ResCap employee retention, incentive plans draw trustee objections

By Jim Witters

Wilmington, Del., Aug. 2 - Residential Capital, LLC's proposed plan to pay $14.9 million in bonuses to 191 employees has drawn an objection from the U.S. Trustee's office, who claims the payments are impermissible under bankruptcy law, according to documents filed Aug. 2 with the U.S. Bankruptcy Court for the Southern District of New York.

The objection involves a key employee incentive plan for 17 senior executive insiders and a key employee retention plan for 174 purported non-insider employees.

Incentive plan objection

The employee incentive plan "is a disguised retention plan, not an incentive plan, because it sets a low performance bar for employees to earn the proposed bonuses. It does not provide real incentives for the employees to improve their performance, work harder, and achieve results greater than in the past," said Region 2 trustee Tracy Hope Davis in her objection.

To pay bonuses to the 17 insiders, ResCap would need to prove three elements, the trustee says:

• Each of the 17 had a job offer at the same or greater compensation;

• Each of the employees' services are essential to the business' survival; and

• The payments fall within the strict limits of the bankruptcy code.

Retention plan objection

The key employee retention plan is subject to the business judgment of the debtor, "if none of the 174 employees eligible ... are insiders," the objection states.

However, the plan includes employees with officer and director titles, such as vice presidents, senior vice presidents and directors of operations, among others, according to court documents.

The debtors contend the titles are merely "officer-like."

Even if the debtors' assertion is true, ResCap fails to meet the legal standard, the trustee claims.

"To be approved, the bonuses must be an actual and necessary cost of preserving the estate, applicable to any administrative expense claim," the objection states.

In addition, ResCap must show "a reasonable relationship between the proposal and the results to be obtained, that the cost and scope of the plan is reasonable, that the plan is consistent with industry standards, and that the debtors conducted reasonable due diligence in establishing the plan," the trustee wrote.

Details of plans

As previously reported, the company proposed $14.9 million in target payments under the two plans - $4.1 million under the KEIP and $10.8 million under the KERP.

If new participants need to be added to either of the plans because of changes in the employee population, the target payments would not exceed $15.9 million, with $4.6 million going to the KEIP and $11.3 million to the KERP.

In addition, the company said there is a potential payout of $7 million under the KEIP if final sale proceeds exceed anticipated sale proceeds by 3% or more.

ResCap said the key employees provide critical services in the areas of finance, legal, origination, servicing, operations and technology.

A hearing on the proposed plans is scheduled for Aug. 8.

Residential Capital, a New York-based mortgage originator and servicer, filed for bankruptcy on May 14. The case number is 12-12020.

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