Relativity Bankruptcy: Trustee Objects To Revised Key Employee Payment Plan

The U.S. Trustee in the Relativity bankruptcy case, William Harrington, is still unimpressed with the studio’s plan to pay key employees and others bonuses tied to their efforts to improve its sale price.

Relativity submitted new plans to the U.S. Bankruptcy Court last week, mostly to address the Trustee’s objections to an initial proposal. But Harrington says in a filing today that it “impermissibly” raised new matters, and offered “no evidence” to suggest that it addressed the law’s “strict standards” for the awards.

The debate involves two plans that are commonly used by companies that want to remain in business while awaiting an auction to emerge from bankruptcy. One called a Key Employee Incentive Plan (KEIP) would give president Tucker Tooley, co-COO Greg Shamo, CFO and co-COO Andrew Matthews, managing director Carol Genis and others an opportunity  to — as the Trustee put it — “recapture any pre-petition salary reductions and to have the opportunity to earn 22.6% of their salary for the period between [the late July bankruptcy filing] and October 5, 2015.”

Harrington complains, though, that in Relativity’s new plan, payments would not have to be reviewed by the board of directors. Chief Restructuring Offier Brian Kushner could adjust them up or down by considering “qualitative and qualitative elements of each [Executive’s] efforts in advancing the goals of the chapter 11 cases.”

In addition to removing the board from the process, the new plan would leave the Bankruptcy Court in the dark “because the procedures have not been articulated” making it impossible to exercise “independent judgment in analyzing how the bonuses will be awarded prior to its ruling on the Revised KEIP.”

The complaint also is sour on special terms for Relativity Television CEO Tom Forman and COO Andrew Marcus, who the Trustee describes as “the two highest-ranking officers of [Relativity’s] crown jewel.”

Harrington agrees that retaining Forman through a sale “is of the utmost urgency.”

It’s “unclear,” though, whether the proposed bonus plan tied to cash receipts and other “TV metrics”  is “truly an incentive plan with metrics that are difficult to achieve …or whether there is a reasonable relationship between effort and outcome.”

The Trustee also objects to a second proposal called a Key Employee Retention Plan (KERP) to keep 73 important non-insider staffers from bolting ahead of a sale.  This is supposed to be designed to hang on to regular employees — not senior officers. But 32 in the group have titles including President, Director, Executive Vice-President, Senior Vice-President or Vice-President.

Relativity said that this was just showbiz puffery: “Like many companies that provide impressive titles to employees to provide them with greater credibility in sales and marketing positions or in lieu of pay raises or similar reasons, [Relativity has] done the same,” the studio said. “This is typical in Hollywood.”

Harrington responds that Relativity provided “no evidence regarding the specific duties or authority of any of the Key Employees, and simply generalize that the Key Employees must seek authorization from senior management on various matters.” As a result, they have “failed to rebut the presumption that the Key Employees are insiders.”

Here, as with the KEIP, Relativity has “not articulated the specific qualitative and quantitative procedures the CRO and his staff will use to determine any adjustment to the proposed bonuses.”

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