R. Michael Andrews Jr., chief executive officer of Buffets Holdings Inc., helped guide the restaurant owner through bankruptcy twice in the past four years. Both times, he was rewarded with court-approved bonuses.
Andrews, Chief Financial Officer A. Keith Wall and the company’s concept officer are among 16 managers who may split about $2.3 million during Buffets’ current bankruptcy. The three men also shared in about $1 million in bonuses handed out in the company’s 2008 case, according to court records.
Both bonus programs took advantage of a common loophole to avoid a 2005 federal law that restricts extra pay for executives who put their companies into bankruptcy. Instead of payments made through so-called Key Employee Retention Plans, which Congress made harder to hand out, bankrupt companies now routinely set up Key Employee Incentive Plans, claiming the extra pay is tied to progress in reorganizing operations.
“The amendment to the code changed the means, but not the value of these plans,” Lee R. Bogdanoff, a founding partner of law firm Klee, Tuchin, Bogdanoff & Stern LLP in Los Angeles, said. “It’s just changed the way you get there, not necessarily how much management gets at the end.”
Bankrupt companies’ bonus plans are attracting scrutiny from Congress. In February, U.S. Senator Charles Grassley, an Iowa Republican who helped write the 2005 bankruptcy reform act, asked the U.S. Justice Department whether there is any difference between retention and incentive pay. Grassley sought to determine whether the law is working as intended, Beth Levine, a spokeswoman for Republicans on the U.S. Senate Judiciary Committee, said.
“Six-figure payouts to executives who helped create the bankruptcy in the first place are not what anybody envisioned when the 2005 bankruptcy law was signed,” Grassley said in a statement.
The Justice Department’s Office of the U.S. Trustee, which monitors corporate bankruptcies, challenges bonuses that appear to violate the 2005 restrictions. Some bonus programs define progress as proposing a reorganization plan, a standard step in reorganizations, by a certain date. Others require the company to achieve specific financial targets, which can lead to time- consuming fights with creditors over whether goals are too low.
Buffets, based in Eagan, Minnesota, bills itself as the biggest U.S. operator of buffet-styled steak restaurants, including Old Country Buffet and HomeTown Buffet, with almost 500 locations in 38 states.
Exceeding the Maximum
In Buffets’ first bankruptcy, 15 employees split $1 million, or an average of $66,667 each, after the company surpassed financial targets for 2008, according to court records filed in February 2009. The company topped those goals so easily that the executives got $280,000 more than the maximum predicted under the proposal, according to court records.
Among the recipients were Andrews, Wall and Fred Williams, an executive vice president who is now chief concept officer. They remained with Buffets after the company exited bankruptcy under the control of its bank lenders.
Buffets filed its second bankruptcy in January in Wilmington, Delaware, after reaching a deal with lenders to cut debt by $245 million. The company wasn’t able to reduce debt enough the first time around, Scott D. Irwin, Buffets’ general counsel, said.
“The debt load has proved to be unsustainable,” Irwin said. Buffets declined to make Andrews, Wall and Williams available to comment on the bankruptcy case and the bonuses.
On March 15, U.S. Bankruptcy Judge Mary F. Walrath approved the payment of $2.3 million in bonuses to Andrews, Williams, Wall and 13 other executives should the company meet certain financial targets, for an average payout of $143,750 each.
The plan “requires five independent metrics be achieved,” Irwin said in an e-mail. The company must maintain a certain amount of cash on specific dates, generate minimum earnings before deducting interest payments, depreciation and taxes, keep its debt on letters of credit low and exit bankruptcy quickly.
In Buffets’ case, the U.S. Trustee objected unsuccessfully to the first bonus plan on technical grounds, saying the company cited the wrong section of the bankruptcy code to justify the payments.
While the U.S. Trustee didn’t object to the new incentive plan, it did oppose a separate proposal to pay Andrews, Wall, Williams and 14 other executives $2.65 million if Buffets sells itself while in bankruptcy. The individual payments would be offset by whatever the executives collect from the $2.3 million pool. At the request of Buffets, Walrath put off a hearing on that plan until April 30.
Anecdotal evidence suggests the U.S. Trustee’s success rate in opposing bonus plans is lower than for any other topic for which the office keeps records, Assistant Attorney General Ronald Weich said in a letter responding to Grassley’s request for data.
Visteon Corp. (VSTN:US), an auto-parts maker, won court permission in 2010 to pay as much as $35.4 million in incentive bonuses, including as much as $5.9 million to 13 executives, after creditors and the U.S. Trustee objected to a more generous proposal. NewPage Corp. (NWP:US), a paper maker, in March received court approval to pay $8.6 million in long-term incentive bonuses to 15 executives over the U.S. Trustee’s opposition.
Mortgage insurer PMI Group Inc. (PPMIQ:US) won approval in February of a bonus plan that may pay Chief Executive Officer L. Stephen Smith more than $1 million, after modifying it downward in response to a protest by the U.S. Trustee. In January, chicken producer Cagle’s Inc. fended off the U.S. Trustee’s objection to win approval of a $250,000 bonus program.
Evaluating a bonus plan is a “difficult job” for bankruptcy judges, said Joseph McMahon, a bankruptcy attorney with Ciardi Ciardi & Astin in Wilmington who worked for 10 years for the U.S. Trustee’s office.
The Buffets case is unusual, said Kelli Alces, a professor at Florida State University College of Law in Tallahassee. Executives who help put a company into bankruptcy rarely keep their jobs when the company reorganizes and leaves court protection under new ownership, said Alces, who formerly worked as a restructuring lawyer.
“That’s strange,” Alces said. “I don’t know why these creditors and the equity holders think the management is still worth the investment.”
A board of directors, not the executives, made the decision to put Buffets into bankruptcy, Irwin said. The board that authorized the first bankruptcy and incentive plan was entirely different from the current board, which filed the second case and the new bonus plan, he said.
“If the board believed it to be in the best interests of Buffets and its shareholders to remove any of Messrs. Andrews, Wall or Williams, they would have done so,” Irwin said. “Likewise, if Buffets’ ownership wished to change the composition of the board, they had an opportunity to do so at our recent 2011 Annual Meeting.”
Under the bankruptcy code, bonuses must be approved by a judge after creditors have a chance to object. In smaller cases, there may be no major creditor willing to spend the money to challenge a bonus plan, said Amiyatosh Purnanandam, a professor at the University of Michigan’s Ross School of Business in Ann Arbor.
The strongest opposition typically comes from lenders that have agreed to finance a company’s bankruptcy with a so-called debtor-in-possession loan, Purnanandam said. That may create a conflict of interest for top managers, who usually pick the DIP lender and can buy off opposition with higher bank fees or interest rates, he said.
“If the lenders don’t object, there is usually a reason,” Purnanandam said.
The case is In re Buffets Holdings Inc., 12-10237, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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