Key Employee Retention under BAPCPA

In 2005, Congress purported to address the hot-button issue of executive compensation in bankruptcy by severely limiting Key Employee Retention Programs ('KERPs') that were then common in reorganization cases. These limitations on KERPs were set forth in Bankruptcy Code ' 503(c), added by the Bankruptcy Abuse and Consumer Protection Act of 2005 (the 'Act'). Although billed as a response to recent abuses of the bankruptcy system by executives of corporate giants like Enron Corporation, the amendment as drafted applied absent any Enron-type fraud or mismanagement, prompting concern that it would impede successful reorganizations by preventing necessary retention payments to debtors' executives. As post-Act case law shows, the Act in practice has not had the dramatic effect on executive compensation in bankruptcy that was perhaps intended. This is good news, however, for companies facing reorganization, which need to provide appropriate compensation to their employees in order to negotiate the difficult terrain of Chapter 11 and emerge successfully.