee s salary based upon the the ultimate purchase price above $250 million (id. 19). The KEIP pool will become fully funded if the bid(s) at the auction exceed(s) $254 million (id.). However, individual awards to Executives will be paid at the sole discretion of the Board of Directors, based upon each Executive s contribution during the sale process (id.). The KEIP bonus is payable one day after the sale closing (id.). 5. The KERP Plan seeks to compensate 80 unidentified employees described as non-insiders (the Employees ) who took pre-petition aggregate salary reductions of $1,172,500 (KERP Motion, ECF No , 15) at a total cost of $589,126 excluding employer contribution taxes (id. 19). The size of the KERP pool is based upon the aggregate of the salary reduction incurred by the Employees and 12.5% of salaries of the Employees incurred by the Debtors from the Petition Date through the sale hearing (id. 18). As with the KEIP Plan, the amounts to be paid to each Employee under the KERP Plan will be determined by the Board based upon each Employee s contribution to the business 3

8 Pg 8 of 18 during the sales process (id.). The KERP bonus is payable one day after the sale closing (id.) A. General Principles relevant part: Objection Section 503(c) of the Bankruptcy Code provides in Notwithstanding subsection (b), there shall neither be allowed, nor paid (1) a transfer made to, or an obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor s business, absent a finding by the court based on evidence in the record that - (A) the transfer or obligation is essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation; (B) the services provided by the person are essential to the survival of the business; and (C) either (i) the amount of the transfer made to, or obligation incurred for the benefit of, the person is not greater than an amount equal to 10 times the amount of the mean transfer or obligation of a similar kind given to nonmanagement employees for any purpose during the calendar year in which the transfer is made or the obligation is incurred; or (ii) if no such similar transfers were made to, or obligations were incurred for the benefit of, such nonmanagement employees during such calendar year, the amount of the transfer or obligation is not greater than an amount equal to 25 percent of the amount of any similar transfer or obligation made to or incurred for the benefit of such insider for any purpose during the calendar year before the year in which such transfer is made or obligation is incurred; * * * 4

9 Pg 9 of 18 (3) other transfers or obligations that are outside the ordinary course of business and not justified by the facts and circumstances of the case, including transfers made to, or obligations incurred for the benefit of, officers, managers, or consultants hired after the date of the filing of the petition. 11 U.S.C. 503(c). Congress added Section 503(c) in 2005 to curtail payments of retention incentives to insiders to eradicate the notion that executives were entitled to bonuses simply for staying with the Company through the bankruptcy process. In re Residential Capital LLC, 478 B.R. 154, 169 (Bankr. S.D.N.Y. 2012) ( Rescap ) (quoting In re Global Home Prods., LLC, 369 B.R. 778, 784 (Bankr. D. Del. 2007)); accord In re Hawker Beechcraft, Inc., 479 B.R. 308, (Bankr. S.D.N.Y. 2012); In re Velo Holdings, Inc., 472 B.R. 201, 209 (Bankr. S.D.N.Y. 2012). In addition, Congress intended to limit the scope of key employee retention plans ( KERP ) and other programs providing incentives to management of the debtor as a means of inducing management to remain employed by the debtor. Rescap, 478 B.R. at 169. Congress intended to put into place a set of challenging standards for debtors to overcome before retention bonuses could be paid. Global Home, 369 B.R. at 784. The proponent of a bonus plan has the burden of showing that the plan is not a retention plan governed by Section 503(c)(1). Hawker Beechcraft, 479 B.R. at 313; Rescap, 478 B.R. at 170. Where Section 503(c)(1) applies, the transfer cannot be justified solely on the debtor s business judgment. See In re 5

10 Pg 10 of 18 Borders Group.,Inc., 453 B.R. 459, (Bankr. S.D.N.Y. 2011). If a proposed transfer falls within Section 503(c)(1), then the business judgment rule does not apply, regardless of whether a sound business purpose may actually exist. In re Dana Corp., 351 B.R. 96, 101 (Bankr. S.D.N.Y. 2006) ( Dana I ). Further, a debtor s label of a plan as incentivizing to avoid the strictures of Section 503(c)(1) must be viewed with skepticism; rather, the circumstances under which the proposal is made and the structure of the compensation package control. Velo Holdings, 472 B.R. at 209 ( Attempts to characterize what are essentially prohibited retention programs as incentive programs in order to bypass the requirements of section 503(c)(1) are looked upon with disfavor, as the courts consider the circumstances under which particular proposals are made, along with the structure of the compensation packages ); see also Hawker Beechcraft, 479 B.R. at 313 ( The concern... is that the debtor has dressed up a KERP to look like a KEIP in the hope that it will pass muster under the less demanding facts and circumstances standard in (c)(3). ); Dana I, 351 B.R. at 102 n.3 ( If it walks like a duck (KERP) and quacks like a duck (KERP), it s a duck (KERP). ). Finally, not only must bonus plans comply with Section 503(c) but, as administrative expenses they must also be actual, necessary costs and expenses of preserving the estate, as required by Section 503(b). 6

11 Pg 11 of 18 B. The Proposed KEIP Plan Fails To Satisfy Section 503(c)(1) And Should Not Be Approved In Its Present Form As a threshold matter, the Executives are all officers or persons in control of the Debtor, and thus, qualify as insiders. 11 U.S.C. 101(31)(B)(ii)-(iii); see also In re Global Aviation Holdings, Inc., 478 B.R. 142, 148 (Bankr. E.D.N.Y. 2012) (statutory definition is merely illustrative and the term insider should be flexibly applied on a case by case basis ) (internal quotation omitted); Borders, 453 B.R. at 469 ( [i]nsider status can also be determined on a case-by-case basis based on the totality of the circumstances, including the degree of an individual's involvement in a debtor's affairs ). 2 Because all of the Executives are insiders, to show that the more permissive terms of Section 503(c)(3) apply, the Debtors must establish by a preponderance of the evidence that the KEIP Plan is primarily incentivizing, rather than primarily retentive. Rescap, 478 B.R. at 170; see Hawker Beechcraft, 479 B.R. at 313. The Debtors must demonstrate that the KEIP Plan presents challenging standards and significant hurdles which are difficult to achieve. See Hawker Beechcraft, 479 B.R. at 313; Velo Holdings, 472 B.R. at 209; Global Home, 369 B.R. at 784; see also In re Dana Corp., 358 B.R. 567, 583 (Bankr. S.D.N.Y. 2006) 2 The Executives are the Debtors President, Managing Director, Co-Chief Operating Officer, Chief Financial Officer/Co- Chief Operating Officer and the Chief Executive Officer of Debtor Relativity Television, LLC (ECF No ). 7

12 Pg 12 of 18 ( Dana II ) (benchmarks for the debtors long-term KEIP are difficult targets to reach and are clearly not lay-ups ). 1. The KEIP Plan s Primary Purpose Is To Retain The Executives In order for the bonuses to not run afoul of Section 503(c)(1), the Debtors must demonstrate that the KEIP Plan is not retention-based, but rather that it presents significant hurdles which are difficult to achieve. Rescap, 478 B.R. at 169; Dana II, 358 B.R. at 583. Retention plans usually are intended to encourage certain crucial employees to remain with the company through a critical, transitional time period when the exact future of the company is unclear and when those employees would be most likely to search for other employment. In re Georgetown Steel Co., 306 B.R. 549, 556 (Bankr. D.S.C. 2004) (quoted in In re The Brooklyn Hosp. Ctr., 341 B.R. 405, 413 (Bankr. E.D.N.Y. 2006)). Here, the KEIP Plan is retentive. The Debtors Chief Restructuring Officer ( CRO ) describes the Executives as possess[ing] intimate knowledge of the Debtors operations and [who]... are vital to the success of the Sale Process and these chapter 11 cases (Declaration of Brian G. Kushner ( Kushner KEIP Dec. ), ECF No , pg 26 of 34), and whose participation is absolutely critical through the conclusion of the Sale Process (id. 13, pg 27 of 34). It is apparent that the Debtors seek to retain these key Executives through the Sale. The KEIP bonus is not payable until the day of the closing (KEIP Motion, 8

13 Pg 13 of 18 ECF , pg 29 of 34). Moreover, the evidence Debtors have submitted supporting their assertion that the KEIP is primarily incentivizing is generally conclusory. Rescap, 478 B.R. at E.g., Kushner KEIP Dec. 16 (the board voted to approve the KEIP as an incentive plan (rather than retentive-based) compensation program ). Where, as here, challenging performance metrics do not exist, the KEIP is primarily retentive. Rescap, 478 B.R. at 172. The underlying stalking horse bid was $250 million (ECF 25, Exh. B, pg 3 of 15). The stalking horse bidder also proposed to pay an additional $3.171 million for a film and to pay other consideration not quantified in the stalking horse agreement (ECF No. 348, Art. 3.1, pg. 32 of 341). The the benchmark of $254 million is easily in sight, given that it is already at $ million and, indeed, in light of the unquantified consideration, may have already been met. Using these metrics, the bonuses are essentially guaranteed. Therefore, the KEIP is a retentive plan and not an incentive plan. The Debtors contend that the bonuses are necessary to incentivize the Executives to maximize the sale price (KEIP Motion, ECF No ). However, insiders should not be paid bonuses to incentivize them to satisfy the very fiduciary duties that they are already required to fulfill under the Bankruptcy Code. See 11 U.S.C. 704 and 1106; see also Dana I, 351 B.R. at 102 ( The Executives... have a fiduciary duty to creditors ). 9

14 Pg 14 of 18 Courts in this district have made clear that triggering bonus awards solely on the basis of a sale transaction, confirming a reorganization plan or exiting bankruptcy are not sufficient to shift [judicial] consideration of a plan providing payments to insiders from section 503(c)(1) to section 503(c)(3). Rescap, 478 B.R. at 172; see also Velo Holdings, 472 B.R. at (approving KEIP measured by Section 363 sales proceeds and financial hurdles); Borders, 453 B.R. at , (approving KEIP that required successful reorganization or going concern sale and meeting substantial cost reduction targets). Finally, there is no evidence that the Executives would not perform the work necessary to close the sale irrespective of the proposed bonuses. 2. Even If The KEIP Plan Were Governed By Sections 503(c)(3) And 363, It Is Still Deficient As discussed above, because the KEIP Plan is effectively a retention plan for insiders, Section 503(c)(1) applies. Section 363 of the Bankrupcy Code does not apply, regardless of whether the Debtors may actually have a sound business purpose. Dana I, 351 B.R. at 101. If the Court finds otherwise, however, the KEIP Plan is still deficient pursuant to Sections 503(c)(3) and 363. To evaluate whether a proposed bonus plan passes muster under Section 503(c)(3), courts generally consider the following factors outlined in Dana II: 10

15 Pg 15 of 18 [1] Is there a reasonable relationship between the plan proposed and the results to be obtained, i.e., will the key employee stay for as long as it takes for the debtor to reorganize or market its assets, or, in the case of a performance incentive, is the plan calculated to achieve the desired performance?... [2] Is the cost of the plan reasonable in the context of the debtor's assets, liabilities and earning potential? [3] Is the scope of the plan fair and reasonable; does it apply to all employees; does it discriminate unfairly? [4] Is the plan or proposal consistent with industry standards? [5] What were the due diligence efforts of the debtor in investigating the need for a plan; analyzing which key employees need to be incentivized; what is available; what is generally applicable in a particular industry? [6] Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the incentive compensation? 3 Dana II, 358 B.R. at (court s emphasis). [T]he court must make its own determination that the transaction will serve the interests of creditors and the debtor s estate. GT Advanced Tech. Inc, 2015 WL , at *7 (D.N.H. July 21, 2015) (quoting In re Pilgrim s Pride Corp., 401 B.R. 229, 237 (Bankr. N.D. Tex. 2009)). Here, the first and fourth factors have not been met. 3 Although courts in this district have determined that the standard under Section 503(c)(3) is not different from the business judgment test under Section 363, see In re Residential Capital, LLC, 491 B.R. 73, 84 (Bankr. S.D.N.Y. 2013), courts continue to apply the Dana II factors. E.g.., Velo Holdings, 472 B.R. at 212; Borders, 453 B.R. at

16 Pg 16 of 18 With respect to the first factor, as noted, the metrics of a sale over $254 million is easily reachable or may have already been met (ECF No. 348, Art. 3.1, pg. 32 of 341). Where the Executives have already met, or are about to meet, the company s goal with respect to a sale, it cannot be said that the KEIP Plan is calculated to achieve the desired performance, i.e., a sale to maximize value to the estate. With respect to the fourth factor, the CRO states in his declaration that based upon the Croner Entertainment Study (the Croner Study ), the Debtors base compensation... is generally lower than other companies in the study (Kushner KEIP Dec., ECF No , pg 24 of 34). The Croner Study, however, has not been filed. Furthermore, as described by the CRO, two employees are above the mean pay point or greater than five percent above the mean in the Croner Study (id.). It is unknown whether any of the Executives are already among the two employees who are above the mean industry pay point. Nor does the KEIP Motion state whether the Debtors evaluated the bonus plans of other Chapter 11 Debtors (including entertainment debtors) or how their proposed KEIP Plan compares to such other debtors approved compensation practices. The Debtors have therefore failed to meet their burden of showing that the KEIP Plan is in line with industry standards. Finally, the KEIP bonus is to be paid at the discretion of the Board of Directors. The KEIP Motion fails to state what criteria, if any, the Board will employ in awarding bonuses. Nor 12

17 Pg 17 of 18 have the Debtors furnished any evidentiary support for the notion that the proposed bonuses are fair and reasonable. There is no evidence in the record regarding the compensation earned by the Debtors rank and file employees, and thus, no basis for the Court to determine how much more the Executives are being paid compared to them. Because the Debtors have not demonstrated that the proposed bonuses are justified by the facts and circumstances of these cases, the KEIP Motion should be denied. C. The KERP Plan Is Deficient Under the Bankruptcy Code, officers are insiders of a corporate debtor. 11 U.S.C. 101(31)(B). The CRO admits that [c]ertain of the Employees [sought to be compensated under the KERP] hold titles such as president, executive vice president, [and ] senior vice president (Declaration of Brian G. Kushner ( Kushner KERP Dec. ), ECF No , pg 24 of 32). In fact, 43 of the Employees hold the title of vice president or above (id. 35, pg 22 of 32). The Debtors have failed to meet their evidentiary burden to prove that none of the recipients of the KERP Plan are insiders within the meaning of Section 101(31) of the Bankruptcy Code (KERP Motion, ECF No , 4 15). Employees holding titles such as those cited by the CRO are presumptively officers and therefore insiders under the Bankruptcy Code unless the presumption is rebutted. In re 4 The CRO states that he is advised by legal counsel that none of Employees are insiders (Kushner KERP Dec., ECF No , pg 25 of 32). 13

18 Pg 18 of 18 Foothills Texas, Inc., 408 B.R. 573, 579 (Bankr. D. Del. 2009). The CRO s bare assertion that the Employees are not persons in control of the Debtors (Kushner KERP Dec. 40) does not rebut the presumption absent a more fulsome discussion of the roles and responsibilities of each employee. In sum, insiders are subject to the requirements of Section 503(c)(1). Finally, like the KEIP, the KERP is to be paid at the discretion of the Board of Directors. The KERP Motion fails to state what criteria, if any, the Board will employ in awarding bonuses. Nor does it state whether similarly-situated Employees qualify for the same percentage bonus. Conclusion WHEREFORE, the United States Trustee respectfully requests that the Court sustain its objection and grant such other and further relief as may be deemed just and proper. Dated: New York, New York September 4, 2015 Respectfully submitted, WILLIAM K. HARRINGTON UNITED STATES TRUSTEE By: /s/ Serene K. Nakano SERENE K. NAKANO SUSAN D. GOLDEN Trial Attorneys U.S. Federal Office Building 201 Varick St., Room 1006 New York, New York (212)