1 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

TIMOTHY S. LAFFREDI (WI SBN 1055133) 

Assistant United States Trustee 

JASON BLUMBERG (NY SBN 4055257) 

Trial Attorney 

MARTA E. VILLACORTA (NY SBN 4918280) 

Trial Attorney 

United States Department of Justice 

Office of the U.S. Trustee 

450 Golden Gate Avenue, Suite 05-0153 

San Francisco, CA 94102 

Telephone: (415) 705-3333 

Facsimile: (415) 705-3379 

Email: jason.blumberg@usdoj.gov 

marta.villacorta@usdoj.gov 

Attorneys for Andrew R. Vara, 

Acting United States Trustee for Region 31

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA 

 SAN FRANCISCO DIVISION 

In re:

PG&E CORPORATION, 

 - and - 

Bankruptcy Case 

No. 19-30088 (DM) 

Chapter 11 

(Lead Case) 

(Jointly Administered) 

Date: July 24, 2019 

Time: 9:30 a.m. (Pacific Time) 

Place: United States Bankruptcy Court 

 Courtroom 17, 16th Floor 

 San Francisco, CA 94102 

PACIFIC GAS AND ELECTRIC 

COMPANY, 

 Debtors. 

 Affects PG&E Corporation 

 Affects Pacific Gas and Electric Company 

 Affects both Debtors 

* All papers shall be filed in the lead case, 

No. 19-30088 (DM) 

UNITED STATES TRUSTEE’S OBJECTION TO MOTION OF DEBTORS FOR 

ENTRY OF AN ORDER APPROVING KEY EMPLOYEE INCENTIVE PLAN 

Andrew R. Vara, Acting United States Trustee for Region 3 (the “United States 

Trustee”), by and through his undersigned counsel, hereby files this objection (the “Objection”) 

 

1

 Andrew R. Vara, Acting United States Trustee for Region 3, is acting in this appointment for Tracy 

Hope Davis, United States Trustee for Region 17, who has recused herself. 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 1 of

18
2 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

to the Motion of Debtors Pursuant to 11 U.S.C. §§ 105(a), 363(b), and 503(c) for Entry of an 

Order (I) Approving Debtors’ Incentive Program for Certain Key Employees and (II) Granting 

Related Relief (ECF No. 2664) (the “Motion”). This Objection is supported by the following 

memorandum of points and authorities and any argument the Court may permit.2

MEMORANDUM OF POINTS AND AUTHORITIES 

A. Introduction 

The Motion seeks authority to pay the Debtors’ senior executives KEIP Awards3

 that 

would exceed $5.4 million at the “threshold” performance (or more than 92% of the executives’ 

aggregate base salaries); $10.9 million at the “target” performance (or more than 185% of the 

executives’ aggregate base salaries); and $16.3 million at the “maximum” performance (or more 

than 275% of the executives’ aggregate base salaries). 

The Court should deny the Motion as lacking sufficient information for the Court and 

parties in interest to assess whether the KEIP is a true incentive plan – particularly at the 

“threshold” level. The Debtors provide no information about the performance levels for the 

“Financial Performance” metric, and the relevant contracts are not on file with the Court. 

The Debtors represent in the Motion only that the performance metrics for the KEIP are 

“similar” to those approved under the 2019 STIP. But without specifics, the Court and parties in 

interest are left to wonder just how “similar” the performance metrics actually are. Moreover, by 

the time the Court hears the Motion, the Performance Period for the KEIP will be more than 50% 

 

2

 The United States Trustee requests that the Court take judicial notice of the pleadings and 

documents filed in these cases pursuant to Federal Rule of Bankruptcy Procedure 9017 and Federal 

Rule of Evidence 201. 

3

 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion.

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 2 of

18
3 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

complete. The Motion likewise provides no information with respect to whether the Debtors are 

on track to satisfy the performance metrics. 

Based on the Debtors’ limited disclosures, it appears that the goals are easily achievable. 

The Debtors reveal that they have achieved “target” performance levels for their incentive plans 

in “only” five of the past nine years. It appears, though, that the Debtors achieved the 

“threshold” performance level in each of the other four years. Thus, past performance strongly 

suggests that the “threshold” performance level under the KEIP is not “challenging yet 

achievable.” Rather, it is more in the nature of a Golden State Warrior “lay-up.” 

The Debtors should provide relevant information, as set forth below. 

B. Background Facts and Procedural Posture 

1. On January 29, 2019, the Debtors commenced the above-captioned cases by filing 

voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the “Petition Date”). See

ECF No. 1. No trustee has been appointed in the Debtors’ cases. See generally Case Dockets. 

2. On February 12, 2019, the United States Trustee appointed an Official Committee 

of Unsecured Creditors. See ECF No. 409. On February 15, 2019, the United States Trustee 

appointed an Official Committee of Tort Claimants. See ECF No. 453. 

3. The section 341(a) meeting of creditors in these cases was initially held on March 

4, 2019 and concluded on April 29, 2019. See ECF Nos. 396, 736. 

The 2019 STIP

4. On April 29, 2019, the Court approved the Debtors’ 2019 short-term incentive 

program for approximately 10,000 non-insider employees (the “2019 STIP”). See ECF No. 1751 

(Order approving 2019 STIP); see also Motion, at pp. 7, 11, 20. 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 3 of

18
4 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5. The performance metrics for the 2019 STIP are weighted as follows: (i) 65% for 

“Safety Metrics”; (ii) 10% for “Customer Satisfaction”; and (iii) 25% for “Financial 

Performance.” See ECF No. 1751; ECF No. 806 (the “2019 STIP Motion”), at p.14. 

6. The “Safety Metrics” consist of five measures: (i) “Nuclear Reliability and Safety 

Indicator” (weight: 5%); (ii) “Public Safety Index” (weight: 25%); (iii) “First-Time ILI Miles” 

(weight: 10%); (iv) “Asset Records Duration Index” (weight: 10%); and (v) “Serious Injuries 

and Fatalities Corrective Actions Index” (weight: 15%). The “Public Safety Index” is, in turn, 

comprised of an “Enhanced Vegetation Management” metric and a “System Hardening” metric. 

See 2019 STIP Motion, at p.14; ECF No. 1751. 

The KEIP 

7. Pursuant to the Motion, the Debtors seek approval of a key employee incentive 

plan (the “KEIP”) for 12 senior executive officers (the “KEIP Participants”). See Motion, at pp. 

2, 7. 

8. The KEIP Participants are: (i) John Simon, EVP, Law, Strategy and Policy; (ii) 

Jason Wells, EVP and CFO; (iii) Janet Loduca, SVP and General Counsel; (iv) Melvin 

Christopher, VP, Gas Operations; (v) Michael Lewis, SVP, Electric Operations; (vi) Julie Kane, 

SVP, Chief Ethics & Compliance Officer, and Deputy General Counsel; (vii) Dinyar Mistry, 

SVP, Human Resources, Shared Services and Chief Diversity Officer; (viii) Loraine Giammona, 

SVP and Chief Customer Officer; (ix) Fong Wan, SVP, Energy Policy & Procurement; (x) 

Kathleen Kay, SVP and Chief Information Officer; (xi) James Welsch, SVP and Chief Nuclear 

Officer; and (xii) David Thomason, VP, CFO Utility and Controller. See Motion, at pp. 11-12.4

 

 

4

 The Chief Executive Officer is not a KEIP Participant. See Motion, at p.7. The Debtors have filed a 

separate motion for approval of the Chief Executive Officer’s compensation. See ECF No. 2662. 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 4 of

18
5 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9. The base salaries of the KEIP Participants total approximately $5,899,000. See

Motion, at p.14; see also Declaration of Douglas J. Friske (ECF No. 2667) (the “Friske 

Declaration”), at p.9; Declaration of John Lowe (ECF No. 2668) (the “Lowe Declaration”), at p. 

8. 

10. The total cost of the KEIP Awards could exceed $16 million. More specifically, 

at “threshold performance,” the aggregate value of the KEIP Awards would be $5,465,500; at 

“target performance,” the aggregate value of the KEIP Awards would be $10,931,000; and at 

“maximum performance,” the aggregate value of the KEIP Awards would be $16,396.500. See

Motion, at p.12. 

11. The KEIP Awards would be payable in cash (50%) and equity (50%). The equity 

portion of the award would be in the form of performance-based restricted stock. But the 

Debtors would have the option to settle the performance-based restricted stock in cash. See

Motion, at pp. 8, 12. 

12. As part of the Motion, the Debtors seek authority to replace any KEIP Participant 

whose employment ends prior to the conclusion of the Performance Period. The replacement 

would be eligible to receive a prorated share of the applicable KEIP Award. See Motion, at p.14. 

13. The Debtors also seek authority to provide KEIP Awards for up to two additional 

KEIP Participants in 2019. The aggregate KEIP Awards for the additional KEIP Participants 

could be as much as $4 million. See Motion, at p.14. 

14. According to the Motion, the Performance Metrics for the KEIP “are similar to 

those approved by this Court in connection with the 2019 STIP ....” See Motion, at p.16 

(emphasis added). As with the 2019 STIP, “Safety Metrics” are weighted at 65%, while the 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 5 of

18
6 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

“Customer Satisfaction” and “Financial Performance” metrics are weighted at 10% and 25%, 

respectively. See id., at pp. 12-13. 

15. The KEIP also includes a downward modifier if the Debtors fail to meet the 

threshold level (-50%) or the target level (-25%) for the Public Safety Index component of the 

Safety Metric. See id., at p.13. 

16. The Performance Period for the KEIP is January 1, 2019 through December 31, 

2019. See Motion, at p.12. 

17. According to the Motion, the Debtors have “achieved their target STIP metrics in 

five of the past nine years ....” See Motion, at p.17; see also Lowe Declaration, at p.10. 

The Apparent Bonuses Paid to Executives After the Petition Date

18. The Debtors’ operating report for March (ECF No. 1945) (the “March MOR”) 

reflects that ten KEIP Participants have already received increases in their salaries for that month 

(the “Additional March Payments”). Two non-KEIP Participants - Mr. Malnight and Mr. Soto – 

also received the Additional March Payments. See March MOR, at p.13. 

19. A summary of the increased payments for March 2019 is reflected in the 

following chart (showing a return to normal payments in April):

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 6 of

18
7 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

20. Copies of the relevant pages of the February monthly operating report (ECF No. 

1137), the March MOR (ECF No. 1945) and the April monthly operating report (ECF No. 2276) 

are attached as Exhibit A to the Declaration of Laurie A. Brugger filed herewith (the “Brugger 

Declaration”). 

21. The United States Trustee and the Debtors have exchanged information about the 

Additional March Payments. The Debtors have described these payments as “annual allowances 

for perquisite benefits. This is ... not a bonus; rather it is a lump-sum annual cash stipend paid in 

lieu of providing broader perquisite benefits.” The email exchange between the Debtors and the 

United States Trustee is attached as Exhibit B to the Brugger Declaration. 

22. By letter dated June 18, 2019, the United States Trustee wrote to the Debtors’ 

counsel (the “UST Letter”) asking for more information, including whether payments similar to 

the Additional March Payments have been made to the employees in the past and whether these 

payments were the subject of written contracts. A copy of the UST Letter is attached as Exhibit 

C to the Brugger Declaration. 

23. The Debtors responded to the UST Letter by letter dated June 28, 2019. In their 

letter, the Debtors asserted that the Additional March Payments “are a long-running element of 

the Debtors’ compensation to their officers, consistent with their terms of employment and 

prepetition policies of the Debtors and are justified as appropriate compensation for the Debtors’ 

officers’ service as senior executives in a large and complex business..... Accordingly, the 

requirements of section 503(c) do not apply to the Lump Sum Perquisite Allowance.” The 

Debtors’ letter did not address whether the Additional March Payments were made in accordance 

with written contracts. A copy of the Debtors’ letter is attached as Exhibit D to the Brugger 

Declaration. 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 7 of

18
8 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

C. Statutory Framework 

Section 503 governs the allowance of administrative expenses “for actual, necessary costs 

and expenses of preserving” a debtor’s bankruptcy estate. 11 U.S.C. § 503(b)(1)(A). The two 

general overriding policies of Section 503 of the Bankruptcy Code are to: (i) preserve the value 

of the estate for the benefit of its creditors; and (ii) prevent the unjust enrichment of the insiders 

of the estate at the expense of its creditors. See In re Journal Register Co., 407 B.R. 520, 535 

(Bankr. S.D.N.Y. 2009). 

Section 503(c)(1) of the Bankruptcy Code prohibits any 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, absent a finding by the court based on evidence in the record 

that-- 

(A) the transfer or obligation is essential to retention of the person because 

the individual has a bona fide job offer from another business at the same 

or greater rate of compensation; 

(B) the services provided by the person are essential to the survival of the 

business; and 

(C) either – 

(i) the amount of the transfer made to, or obligation incurred for the 

benefit of, the person is not greater than an amount equal to 10 

times the amount of the mean transfer or obligation of a similar 

kind given to nonmanagement employees for any purpose during 

the calendar year in which the transfer is made or the obligation is 

incurred; or 

(ii) if no such similar transfers were made to, or obligations were 

incurred for the benefit of, such nonmanagement employees during 

such calendar year, the amount of the transfer or obligation is not 

greater than an amount equal to 25 percent of the amount of any

similar transfer or obligation made to or incurred for the benefit of 

such insider for any purpose during the calendar year before the 

year in which such transfer is made or obligation is incurred; 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 8 of

18
9 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11 U.S.C. § 503(c)(1) (emphasis added). 

 A transfer to an insider to induce the insider to remain with the debtor’s business must 

satisfy the requirements under subdivisions (A), (B), and (C) of Section 503(c)(1) of the 

Bankruptcy Code to be subject to this subdivision’s exception. 4 Collier on Bankruptcy ¶ 503.17 

(15th ed. rev. 2007); see also In re Dana Corp., 358 B.R. 567, 575 (Bankr. S.D.N.Y. 2006) 

(“Dana II”) (summarizing the requirements under Section 503(c)(1) of the Bankruptcy Code). 

Section 503(c) of the Bankruptcy Code, added in 2005 as part of the Bankruptcy Abuse 

Prevention and Consumer Protection Act (“BAPCPA”), was intended to curtail payments of 

retention incentives to insiders, including bonuses granted to other employees without factual 

and circumstantial justification. See Journal Register; 407 B.R. at 536; see also In re Pilgrim’s 

Pride Corp., 401 B.R. 229, 234 (Bankr. N.D. Tex. 2009) (“Section 503(c) was enacted to limit a 

debtor’s ability to favor powerful insiders economically and at estate expense during a chapter 11 

case.”); In re Global Home Prods., LLC, 369 B.R. 778, 784 (Bankr. D. Del. 2007) (the 

amendments were added to “eradicate the notion that executives were entitled to bonuses simply 

for staying with the Company through the bankruptcy process.”); see also In re Maust Transp., 

Inc., 589 B.R. 887, 893 (Bankr. W.D. Wash. 2018) (“[T]he 2005 amendments to § 503, which 

specifically prohibit certain insider retention bonus administrative claims, make it clear that 

Congress can and has removed the broad discretion granted to courts in § 503 where it deems the 

exercise of such discretion improper as to certain specific categories of administrative claims.”). 

This section establishes specific evidentiary standards that must be met before a 

bankruptcy court may authorize payments made to an insider for the purpose of inducing such 

person to remain with a debtor’s business. See In re Dana Corp., 351 B.R. 96, 100 (Bankr. 

S.D.N.Y. 2006) (“Dana I”); 11 U.S.C. § 503(c)(1). 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 9 of

18
10 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

The BAPCPA amendments make it abundantly clear that if a proposed transfer falls 

within Section 503(c)(1), then the business judgment rule does not apply, irrespective of whether 

a sound business purpose may actually exist. Id. at 101; see also In re Siliken Mfg. USA, Inc., 

2013 WL 5330481, at *7 (Bankr. S.D. Cal. Sept. 19, 2013) (“[T]he Code often subjects insider 

dealings to heightened scrutiny in recognition that even ostensibly arm's length transactions 

between insiders have an inherently coercive element to them.”). 

The effect of Section 503(c) of the Bankruptcy Code was to put in place “a set of 

challenging standards” and “high hurdles” for debtors to overcome before retention bonuses 

could be paid. See In re Mesa Air Group, Inc., 2010 WL 3810899, at *2 (Bankr. S.D.N.Y. Sept. 

24, 2010) (citing Global Home Prods., 369 B.R. at 785). 

ARGUMENT 

I. The Debtors Have Not Established that Section 503(c)(1) is Inapplicable to the 

KEIP. 

To avoid the requirements of section 503(c)(1), a debtor must show that “the proposed 

transfers are not to insiders of a debtor or, if the recipients of the proposed transfers are insiders, 

that the transfers are not being made for the purpose of retaining those insiders.” See In re 

Residential Capital, LLC, 478 B.R. 154, 169 (Bankr. S.D.N.Y. 2012) (emphasis added) 

(“Rescap”). 

Here, the Debtors contend that Section 503(c)(1) is inapplicable to the relief requested in 

the Motion, because the KEIP is an incentive plan. See Motion, at p.15. Consequently, the 

Motion does not address the KEIP’s compliance with the strict requirements of subdivisions (A), 

(B), and (C) of Section 503(c)(1). 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 10

of 18
11 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

As discussed below, however, the Motion fails to provide sufficient information for the 

Court and parties in interest to assess whether the KEIP is, in fact, primarily incentive in nature.5

 

A. The KEIP Participants are Insiders. 

Pursuant to the Section 101(31) of the Bankruptcy Code, if a debtor is a corporation, the 

term “insider” includes an officer of the debtor. 11 U.S.C. § 101(31)(B)(ii). A vice president, as 

an officer, is presumptively an insider. See In re Foothills Texas, Inc., 408 B.R. 573, 574, 579 

(Bankr. D. Del. 2009); see also In re The Village at Lakeridge, LLC, 814 F.3d 993, 999 (9th Cir. 

2016) (“Statutory insiders, also known as ‘per se insiders,’ are persons explicitly described in 11 

U.S.C. § 101(31) .... As a matter of law, a statutory insider has a sufficiently close relationship 

with a debtor to warrant special treatment.”). 

Moreover, regardless of title, a person with broad responsibilities over significant aspects 

of a debtor’s business is considered an insider, even if he or she is not a member of senior 

management. See In re Foothills Texas, Inc., 408 B.R. at 584 (finding vice presidents who were 

not members of senior management, but who had broad responsibilities over significant aspects 

of debtor’s business, to be insiders); see also In re The Village at Lakeridge, LLC, 814 F.3d at 

1001 (“Having – or being subject to – some degree of control is one of many indications that a 

creditor may be a non-statutory insider, but actual control is not required to find non-statutory 

insider status.”); In re Borders Group, Inc., 453 B.R. 459, 469 (Bankr. S.D.N.Y. 2011) 

(“[i]nsider status can also be determined on a case by-case basis based on the totality of the 

circumstances, including the degree of an individual's involvement in a debtor's affairs”). 

Here, each of the KEIP Participants hold officer titles, such as Vice President or Chief 

Financial Officer. Also, the Debtors acknowledge that the KEIP Participants are their “most 

 

5

 The United States Trustee reserves his right to conduct discovery on these issues and any matter 

relevant to the Motion. 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 11

of 18
12 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

senior officers” and “are largely responsible for the Debtors’ ongoing day-to-day operations and 

guiding the Debtors’ overall business strategy.” See Motion, at pp. 7, 9 11. 

Thus, the KEIP Participants are insiders based both on their titles and their degree of 

control over the Debtors’ affairs.6

 

B. The Debtors Have Failed to Satisfy their Burden of Demonstrating that the 

KEIP is an Incentive Plan. 

 As discussed above, retention plans implicate Section 503(c)(1). Retention plans usually 

are intended “to encourage certain crucial employees to remain with the company through a 

critical, transitional time period when the exact future of the company is unclear and when those 

employees would be most likely to search for other employment.” See In re Georgetown Steel 

Co., LLC, 306 B.R. 549, 556 (Bankr. D.S.C. 2004). In contrast, incentive plans are designed to 

motivate employees to achieve performance goals. See Mesa Air Group, Inc., 2010 WL 

3810899, at *4. 

The Debtors bear the burden of establishing by a preponderance of the evidence that the 

KEIP is primarily incentivizing, rather than primarily retentive. See Rescap, 478 B.R. at 170; see 

also In re Hawker Beechcraft, 479 B.R. 308, 312-13 (Bankr. S.D.N.Y. 2012). In other words,

the Debtors must demonstrate that the KEIP is not retention-based, but rather that it presents 

significant hurdles which are difficult to achieve. See Rescap, 478 B.R. at 157-58, 164, 169, 

173; In re Velo Holdings Inc., 472 B.R. 201, 209 (Bankr. S.D.N.Y. 2012); Global Home, 369 

B.R. at 784; see also Dana II, 358 B.R. at 583 (benchmarks for the debtors’ long-term KEIP “are 

difficult targets to reach and are clearly not ‘lay-ups’”). 

 

6

 The Debtors’ monthly operating reports reflects two insiders who are not listed in the Motion - Steven 

Malnight and Jesus Soto. See Exhibit A to the Brugger Declaration. While the Debtors’ operating report 

for April states that Mr. Malnight resigned in April (ECF No. 2276, at p.14), the Debtors must explain 

their decision to exclude Mr. Soto from the KEIP. 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 12

of 18
13 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

The Debtors have not satisfied this burden. While the Debtors represent that the KEIP is 

an incentive plan, it is the substance of how and why the proposed payments are made - not the 

label put on the plan - that is determinative. See, e.g., Mesa Air Group, Inc., 2010 WL 3810899, 

at *2, 4 (incentive plans are designed to motivate employees to achieve performance goals). 

The Debtors’ Motion fails to identify the specific targets for each Performance Metric or 

how those targets can be achieved. The Motion instead represents that the KEIP metrics “are 

similar to those approved by this Court in connection with the 2019 STIP” and directs the Court 

and parties in interest to Mr. Lowe’s testimony in support of the 2019 STIP and a demonstrative 

presentation filed as part of ECF No. 1634 (the “Demonstrative Presentation”). See Motion, at 

pp. 8, 16 & n.3 (emphasis added).7

The Court and parties in interest are left to wonder just how “similar” the Performance 

Metrics under the KEIP are to those under the 2019 STIP. Even if the Performance Metrics are 

identical, the Motion fails to provide any information as to whether the Debtors are on track to 

satisfy the metrics. This information is critical, because the Debtors have already completed 

more than 50% of the Performance Period. What seemed like a challenging target in April may 

now be a lay-up. 

Moreover, the Motion acknowledges that the Debtors have achieved the “target” 

performance in five of the past nine years. But it provides no information as to whether the 

 

7

 The Demonstrative Presentation identifies the threshold, target, and maximum performance levels for 

the Performance Metrics under the 2019 STIP, except for the “Financial Performance” metric. See ECF 

No. 1634-1, at p.6. The “threshold” performance levels for the “Public Safety Index” metric (comprised 

of the “Enhanced Vegetation Management” and “System Hardening” metrics) appear to be lower than the 

mileage targets in the Debtors’ Wildfire Safety Plan. Compare Demonstrative Presentation, at p.6 with

ECF No. 1014-2 in Case No. 3:14-cr-00175-WHA (N.D. Cal.), at pp. 151-52 of 318. Notwithstanding 

the PSI modifier, this begs the question of whether senior executives should be entitled to any bonus if the 

Debtors fail to reach the targets in their Wildfire Safety Plan – particularly because compliance with the 

plan is a condition of PG&E’s probation (ECF No. 1040 in Case No. 3:14-cr-00175-WHA, at ¶ 2). 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 13

of 18
14 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Debtors achieved the “threshold” performance in the other four years. The Demonstrative 

Presentation, though, suggests that the Debtors did achieve the “threshold” performance in each 

of the four years. See ECF No. 1634-1, at p.12. 

Without more specific information, the Court and parties in interest cannot assess 

whether the Performance Metrics present difficult targets and are not “lay-ups” - particularly at 

the “threshold” level. See, e.g., In re Hawker Beechcraft, 479 B.R. at 313, 315 (“[A]lthough the 

KEIP includes incentivizing targets, the lowest levels are well within reach.... Because the SLT 

members will likely earn some bonus under the KEIP merely by remaining with the Debtors ... 

approval of the KEIP must be denied.”); In re GT Advanced Tech., Inc., 2015 WL 5737181, at 

*5 (Bankr. D.N.H. Sept. 30, 2015) (holding that bonus plan was primarily retentive, in part, 

because it was “designed to provide ... Insiders with some performance bonuses in addition to 

their base salaries even if their performance meets only the ‘threshold’ level, a level below that 

provided for in the Debtors’ Business Plan.”) (emphasis in original). 

C. Even if the KEIP is Governed by Section 503(c)(3), the Debtors Have Not 

Established that the KEIP is Justified by the Facts and Circumstances of the 

Case. 

Even if the Court were to find that Section 503(c)(1) does not apply to the KEIP, the 

Motion may be granted only if the Court finds that it is necessary to preserve the value of the 

Debtors’ estate, and is “justified by the facts and circumstances of the case.” See 11 U.S.C. § 

503(c)(3); In re Dant & Russell, Inc., 853 F.2d 700, 706 (9th Cir. 1988) (“Any claim for 

administrative expenses and costs must be the actual and necessary costs of preserving the estate 

for the benefit of its creditors.”), superseded by statute on other grounds, 11 U.S.C. § 365(d)(3); 

see also In re Regensteiner Printing Co., 122 B.R. 323, 326 (N.D. Ill. 1990) (reversing approval 

of severance agreements for key employees, because debtors presented no evidence that 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 14

of 18
15 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

severance payments were necessary to preserve bankruptcy estate); In re Pacific Gas and 

Electric Co., 2001 WL 34133840, at *2 n.4 (Bankr. N.D. Cal. July 13, 2001) (initial declaration 

“‘on information and belief’” was “insufficient” basis to grant KERP motion).8 

In Dana II, Judge Lifland listed several factors that courts consider when determining if 

the structure of a compensation proposal and the process for its development satisfy Section 

503(c)(3): 

• Is there a reasonable relationship between the plan proposed and the 

results to be obtained, i.e., will the key employee stay for as long as it 

takes for the debtor to reorganize or market its assets, or, in the case of a 

performance incentive, is the plan calculated to achieve the desired 

performance? 

• Is the cost of the plan reasonable in the context of the debtor's assets, 

liabilities and earning potential? 

• Is the scope of the plan fair and reasonable; does it apply to all employees; 

does it discriminate unfairly? 

• Is the plan or proposal consistent with industry standards? 

• What were the due diligence efforts of the debtor in investigating the need 

for a plan; analyzing which key employees need to be incentivized; what 

is available; what is generally applicable in a particular industry? 

• Did the debtor receive independent counsel in performing due diligence 

and in creating and authorizing the incentive compensation? 

358 B.R. at 576–77. The Debtors have failed to satisfy several of these factors. 

 

8 The Debtors contend that the test under Section 503(c)(3) is identical to the business judgment rule as 

applied under Section 363(b)(1). See Motion, at pp. 17-18. This reading, however, would render Section 

503(c)(3) superfluous. See In re Pilgrim's Pride Corp., 401 B.R. at 236–37 (Bankr. N.D. Tex. 2009) (“To 

read section 503(c)(3) as requiring nothing not already required by section 363(b)(1) would violate” the 

principle of construction that Congress intended independent Code Sections to “have independent, 

differing impacts.”); see also In re GT Advanced Tech. Inc., 2015 WL 4459502, at *7 (D.N.H. July 21, 

2015) (Section 503(c)(3) “directs courts to give more scrutiny to the business judgment of debtors than is 

permitted under the § 363(b)(1) business judgment test.”).

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 15

of 18
16 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

First, the Motion fails to establish a reasonable relationship between effort and outcome. 

Particularly at the “threshold” level, it is not evident that the Performance Metrics are 

challenging to meet. Even under the less rigorous standards of Sections 503(c)(3), the 

benchmarks for the payment of bonuses must be “difficult targets to reach.” Dana II, 358 B.R. 

at 583-84. 

Also, the Motion provides very little information about the correlation of the 

responsibilities of KEIP Participants and the satisfaction of specific Performance Metrics. It is, 

for example, unclear how the duties of the Chief Diversity Officer or the Chief Information 

Officer directly impact the Debtors’ achievement of the safety metric targets. 

Second, there is insufficient evidence that the KEIP Awards are consistent with industry 

standards. At “maximum” performance, the total cost of the KEIP would exceed $16 million. 

That amount is more than 275% of the KEIP Participants’ aggregate base salaries. See Motion, 

at pp. 12, 14. 

In his declaration, Mr. Friske concludes that (i) the total direct compensation of the KEIP 

Participants is below market (unless “maximum” performance is achieved), and (ii) the cost of 

the KEIP expressed as a percentage of the Debtors’ revenue is reasonable relative to KEIPs 

implemented by “Restructuring Peers.” However, Mr. Friske’s declaration omits the data that he 

relied upon to make these conclusions. See Friske Declaration, at pp. 9-12. 

Also conspicuously absent from Mr. Friske’s declaration is an analysis of whether the 

high cost of the KEIP relative to the KEIP Participants’ base salaries is consistent with 

incentive programs implemented by other debtors. Cf. In re GT Advanced Techs., Inc., 2015 

WL 5737181, at *6 (“Interestingly, under the KEIP, the other four Insiders have the ability to 

earn bonuses that actually exceed their prepetition cash income. The Debtors have failed to 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 16

of 18
17 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

justify why any of the Insiders should potentially be compensated for their work during this 

Chapter 11 case in an amount greater than ... their prepetition remuneration.”) (emphasis in 

original); United Mine Workers of Am. 1974 Pension Plan & Tr. v. Alpha Nat. Res., Inc., 553 

B.R. 556, 564 (E.D. Va. 2016) (“Another factor demonstrating that the KEIP is justifiable is its 

similarity to the KEIPs of peer companies. When Meridian analyzed twenty peer companies, 

they took note of the number of participants, number and duration of performance periods, types 

of metrics, target payout as a percentage of participants’ base salaries, payout timing, and cost 

of the program as a percentage of prepetition assets.”) (emphasis added). 

Lastly, the Debtors are seeking an open-ended authorization to pay an additional $4 

million in KEIP Awards to two employees that could be named as KEIP Participants at any time 

in 2019. There is no evidence of the reasonableness of this request, or how significantly 

increasing the amount of the KEIP Awards late in the Performance Period would help the 

Debtors achieve the Performance Metrics. This request should be denied. 

D. The Post-Petition Payments to Insiders 

As discussed above, the Debtors made the Additional March Payments, as reflected in the 

March MOR. The Debtors have characterized these payments as “perquisites.” See Exhibit B to 

the Brugger Declaration. 

Section 503(c) was added to the Bankruptcy Code as one of the BAPCPA amendments in 

2005, to “eradicate the notion that executives were entitled to bonuses simply for staying with 

the Company through the bankruptcy process.” In re Residential Capital, LLC, 491 B.R. 73, 82 

(Bankr. S.D.N.Y. 2013) (citing In re Global Home Prods., LLC, 369 B.R. at 783–84). 

Attempts to characterize what are essentially prohibited retention programs as “incentive” 

programs to bypass the requirements of Section 503(c)(1) of the Bankruptcy Code are looked 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 17

of 18
18 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

upon with disfavor, as courts consider the circumstances under which particular proposals are 

made, along with the structure of the compensation packages, when determining whether the 

compensation programs are subject to section 503(c)(1) of the Bankruptcy Code. See In re Mesa 

Air Group, Inc., 2010 WL 3810899, at *2 (citing Dana I, 351 B.R. at 102, n.3 (stating that if a 

bonus proposal “walks like a duck (KERP), and quacks like a duck (KERP), it’s a duck 

(KERP).”)). 

The UST Letter outlines the United States Trustee’s continuing concerns about these 

payments. See Exhibit C to the Brugger Declaration. The Debtors must explain whether the 

Additional March Payments were made pursuant to written contracts and demonstrate that the 

payments meet the requirements of Section 503, as set forth above. 

CONCLUSION 

The United States Trustee respectfully requests that the Court deny the Motion and grant 

such other relief as the Court deems fair and just. 

Dated: July 17, 2019 Andrew R. Vara 

 Acting United States Trustee, Region 3 

 By:/s/ Jason Blumberg 

Jason Blumberg 

Trial Attorney for United States Trustee 

Case: 19-30088 Doc# 3029 Filed: 07/17/19 Entered: 07/17/19 13:50:05 Page 18

of 18