1

The court’s jurisdiction was not at issue. This Memorandum Opinion constitutes our

findings of fact and conclusions of law.

2

DN 147. 

3

The bonuses were labeled as “Insider Bonuses” in the Committee’s Motion and titled as

a “Transaction Bonus” in the written Bonus Agreements. DN 214, Exhibit A.

1

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

____________________________________

)

In re: )

) Case No.: 06-20224 JKF

AIRWAY INDUSTRIES, INC., )

) Chapter 11

Debtor. )

____________________________________) Related to Document No. 147 

OFFICIAL COMMITTEE OF )

UNSECURED CREDITORS )

)

Movant, )

)

v. )

)

AIRWAY INDUSTRIES, INC., )

CERBERUS CAPITAL MANAGEMENT, )

L.P., MADELEINE, L.L.C. )

)

Respondents. )

____________________________________)

MEMORANDUM OPINION1

Before the court is a motion by the Official Committee of Unsecured Creditors

("Turnover Motion")2

 seeking entry of an order pursuant to §§503, 541, 542, and 105 of the

Bankruptcy Code directing that Transaction Bonuses3

 provided by a secured creditor be turned

over to Debtor’s estate or, in the alternative, disallowing or prohibiting payment of the bonuses

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4

Under §101(2) of the U.S. Bankruptcy Code, “affiliate” means "(A) entity that directly

or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding

voting securities of the debtor, other than an entity that holds such securities—(i) in a fiduciary

or agency capacity without sole discretionary power to vote such securities; or (ii) solely to

secure a debt, if such entity has not in fact exercised such power to vote." 11 U.S.C. §101(31).

5

According to Debtor’s List of Equity Security Holders, Madeleine and affiliates own

42.43 percent of Debtor’s equity.

6

The bonuses were to be paid following sale regardless of whether or not Airway entered

bankruptcy proceedings. See Bonus Agreements, DN 90, Exhibits A, B; DN 214, Exh. A.

7

Airway Industries Inc.’s Response, DN 215; Cerberus’s Response, DN 214.

2

pursuant to §503. The beneficiaries of the bonuses are four executives of the Debtor. The

bonuses are to be provided by Cerberus Capital Management, L.P. ("Cerberus Capital"), an

affiliate4

 of Cerberus Partners, L.P. ("Cerberus Partners"), and Madeleine, L.L.C. ("Madeleine",

and collectively with Cerberus Partners and Cerberus Capital, "Cerberus").5

 The bonuses were

conditioned on the executives remaining with the company until the proposed sale was

completed and the bonuses were to be paid by Cerberus, following the sale.6

 The purported

intention of the bonuses, as asserted by Cerberus, was to stabilize the company and maximize the

value of the sale. Both Cerberus and the Debtor filed responses, requesting that the court deny

the Turnover Motion.7

BACKGROUND

It is undisputed that the Debtor is a Pennsylvania corporation founded in 1919 as Reliable

Trunk Company. Debtor did business as “Atlantic Luggage Company” and sold specialty

luggage products and travel accessories to department stores, specialty luggage stores, and other

distribution channels in the United States, Canada, and China. As of the Petition Date, Debtor

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3

had approximately 90 employees. Approximately 67 of these employees were located at

Debtor's corporate headquarters in Ellwood City, Pennsylvania, and the remaining employees

worked in Debtor's facilities in Orland, California, Mississauga, Canada, and Hangzhou, China.

The Cerberus Entities hold secured claims and interests in a partnership that holds shares

of Debtor’s preferred stock. Cerberus Capital, signatory to the Bonus Agreements, is an affiliate

of Cerberus Partners. Madeleine, an affiliate of Cerberus Partners, is also a prepetition secured

creditor of the Debtor and was the lender to Debtor under a debtor-in-possession financing

facility.

On January 20, 2006, Debtor filed its voluntary petition under Chapter 11 of the

Bankruptcy Code in the United States Bankruptcy Court for the Western District of

Pennsylvania. The United States Trustee for the Western District of Pennsylvania (the “U.S.

Trustee”) appointed the Official Committee of Unsecured Creditors of Airway Industries, Inc.

(the “Committee”) on February 6, 2006. No trustee or examiner has been appointed in this case. 

Pursuant to §1107 and §1108 of the Bankruptcy Code, Debtor continues to operate its business

and manage its respective properties as debtor-in-possession. 11 U.S.C. §1107; 11 U.S.C.

§1108.

Prior to the Chapter 11 filing, Debtor’s business was in substantial decline. According to

the testimony of Grace Kurowska, Debtor’s Executive Vice President and Chief Financial

Officer:

We realized that our sales [were] dropping significantly. It got to

the point that in September of 2004 we ran out of cash to run the

operation . . . . We, at that time, lost the business with J.C.

Penney. We lost the business with Kohl's. Eventually, in early

2005 we lost business with Marshall Fields.

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4

2/27/06 Sale Hearing Transcript at 33:20-22; 37:22-24, DN 180. Many of the sales people left

the company for more lucrative opportunities elsewhere, which accelerated Debtor’s financial

decline. Id. at 39:9-13. The former Chief Executive Officer, John Dudash, was one of those

who left Debtor’s employ during that time. Without access to capital, management decided that

a sale was Debtor’s only viable option. As the company was considering its options, its senior

management employees were being offered more lucrative opportunities elsewhere. In an effort

to stabilize the business and preserve the value of Debtor’s assets in any subsequent sale, and

well before the bankruptcy was filed or the BAPCPA amendments took effect, Cerberus Capital,

on behalf of Cerberus, proposed to pay Transaction Bonuses and entered into written incentive

Bonus Agreements with William Berry (Chief Executive Officer) (“Berry”) and Grace

Kurowska (Executive Vice President and Chief Financial Officer) (“Kurowska”) and oral

agreements with Brian Miller (Vice President, Sales and Marketing) (“Miller”) and Gerald Carr

(Comptroller) (“Carr” and, collectively with Berry, Kurowska and Miller, the “Management

Employees”). See 2/27/06 Sale Hearing Transcript, DN 180, Kurowska’ testimony beginning at

31. The written Agreements were signed in August, 2005. DN 90, Exhibits A, B; DN 214,

Exhibit A.

The Bonus Agreements provide that if Debtor sells all or substantially all of its assets –

regardless of whether such sale occurs outside or in the context of a bankruptcy case – and

Cerberus receives cash distributions from the sale proceeds, each Management Employee will

receive his or her applicable Transaction Bonus. See DN 90, Exhibits A, B; DN 214, Exhibit A.

The amounts of the bonuses were as follows: $500,000 for Berry; $75,000 for Carr; and the

greater of (i) $300,000 and [sic] (ii) 4 percent of the amount by which the net proceeds of

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8

Sale Hearing Transcript, DN 180.

5

distributions to Cerberus from the sale exceed $14.6 million, up to a maximum of $320,000 for

Kurowska and Miller. The Berry, Kurowska, and Miller Bonus Agreements also provide that if

those individuals are not offered positions as of the closing of a sale comparable to those they

held with Debtor at the time of execution of the Bonus Agreement, each would have the

opportunity to become a consultant on the “operations team” of Cerberus Capital and its

affiliated companies. The Bonus Agreements were signed on August 15, 2005. See DN 90,

Exhibits A, B; DN 214, Exhibit A. 

On January 27, 2006, Debtor filed a motion for an order approving an asset purchase

agreement among itself, TravelPro International, Inc. (“TPI”), Austin House, Inc. and Cerberus

Partners. DN 70. On February 8, 2006, Debtor filed a supplement (the “Supplement”) to the

Sale Motion, disclosing to the court and interested parties that four of Debtor's executive officers

– Berry, Kurowska, Miller, and Carr – had either entered into or would enter into incentive

bonus agreements with Cerberus Capital. DN 90.

On February 10, 2006, the U.S. Trustee filed an objection to the Sale Motion requesting

that the court prohibit the payment of the bonuses. DN 92. On February 23, 2006, the

Committee filed its Turnover Motion, demanding that the bonuses be turned over to Debtor’s

estate or, alternatively, that the court disallow or prohibit payment. DN 147. 

The hearing on the Sale Motion was held on February 27, 2006.8

 This court entered an

order on February 28, 2006, approving the sale to TPI and found that “Debtor’s marketing efforts

and solicitations conducted in connection with the sale process were appropriate and reasonable

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9

Sale Order, DN 171 at 3. 

6

and designed to obtain the highest and/or best price for the Acquired Assets.”9

 On March 2,

2006, the closing on the sale to TPI occurred.

ANALYSIS

Under the facts of this case, Debtor pursued the sale of the company and negotiated the

Bonus Agreements prepetition and prior to the effective date of BAPCPA. The court recognizes

that the timing of the sale, the bankruptcy filing, and the changes in the Bankruptcy Code created

a unique situation likely never to occur again.

The Committee first requests that the Transaction Bonuses be turned over to Debtor’s

estate under Bankruptcy Code §541 and §542. Under §541, the filing of a petition creates an

estate compromised of all property, “wherever located and by whomever held, of all legal or

equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C.

§541(a)(1). See also U.S. v. Whiting Pools, Inc., 462 U.S. 198, 205 (1983). If property is

established to be property of the estate and is not in possession of the debtor, trustee, or debtorin-possession, §542 governs the turnover of such property to the bankruptcy estate. See 11

U.S.C. §542. Additionally, the court has authority, under §105(a) to “issue any order . . .

necessary or appropriate to carry out the provisions of” title 11.

A turnover under §542 is predicated on a determination under §541 that the property at

issue is property of the estate. The Committee alleges that the Transaction Bonuses will be paid

from property of the estate; however, that is not so. Rather, Cerberus has agreed to pay the

bonuses from its own funds. See DN 90, Exhibits A, B; DN 214, Exhibit A. The Bonus

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7

Agreements explicitly provide that Cerberus, not the Debtor, will pay them “in the event that the

[Debtor] sells all or substantially all of its assets . . . and, as a result, [Cerberus] receives cash

distributions . . .” DN 214, Exhibit A.

The Committee cites no relevant law to show that a court may order turnover of nonestate property under §542. The Committee relies on In re Dalow Industries, Inc., 333 B.R. 640

(Bankr. E.D.N.Y. 2005), arguing that it is analogous to the current situation. However, Dalow

is easily distinguishable. In Dalow, the debtor sold its assets to the highest bidder at an auction,

with the provision that as part of the purchase price, the purchaser would pay the secured claim

of the debtor’s bank. Id. at 641. After the sale and payment, an accounting error was

discovered, through which the bank had received overpayment of interest. The debtor

successfully moved for turnover of the overpayment, pursuant to §542. The issue was not

whether the funds properly paid to the bank remained property of the estate, but whether the

overpayment – to which the bank had never been entitled or made a claim – remained an asset of

the estate. The current situation would be analogous to the funds properly paid to the bank, not

the overpayment. Here the proceeds of sale will be paid to Cerberus in satisfaction of its security

interest. In fact, the proceeds of sale will not pay the secured claim in full. Cerberus then will

use its own funds to pay the bonuses. Because Cerberus will pay the bonuses from its own

funds, the request for turnover under §542 must be denied. 

The Committee alternatively argues that if the court determines that the bonuses are not

property of the estate, they should be disallowed or prohibited because §503(c) of the

Bankruptcy Code "expressly prohibits such payments." DN 147 at 11. Section 503(c) covers

three categories of administrative expense: 

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10The Committee has not argued that §503(c)(2) or (c)(3) should govern the bonuses. 

The U.S. Trustee acknowledged that §503(c)(3) is inapplicable but suggested that the payments

could possibly be deemed severance payments, therefore implicating §503(c)(2). DN 92: DN

205.

11“The purpose of this Supplement is to provide the Court and all interested parties with

information regarding incentive bonuses and potential future employment opportunities being

provided to certain members of the Debtor’s management team by Cerberus Capital

Management, L.P.” DN 90. 

8

(1) a transfer made to, or an obligation incurred for the benefit of,

an insider of the debtor for the purpose of inducing such person to

remain with the debtor's business . . .

(2) a severance payment to an insider of the debtor . . . 

(3) other transfers or obligations that are outside the ordinary

course of business and not justified by the facts and circumstances

of the case, including transfers made to, or obligations incurred for

the benefit of, officers, managers, or consultants hired after the

date of the filing of the petition.

These three categories of administrative expense are prohibited unless a finding by the court

based on evidence in the record indicates that the statutorily prescribed limitations are not

exceeded. The Committee made an argument for the application of §503(c)(1) and the U.S.

Trustee argued that both §503(c)(1) and §503(c)(2) apply.10 However, the application of §503(c)

is inappropriate considering the unique facts of this case.

Section 503 applies to “Administrative Expenses of the Estate.” The court did not

receive an administrative expense request from the parties who would receive the bonuses or

from Cerberus. Rather, notice of the agreement was introduced in a Supplement to the Sale

Motion.11 An administrative expense request is filed in order to obtain court approval for the

expenditure of estate assets. Here, the estate is not paying the bonuses; Cerberus voluntarily

agreed to make the payment from its own funds in an effort to maximize its distribution. The

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12Section 503(c) was a last minute addition to BAPCPA proposed by Senator Edward M.

Kennedy, D-Mass. The addition of the Section occurred without any debate and there is no

written record regarding the deliberations. A reported statement by Senator Kennedy explained

that the amendment was “designed to stop the travesty of high-level corporate insiders who walk

away with millions while the company’s worker’s and retirees are left empty-handed.” See Mike

Casey, “Benefit Inequity Deepens Gap,” The Kansas City Star, July 24, 2005.

9

payments will not be allowed administrative expenses to be paid from the Debtor’s estate, nor

will Cerberus seek reimbursement from the estate for payment of the Transaction Bonuses. 

Section 503(c) of BAPCPA was adopted in an effort to deal with the effect that large

administrative claims arising pursuant to KERPs have on the estate.12 The court in In re U.S.

Airways, Inc., 329 B.R. 793 (E.D. Va. 2005), noted that the primary concern with KERPs is an

unwarranted depletion of the debtor’s estate at the expense of the creditors:

All too often [KERPs] have been widely used to lavishly reward –

at the expense of the creditor body – the very executives whose

bad decisions or lack of foresight were responsible for the debtor’s

financial plight.

Id., 329 B.R. at 797. These concerns do not arise under the facts of this case because the

bonuses create no expense to the estate or diminution to the creditor body. The financial burden

rests solely on Cerberus. Because Cerberus is undersecured, there is no way unsecured creditors

will be paid from the sale. The objections of the Committee and the U.S. Trustee asserting

application of §503(c) are inappropriate because the Transaction Bonuses are not administrative

expenses and do not otherwise deplete the Debtor’s estate at the expense of the creditors. The

Transaction Bonuses will not be disallowed or prohibited under §503(c). 

The Committee also alleges that Cerberus constructed the Bonus Agreements with the

intention of circumventing §503(c). However, the evidence establishes otherwise. Under the

Bonus Agreements, Cerberus's obligation is not predicated on the Debtor's bankruptcy filing but

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13See Deposition of Robert C. Davenport, DN 214, Exh. C at 129, 132-35.

14See 2/27/06 Sale Hearing Transcript, DN 180 at 34-65.

10

only on the sale of assets. The only conditions to payment of the Transaction Bonuses are: (i)

the sale of substantially all of the Debtor's assets (whether in or outside of a bankruptcy case); 

(ii) Cerberus receiving a cash distribution as a result thereof; and (iii) the applicable

Management Employee being in good standing immediately prior to the closing of any sale. The

credible evidence indicates that the Bonus Agreements were not written in anticipation or even

contemplation of the new bankruptcy law.

Q: The agreements that you reviewed you signed in August?

A: Okay.

Q: Did you discuss these agreements with [the Management

Employees] before they were signed?

A: Yes.

Q: It was about the same time that you learned about the changes

in the Bankruptcy Code?

A: No, there was no connection between the two. I think our

assumption was when we entered into these agreements, the

company was going to file for bankruptcy before the Code

changed. So I don't think there was any relevance.

Q: Why were you considering filing for bankruptcy before the

Code changed?

A: I think the assumption was that the Asset Purchase Agreement

with TravelPro would have been done. 

Davenport Deposition, DN 214, Exh. C at 179-80. The evidence establishes that the agreements

were precipitated by the former CEO (Dudash) aggressively recruiting the Management

Employees away from Debtor.13 Further, the sale of the company was initially intended to be

conducted outside of bankruptcy.14

The U.S. Trustee argues that if the court finds that the structure of the Bonus Agreements

prevents the bonuses from being considered administrative expenses of the estate, therefore

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15DN 205 at 4-8. 

11

avoiding the limitations of §503(c), the directors and controlling shareholders of the Debtor may

have created a conflict of interest by allowing the officers to be compensated by a secured

lender.15 In doing so, the U.S. Trustee contends, the directors, officers, and controlling

shareholders may have breached their fiduciary duty to act in the best interests of the corporate

Debtor and creditor body. "[T]he willingness . . . to leave debtors in possession ‘is premised

upon an assurance that the officers and managing employees of the debtor can be depended upon

to carry out the fiduciary responsibilities of a trustee.’" Commodity Futures Trading

Commission v. Weintraub, 471 U.S. 343, 355 (1985)(citation omitted). See also Wolf v.

Weinstein, 372 U.S. 633, 651, rehearing denied 373 U.S. 928 (1963).

A debtor-in-possession, as a fiduciary of the bankruptcy estate, is required to protect and

conserve property for the benefit of creditors. "Directors of an insolvent corporation hold their

powers 'in trust' for all creditors of the corporation. They may not use their powers for their own

benefit and to the detriment of creditors." In re Insulfoams, Inc., 184 B.R. 694, 703-04

(Bankr.W.D.Pa. 1995), aff'd sub nom. Donaldson v. Bernstein, 104 F.3d 547 (3d Cir. 1997). In

essence, the argument asserts that if Mr. Davenport, who was signatory to the agreement as the

Managing Director of Cerberus Capital and also a member of the Board of Directors of the

Debtor, was acting on behalf of Cerberus, and the agreement to pay the bonuses to the officers

was for the benefit of Cerberus and to the detriment of the remaining creditors of Debtor, then

Mr. Davenport may have breached his fiduciary duty as a Director of the Debtor. Similarly, if

Berry, Kurowska, Miller, and Carr signed the agreement for their benefit and to the detriment of

Debtor and the creditor body, then they also may have breached their fiduciary duty. Thus, we

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16See DN 90 at 3. Debtor’s assertion in its motion to sell is not disputed.

12

examine this issue to determine if there is an equitable basis on which to grant the Turnover

Motion.

The Bonus Agreements themselves explicitly provide that the Management Employees

must continue to comply with their fiduciary duties to the Debtor, even if such duties would

conflict with the interests of Cerberus:

Duties. Notwithstanding anything to the contrary set forth herein,

you will carry out your duties to the [Debtor] in a manner

consistent with your fiduciary duties to the [Debtor] regardless of

whether those duties would conflict with any duties owed to, or the

interests of, Cerberus. If the transaction contemplated in this letter

agreement would, in the reasonable opinion of the [Debtor] or

Cerberus, create any actual or perceived conflict of interest, the

parties will use their reasonable efforts to enter into mutually

satisfactory arrangements to compensate you in a manner that is

reasonably designed to eliminate any such conflicts.

DN 214, Exhibit A. Additionally, once in bankruptcy, the Management Employees were advised

of their fiduciary duties to all of the Debtor's creditors.16

Despite the potential for breaches of fiduciary duty, none have been established in this

case. All evidence indicates that both Cerberus and the Management Employees of the Debtor

acted in good faith to maximize the value of the Debtor's business and estate. After the CEO left

Debtor’s employ and started to recruit Debtor’s employees, and after Debtor lost many

customers and faced winding down its business, Cerberus and Debtor were concerned that the

loss of the remaining executives, who were being heavily recruited by the former CEO, would be

devastating to the business and detrimental to the sale. Robert Davenport, representative of

Cerberus, testified in deposition that after the former CEO left Debtor, he started trying to recruit

Kurowska and Miller. Davenport Deposition, DN 214, Exhibit C, at 129. Maximizing the sale

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2

Joel M. Walker, Esq.

Duane Morris LLP

600 Grant Street, Suite 5010

Pittsburgh, PA 15219

Norma Hildenbrand, Esquire

Office of the U.S. Trustee

9th Floor, Liberty Center

1001 Liberty Avenue

Pittsburgh, PA 15222

Deborah C. Phillips, Esquire

Department of Labor &

Industry

914 Penn Avenue, 6th Floor

Pittsburgh, PA 15222

Joel Helmrich, Esquire

Meyer, Unkovic & Scott LLP

1300 Oliver Building

535 Smithfield Street

Pittsburgh, PA 15219

John Pietro

170 Topaz

Canton, OH 44406

Lawrence C. Gottlieb,

Esquire

Adam Rogoff, Esquire

Kronish Lieb Weiner &

Hellman LLP

1114 Avenue of the Americas

New York, NY 10036-7798

Robert C. Edmundson,

Esquire

PA Department of Revenue

564 Forbes Avenue, 6th Fl.

Pittsburgh, PA 15219

Teachers Insurance and

Annuity

Association of America

Attention: Sharon Manewitz

730 Third Avenue

New York, NY 10017

Phil Uher, Esquire

Brian Lawton, Esquire

Metz Lewis LLC

11 Stanwix Street, 18th Floor

Pittsburgh, PA 15222

Edward L. Laubach, Jr.,

Esquire

Senior Attorney

Internal Revenue Service

1001 Liberty Avenue

Pittsburgh, PA 15222

James F. Grenen, Esquire

Grenen & Birsic, P.C.

One Gateway Center, 9th

Floor

Pittsburgh, PA 15222

Schuyler G. Carroll, Esquire

Robert M. Hirsh, Esquire

George P. Angelich, Esquire

Arent Fox PLLC

1675 Broadway

New York, NY 10019

Lawrence Gelber, Esquire

Howard O. Godnick. Esquire

Schulte Roth & Zebel, LLP

919 Third Avenue

New York, NY 10022

Gilbert B. Weisman, Esquire

Becket and Lee LLP

POB 3001

Malvern, PA 19355

Raymond M. Patella, Esquire

Blank Rome LLP

One Logan Square

Philadelphia, PA 19103

Steven S. Santoro, Esquire

Gefsky and Lehman, P.C.

2301 One PPG Place

Pittsburgh, PA 15222

Howard N. Gorney, Esquire

c/o Nixon Peabody LLP

100 Summer Street

Boston, MA 02110

Renee F. Bergmann, Esquire

Nixon Peabody LLP

1818 Market Street, 11th

Floor

Philadelphia, PA 19103

Libra Securities

11766 Wilshire Blvd., Ste.

870

Los Angeles, CA 90025

U.S. Bancorp

Attention: Daniel Spiller

800 Nicollet Mall

Mail Code BC-MN-H18T

Minneapolis, MN 55402

Gary Cerrone

106 Pinto Court

Bethel Park, PA 15102

J. Richard Abraham

85 Quail Hill Lane

Pittsburgh, PA 15238

George M. Dempster,

Esquire

Fenningham Stevens &

Dempster,

Five Neshaminy Interplex,

Suite 315

Trevose, PA 19053

Malhar S. Pagay, Esquire

Pachulski Stang Ziehl Young

Jones &

Weinstraub LLP

10100 Santa Monica

Boulevard,

11th Fl.

Los Angeles, CA 90067

Tina L. Campo, Esquire

Saul Ewing LLP

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3

Centre Square West

1500 Market Street, 38th

Floor

Philadelphia, PA 19102

500 Group Holdings, Inc.

Attention: Ed Bermas

700 Canal Street

Stamford, CT 06902

ADT Security Services, Inc.

POB 96175

Las Vegas, NV 89193

AT&T

POB 90013909

Louisville, KY 40290

BRT Enterprises

6990 Haigh Street

Orland, CA 95963

Bruce Weiner Family Ltd.

Partnership

930 Beaver Avenue

Ellwood City, PA 16117

Data Micro, Inc.

267 Matheson Boulevard,

East Unit 1

Mississauga Ontario

Canada L4Z 1X8

IBM Credit Corporation

POB 643600

Pittsburgh, PA 15264

Sterling Commerce, Inc.

POB 73199

Chicago, IL 60673

Valley Office Solutions

8534 South Avenue

Youngstown, OH 44514

Pitney Bowes Credit

Corporation

Bankruptcy Department

27 Waterview Drive

Shelton, CT 06484

Dated: 10/4/2006 

10:45:52

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4

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