Publications
Article

Executive Compensation and Severance Agreements in Bankruptcy

Lexis Practice Advisor

This practice note discusses (1) employment agreements antedating a bankruptcy filing and (2) executive compensation and employee retention programs proposed by a debtor in possession in a Chapter 11 case. As to the former, when an executive or nonexecutive employee’s employment straddles a bankruptcy filing, and the executive or nonexecutive is terminated post-filing, the priority of the employee’s severance claim may be difficult to determine. This is because such severance claims do not fit neatly into the pre-petition/post-petition paradigm underpinning the administrative priority determination, due to the fact that unlike ordinary wages, severance pay can be earned at different times during a term of an employee’s employment.

As to the latter, executive compensation programs consist of retention, severance, and incentive plans for the debtor’s management. If a debtor in possession enters into an employment agreement (post-petition), an employee’s claims for compensation and severance payable under the agreement, generally, are entitled to administrative expense priority treatment, subject at all times to the limits imposed by the Bankruptcy Code on executive and insider compensation and severance.

This practice note addresses severance agreements and the Section 503(c) requirements for executive compensation programs and as follows:

  • Severance Agreements
  • Overview of Section 503(c) Requirements for Executive Compensation Programs and Severance Agreement Claims
  • Retention Plans under Section 503(c)(1)
  • Incentive Plans under Section 503(c)(3)
  • Retention or Incentive Plans
  • Severance Payments under Section 503(c)(2)
  • The Priority Status of Severance Claims Is Limited to One Year of Benefits
  • Assumption, Rejection, and Avoidance Risk

To read the full practice note, please click here.

“Executive Compensation and Severance Agreements in Bankruptcy,” by Ira L. Herman was published as a Lexis Practice Advisor® Practice Note on April 28, 2020. Reprinted with permission.