Full title: Notice of Hearing and Motion for Order (I) Granting Expedited Relief (II) Authorizing Debtor to Pay Prepetition Employee Compensation, Benefits, Workers' Compensation Obligations, and other Related Amounts and (III) Authorizing Payroll Provider and Financial Institutions to Honor and Process Checks and Transfers Related to Such Relief. filed by Tea Olive I, LLC . An affidavit or verification, Memorandum of law, Proposed order. Hearing scheduled 1/13/2021 at 02:00 PM at *TELEPHONIC HEARING* with Judge William J. Fisher (St Paul). (Barbie MNBS) (Entered: 01/11/2021)
Document posted on Jan 10, 2021 in the bankruptcy, 33 pages and 0 tables.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MINNESOTA
Case No.: 21-30037
Tea Olive I, LLC d/b/a Stock+Field,
Chapter 11 Case
NOTICE OF HEARING AND MOTION FOR ORDER (I) GRANTING EXPEDITED RELIEF; (II) AUTHORIZING DEBTOR TO PAY PREPETITION EMPLOYEE COMPENSATION, BENEFITS, WORKERS’ COMPENSATION OBLIGATIONS, AND OTHER RELATED AMOUNTS; AND (III) AUTHORIZING PAYROLL PROVIDER AND FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND
TRANSFERS RELATED TO SUCH RELIEF
TO: The parties in interest as specified in Local Rule 9013-3(a)(2).
1. The above-captioned debtor and debtor in possession (together, the “Debtor”) hereby move this Court for the relief requested below and give notice of hearing.
2. The Court will hold a hearing on this Motion at 2:00 p.m. (CT) on Wednesday, January 13, 2021, in Courtroom 2B, 232 Warren E. Burger Federal Building and U.S.
Courthouse, 316 North Robert Street, St. Paul, MN 55101. The hearing will be held telephonically:
a. Dial 1-888-684-8852;
b. When prompted, enter ACCESS CODE: 5988550;
c. When prompted, enter SECURITY CODE: 0428.
3. Local Rule 9006-1(c) provides deadlines for responses to this Motion. However, given the expedited nature of the relief sought, the Debtor does not object to written responses being served and filed two hours prior to the hearing. UNLESS A RESPONSE OPPOSING
THE MOTION IS TIMELY FILED, THE COURT MAY GRANT THE MOTION WITHOUT A HEARING.
4. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §§ 157 and 1334, Rule 5005 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) and Local Rules 1070-1 and 1073-1. This is a core proceeding pursuant to 28 U.S.C. § 157(b).
Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The petition commencing this chapter 11 case was filed on January 10, 2021 (the “Filing Date”). The case is currently pending before this Court.
5. This Motion arises under 11 U.S.C. §§ 105(a), 363, 507, 549, 1107, and 1108.
This motion is filed pursuant to Local Rules 9013-1 through -3. Expedited relief is requested pursuant to Bankruptcy Rule 9006(c) and Local Rule 9006-1(e). Notice of the hearing on this motion is provided pursuant to Bankruptcy Rule 2002(a) and Local Rules 9013-3 and 2002-1(b).
To avoid immediate and irreparable harm, the Debtor requests an order authorizing it to pay accrued but unpaid prepetition employee-related amounts—consisting generally of compensation, benefits, and workers’ compensation obligations—and to continue various prepetition, ordinary course employee-related benefits, programs, and policies.
6. On the Filing Date, the Debtor filed a voluntary petition for relief pursuant to Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The Debtor continues to operate its business as a debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
7. Further general background information about the Debtor and this case is set forth in the Declaration of Matthew F. Whebbe in Support of Chapter 11 Petition and Initial Motions.
The additional facts relevant to this motion set forth below are verified by Matthew Whebbe as evidenced by the attached verification.
RELEVANT FACTS AND RELIEF REQUESTED
8. As of the Filing Date, the Debtor employed approximately 1,001 people (collectively, the “Employees”). Of those, approximately 488 are full-time and approximately 513 are part-time, seasonal, or temporary. A majority of the Employees work in the Debtor’s approximately 25 existing stores and related warehouses located in five different states; other Employees work at the Debtor’s headquarters in Eagan, Minnesota. The Debtor pays the Employees on the same schedule and using the same process and programs. The Debtor owes its Employees prepetition compensation for work performed by the Employees prepetition and owes prepetition amounts in connection with various benefit programs, as described in detail below (collectively, the “Prepetition Employee Obligations,” as further defined below).
9. The Employees serve in a wide variety of roles critical to the Debtor’s ongoing business operations. To operate during the pendency of this chapter 11 case, the Debtor must retain its Employees’ skill, knowledge, and understanding of the Debtor’s business. The management, marketing, sales, distribution, and technical skills of the Employees are essential to the Debtor’s ability to source essential products, such as pet and animal supplies and other consumables, manage inventory through the sale process, and provide customers with positive in-store experiences during the sales. The continued and uninterrupted service of the Employees is essential to the Debtor’s ability to successfully navigate this chapter 11 case.
10. Continued payment, when due, of the Prepetition Employee Obligations and the continuation of the plans, policies, programs and practices underlying the Prepetition Employee Obligations, as described herein, are necessary to ensure the ongoing services of the Debtor’s Employees.
11. If prepetition compensation, benefit, and reimbursement amounts are not received by the Employees in the ordinary course, they will suffer personal hardship and, in many cases, will be unable to pay their basic living expenses, particularly during the ongoing COVID-19 pandemic. Such a result would destroy Employee morale and result in unmanageable Employee turnover, causing immediate and pervasive damage to the Debtor’s ongoing business operations, the sale process, and the value of its assets, thereby resulting in immediate and irreparable harm to the Debtor and its estate.
12. Therefore, payment of the Prepetition Employee Obligations in accordance with the Debtor’s prepetition business practices will enable the Debtor to continue to operate in an economic and efficient manner with minimal disruption and preserve its going concern value, effectively reorganize, and is in the best interests of the Debtor, its creditors, and all parties in interest.
13. Accordingly, by this Motion, the Debtor seeks an order: (a) authorizing, but not requiring, it to pay or cause to be paid, in its sole discretion, all or a portion of the amounts owing (and associated costs) under or related to the Compensation Obligations, the Payroll Provider Obligations, the Employee Funds, the Benefit Plan Obligations, the Other Benefit Obligations, the Reimbursement Obligations, and the Workers’ Compensation Obligations (each as individually defined below and, collectively, the “Prepetition Employee Obligations”); (b) unless otherwise set forth herein, authorizing, but not requiring, it to continue, in its sole discretion, its plans, practices, programs, and policies for its Employees, as those plans, practices, programs, and policies were in effect as of the Filing Date and as may be modified, terminated, amended, or supplemented from time to time, in its sole discretion, and to make payments pursuant to such plans, practices, programs, and policies in the ordinary course of
business, as well as to pay related administrative obligations; and (c) authorizing the payroll provider and applicable banks and other financial institutions to receive, process, honor, and pay any and all checks drawn to the extent that those checks or transfers relate to any of the foregoing. While the self-funded nature of certain insurance benefits offered by the Debtor to its Employees makes it difficult to determine with specificity at this time, the Debtor believes that the amount required to satisfy the Prepetition Employee Obligations will not exceed the caps for priority claims imposed by sections 507(a)(4) and (a)(5) for the wages and benefits to which those caps apply.
I. COMPENSATION OBLIGATIONS
14. The Debtor offers its Employees various forms of compensation, including wages, salaries, and certain forms of paid absences. The Debtor seeks authorization to pay accrued but unpaid prepetition amounts owed with respect to these forms of compensation (collectively, the “Compensation Obligations”).
A. Wages and Salaries.
15. Wages and Salaries. Of the Debtor’s approximately 1,001 Employees, approximately 96 are paid a fixed salary and approximately 905 are paid on an hourly basis. The Debtor’s Employees fill positions ranging from cashiers, to warehouse workers, to buyers, to retail sales, to corporate and administrative positions. The Debtor’s combined average bi-weekly payroll for the Employees totals approximately $778,505. The Employees are paid accrued salaries and wages two weeks in arrears. Payments are made biweekly on Thursdays.
Employees were most recently paid January 7, 2021, for the biweekly period of December 21, 2020, through January 2, 2021. That payroll was funded prior to the Filing Date. Therefore, the first postpetition payroll will be on January 21, 2021 (with processing to begin earlier), which will cover the biweekly period of January 3, 2021, through January 16,2021. Accordingly, that
payroll will include 7 prepetition days. Based on that timing and the Debtor’s average payroll, the Debtor estimates that it owes its Employees compensation in the form of prepetition accrued but unpaid wages and salaries in the approximate aggregate amount of $342,000. To the best of the Debtor’s knowledge, none of the Debtor’s Employees are owed more than $13,650 in accrued and unpaid general prepetition wages or salaries.1
16. Payroll Process. For purposes of administration and distribution of payroll, the Debtor utilizes PEOPLE Etc. as the payroll servicing provider for its Employees (the “Payroll Provider”). The Payroll Provider administers the time clocks for the Debtor’s hourly employees, providing it with real time hours information. Based on this information, the Payroll Provider calculates net wages, taxes, and other withholdings. That calculation is sent to the Debtor for review and any corrections. The amounts required to fund payroll are then withdrawn from the Debtor’s accounts by the Tuesday of the payroll week, and transferred to the Payroll Provider.2 All Employees are paid by either direct deposit or by paper check.
17. The Payroll Provider processes each payroll, then later invoices the Debtor for its services. The ongoing services of the Payroll Provider are imperative to the smooth functioning of the Debtor’s payroll system. The Debtor pays the Payroll Provider approximately $20,651 per payroll for its services, which include payroll processing, tax filing, time and attendance, data processing services, and other related services. The Debtor is current on such payments; however, given that the Payroll Provider invoices after providing services, the next invoice will include some amounts for services provided prepetition. To ensure that the Payroll Provider
1 Although some Employees may have accrued Paid Absences (defined below), the value of which would cause the amount owed to such Employees to exceed $13,650, the Debtor does not believe such Employees are currently owed the value of their Paid Absence in cash, as the Debtor seeks to continue the Paid Absences policies.
2 More information regarding the Debtor’s bank accounts can be found in the Debtor’s cash management motion, filed contemporaneously herewith.
continues providing its critical services—and timely pays over to the appropriate recipients any funds it is holding related to the January 7, 2021 payroll—the Debtor seeks authorization to pay any such prepetition amounts owed to the Payroll Provider (the “Payroll Provider Obligations”).3 18. Human Resources Consultant. For purposes of administration of its workforce, the Debtor utilizes Locomotive Solutions as an outside consultant (the “HR Consultant”) to assist with the Debtor’s human resources. The HR Consultant provides the Debtor with general human resources services.
19. The ongoing services of the HR Consultant are imperative to the smooth functioning of the Debtor’s administration of its employees, including as to dealings with its employees as the Debtor proceeds to wind down its operations. The Debtor pays the HR Consultant approximately $3,360 every other week for its services, which include general human resources services and other related services. The Debtor is current on such payments; however, to ensure that the HR Consultant continues providing its critical services, the Debtor seeks authorization to pay any such prepetition amounts owed to the HR Consultant (the “HR Consultant Obligations”).
20. Taxes, Withholdings, and Employee Funds. In the ordinary course, the Debtor (including via the Payroll Provider) withholds from Employee paychecks certain amounts for transmission to third parties for such purposes as Social Security, Medicare, federal, state, and local income taxes; the employee contribution toward the benefit plans and other benefits described below; and/or payroll deduction payment programs for various garnishment, child
3 The Debtor’s intent to utilize the Payroll Provider postpetition is not to be interpreted as a concession by the Debtor that any agreements with the Payroll Provider are executory contracts and/or that the Debtor intends to assume any agreements with the Payroll Provider pursuant to section 365 of the Bankruptcy Code. The Debtor specifically reserves all rights under section 365 of the Bankruptcy Code.
support and other similar orders (collectively, these amounts the “Employee Funds”). As part of the payroll calculation process described above, the Payroll Provider calculates the Employee Funds to withhold, as well as the employer’s share of federal, state, and local taxes. Certain of such amounts are then included in the funds transferred from the Debtor’s accounts to the Payroll Provider on the Tuesday prior to the payroll date (the remaining amounts are held by the Debtor to remit to the appropriate recipient, such as insurance coverage providers). The Payroll Provider then distributes such funds to the appropriate recipients.
21. The Employee Funds are the property of the Debtor’s employees, and the Debtor believes that such withheld funds, to the extent that they were in the Debtor’s possession as of the Filing Date and/or remain in the Debtor’s possession, are not property of the Debtor’s bankruptcy estate under section 541 of the Bankruptcy Code. The Debtor requests authorization to pay to the appropriate recipients (including via the Payroll Provider) the Employee Funds that the Debtor deducted prepetition or will deduct on account of prepetition obligations to the Employees paid pursuant to an order granting the relief requested in this Motion, and to continue its ordinary course practices with respect to the Employee Funds.
B. Other Compensation.
22. The Debtor offers its Employees other forms of compensation, including paid time off (“PTO”), paid holidays, and COVID-related time off (collectively, the “Paid Absences”). Other available types of time off are unpaid, so are not discussed herein. The Paid Absences are a form of compensation that is usual, customary, and necessary if the Debtor is to retain qualified Employees to operate its business. Accordingly, the Debtor requests authority, but not direction, to honor outstanding prepetition obligations with respect to the Paid Absences
in the ordinary course of business, and to continue these compensation programs postpetition in the ordinary course of business.
23. PTO and Paid Holidays. During the course of the year, Employees are eligible for PTO and paid holidays. PTO accrues based on years of service for full-time Employees or hours worked for part-time Employees, and can be used and paid by eligible Employees in the ordinary course of the Debtor’s business during the fiscal year. PTO includes vacation days and sick days. Eligible employees may earn between 7 to 20 days of PTO per year, with the amount available to the employee based on years of service, and hours worked. Up to 40 hours of unused PTO may be carried over to a new fiscal year, but any unused PTO above 40 hours is forfeited. Earned but unused vacation PTO is paid out at the termination of employment (or a negative PTO balance is deducted from the employee’s final paycheck). Full-time Employees are also entitled to 3 scheduled paid holidays each year, while part-time Employees are eligible for 4 hours of pay for those holidays. The Debtor’s office and warehouse employees are also entitled to 7 scheduled paid holidays each year. Since March, the Debtor has allowed the Employees to take unpaid leaves of absence for COVID concerns, recovery, or care for family members. No pay is involved.
24. As of the date hereof, the aggregate cash value of the Debtor’s Employees’ accrued Paid Absences is approximately $316,000. By this Motion, the Debtor requests authority, but not direction, to continue its Paid Absences policies and pay any outstanding prepetition amounts related thereto in the ordinary course.
II. BENEFIT PLAN OBLIGATIONS
25. The Debtor offers various benefit plans to its Employees, including insurance and other plans related to health, vision, dental, life and accidental death and dismemberment, short- and long-term disability, flexible spending accounts, health savings accounts, and retirement.
The Debtor seeks authorization to pay prepetition amounts owed with respect to these benefit plans, as further described below (collectively, the “Benefit Plan Obligations”), and authorization to continue, modify, or terminate such benefit plans.
A. Insurance Plans and Related Programs.
26. The Debtor has established plans and policies to provide its Employees with (a) health benefits, including medical, dental, and vision insurance; (b) other insurance benefits, including short and long-term disability insurance, and life and accidental death and dismemberment insurance; and (c) flexible spending account and health savings account plans.
The Debtor funds these medical and other insurance benefits through company contributions or private insurance arrangements, as described below.
27. Health Benefits. An important component of the benefit plans offered by the Debtor is medical, vision, and dental coverage, which are offered to full-time Employees after one full calendar month of employment.
28. The Debtor provides medical and prescription drug insurance to approximately 268 employees plus 439 dependents through a self-funded plan (the “Medical Plan”). In 2020, the Debtor offered Employees three different plan options based on different levels of deductibles or coverage of tobacco use-related health complications.
29. Plan administration is provided by Blue Cross Blue Shield of Illinois (“Blue Cross”), for which service the Debtor pays a fee. The Debtor pays Blue Cross monthly for claims processed and paid in the previous month. The Debtor reimburses third party providers’ bills on average $499 per employee per month.
30. Employees contribute approximately 23% of the costs of the Medical Plan through payroll deductions that are adjusted annually based on experience for the prior plan year.
The Debtor contributes the remainder of the funds. Because of the manner in which such expenses are incurred and claims are processed under the Medical Plan, it is difficult for the Debtor to determine the extent of its obligations under the Medical Plan outstanding at any particular time. Based on historical experience and expected future trends, the Debtor estimates that the monthly cost of the Medical Plan (including the administrative fee) is approximately $226,083.92.
31. The Debtor also offers vision insurance with one plan option to approximately 244 employees plus 257 dependents (the “Vision Plan”). The Vision Plan is fully insured, and the policies are issued and administered by VSP. Participating Employees contribute 100% of the costs of the Vision Plan through payroll deductions. There is no administrative fee. The average monthly cost to the Debtor for the Vision Plan is approximately $1,657.49. Payments due under the Vision Plan are generally pre-paid, but the most recent payment may not have cleared the Debtor’s accounts prior to the Filing Date. Accordingly, the Debtor estimates that the prepetition amount owed relating to the Vision Plan is approximately $8,000.
32. The Debtor also offers dental insurance—with two plan options based on different coverages and deductibles—to approximately 250 employees plus 66 dependents through a self-funded plan (the “Dental Plan”). The Dental Plan is administered by Guardian. Participating Employees contribute approximately 50% of the costs of the Dental Plan through payroll deductions that are adjusted annually based on experience for the prior plan year. The Debtor is notified monthly and required to reimburse Guardian for such amounts. Because of the manner in which such expenses are incurred and claims are processed under the Dental Plan, it is difficult for the Debtor to determine the extent of its obligations under the Dental Plan outstanding at any particular time. However, based on historical experience and expected future
trends, the Debtor estimates that the monthly cost of the Dental Plan (including the administrative fee to Guardian) is approximately $9,673.52.
33. The Debtor seeks authority, but not direction, to pay the obligations owed under, and to continue its policies and practices related to, the Medical Plan, Vision Plan, and Dental Plan during the postpetition period in the ordinary course of business.
34. Other Life and Accident Insurance Benefits. The Debtor provides premium life and accident insurance benefits to its full-time Employees.
35. Full-time and Part-time Employees are entitled to Debtor-paid basic life and accidental death and dismemberment insurance after a 60-day waiting period from the date of hire. This insurance is fully insured through Lincoln Financial, and provides for a primary benefit equal to $10,000 for hourly employees and $25,000 for managers and higher-level employees. The Employees have the option to purchase supplemental life insurance at their own expense. The Debtor incurs an approximate monthly cost of $4,522.13 related to this benefit plan. The Debtor pays Lincoln Financial on a monthly and per paycheck basis, with payment to Lincoln Financial being for the prior month’s coverage.
36. For full-time and part-time Employees, the Debtor also provides short-term disability benefits, and offers long-term disability benefits, after a 60-day waiting period from the date of hire. Employees disabled due to an injury or illness are entitled, pursuant to the short-term disability benefit, to 60% of their weekly pay for up to 25 weeks after a 7-calendar-day waiting period. This short-term disability benefit is self-administered and employee-funded, with a monthly cost of $3,993.20 per month to the Debtor.
37. The life and accidental death and dismemberment, short-term disability, and long-term disability benefits (collectively the “Life and Accident Insurance Benefits”) are important to
the maintenance of Employee welfare and morale and are therefore critical to the uninterrupted operation of Debtor’s business. The Debtor therefore requests authority, but not direction, to pay prepetition amounts in the ordinary course, and to continue its policies and practices related to the Life and Accident Insurance Benefits during the postpetition period in the ordinary course.
38. As of the Filing Date, some former employees have elected COBRA coverage under various benefit plans offered by the Debtor, as follows:
Employees Benefit Plan Elected
2 Medical Plan
3 Dental Plan
3 Vision Plan
These former employees contribute 100% of the expected costs to fund the plan plus a 2% administration fee. The Debtor requests authority to continue to offer COBRA coverage without interruption unless and until the Debtor discontinues the relevant benefit plans in accordance with applicable law, including mandatory notice provisions.
39. Flexible Spending Accounts and Health Savings Accounts. The Debtor provides its full-time Employees with flexible spending account plans pursuant administered by HSA Bank to which some Employees maintain accounts for healthcare and dependent care. The Debtor provides three different flexible spending account options to its Employees. Under the flexible spending account plans, Employees have amounts withheld from their paychecks and those amounts subsequently can be used to reimburse Employees for their healthcare expenses and dependent care expenses, such as insurance deductible amounts. Flexible spending accounts are composed primarily of the Employee contributions; the Debtor contributes approximately $200 to $300 annually per Employee.
40. The Debtor also offers two health savings account plans pursuant to which some Employees maintain accounts for certain qualified medical expenses. Under the health savings account plans, Employees have amounts withheld from their paychecks and those amounts subsequently can be used to reimburse Employees for certain healthcare expenses not covered under the high-deductible option of the Medical Plan. The Debtor matches all pre-tax contributions up to a maximum amount of $300 per employee. The match is paid bi-weekly as part of payroll. The average monthly cost to the Debtor of such matching contribution is approximately $2,126, plus a nominal administrative fee. Other than that limited match and administrative fee, the health savings accounts are composed entirely of Employee contributions.
Both the flexible spending accounts and the health savings accounts are administered by HSA Bank.
41. The Debtor requests authority, but not direction, to pay the prepetition match obligations for the health savings accounts in the ordinary course, and to continue its policies and practices related to the flexible spending accounts and health savings accounts during the postpetition period in the ordinary course. As to the Employee-contributed portions of both types of accounts—which represent the bulk of the amounts in such accounts—the Debtor believes these monies are being held in trust for the benefit of those contributing Employees and, therefore, generally are not property of the Debtor’s bankruptcy estate. Nevertheless, out of an abundance of caution, the Debtor seeks approval of this Court to continue this program and to reimburse Employees in the ordinary course.
B. Retirement Plan.
42. 401(k) Plan. 401(k) plans are available to all full-time and part-time Employees age 21 and older after 60 days of employment. Lincoln Financial Group administers the plan.
The Debtor offers a match contribution of 100% of the first 6% contributed by Employees. The Debtor is current on such contributions, which are made bi-weekly, in conjunction with payroll.
The average monthly cost to the Debtor of such matching contribution is approximately $19,351.34, and the Debtor estimates that the total prepetition unpaid match obligation is approximately $3,600. The Debtor seeks authority, but not direction, to pay the prepetition unpaid match amount.
III. OTHER BENEFIT OBLIGATIONS
43. In addition to the benefit plans described above, the Debtor offers certain other benefit programs to Employees.4 These programs include an Employee Assistance Program. The Debtor believes that these programs are important to maintaining Employee health and morale and retaining the Debtor’s workforce, and that failing to honor such programs would have an adverse effect on the operation of the Debtor’s business. Thus, by this Motion, the Debtor seeks authorization to pay amounts owed with respect to these other benefits (collectively, the “Other Benefit Obligations”), and authorization to continue, modify, or terminate such benefit programs.
44. Employee Assistance Program. The Debtor offers its full-time Employees access to a program called the Employee Assistance Program. This program is administered by Lincoln Financial-EmployeeConnect. Through the Employee Assistance Program, the Debtor’s Employees receive access to counseling and advisory services, as well as referrals for other services in support of their families, health, and other life issues. There is no added cost for the EmployeeConnect program as it is included in the Debtor’s overall benefits package with Lincoln Financial.
4 Certain Employees may have access to other benefits. Such benefits are not administered by and have no cost to the Debtor, so are not described herein.
IV. REIMBURSEMENT OBLIGATIONS
45. Business Expenses. Pursuant to its normal business practices, the Debtor reimburses Employees for certain business expenses within the scope of their employment, including expenses for travel, lodging, meals, supplies, phone, and other miscellaneous expenses (together, the “Reimbursement Obligations”). Accordingly, all prepetition reimbursable business expenses were incurred by Employees with the understanding that they would be reimbursed by the Debtor.
46. Because Employees do not always submit claims for reimbursement promptly, it is difficult for the Debtor to determine the exact amount outstanding at any particular time, but Employees incur, on average, approximately $6,000 monthly in reimbursable business expenses.
It would be inequitable to require the Debtor’s Employees to bear personally the business expenses that are incurred on behalf of the Debtor with the expectation that they would be reimbursed. Accordingly, by this Motion, the Debtor seeks authority, but not direction, to pay the Reimbursement Obligations in the ordinary course of business, including those incurred prior to the Filing Date for which Employees have not yet been reimbursed, and to continue its policies relating to reimbursable expenses in the ordinary course of business.
V. WORKERS’ COMPENSATION OBLIGATIONS
47. The Debtor maintains certain workers’ compensation insurance policies with Liberty Insurance Company. The Debtor’s deductible under the workers’ compensation insurance policies is $1 million per employee. The Debtor is liable for all claim amounts below that deductible (collectively, the “Workers’ Compensation Obligations”). The Debtor estimates that it paid approximately $344,000 in workers’ compensation claims in fiscal year 2020.
48. It is crucial for Employee morale and the operation of the Debtor’s business that the Debtor has authorization to pay the Workers’ Compensation Obligations in the ordinary
course of business, including such obligations that arose prepetition. Accordingly, the Debtor seeks authority, but not direction, to continue to pay the Workers’ Compensation Obligations in the ordinary course and honor any payments owed with respect to the Workers’ Compensation Obligations regardless of when such obligations arose.
VI. DIRECTION TO PAYROLL PROVIDER AND BANKS
49. To facilitate the other relief requested herein and prevent delays and interruptions that could otherwise result, the Debtor also seeks an order (a) authorizing and directing the Payroll Provider and any other financial institution upon which any checks, drafts, electronic funds transfers, or wire transfers are drawn in payment of the Prepetition Employee Obligations—either before, on, or after the Filing Date—to honor all such checks or drafts issued, upon presentation thereof, or all such wire transfer instructions, upon receipt thereof, provided that sufficient funds are immediately available and on deposit in the applicable accounts and (b) prohibiting the Payroll Provider and any other financial institutions from placing any holds on, or attempting to reverse, any automatic transfers to employees’ accounts for Prepetition Employee Obligations. The Debtor requests that the Payroll Provider and all other financial institutions be authorized and directed to rely on the representations of the Debtor as to which checks, drafts or wire transfers are in payment of the Prepetition Employee Obligations.
50. The Debtor also requests that any party receiving payment from the Debtor be authorized and directed to rely upon the representations of the Debtor as to which payments are authorized by the requested relief.
VII. EXPEDITED RELIEF
51. Because the filing of this bankruptcy case and provision of full notice of this Motion would otherwise interrupt the Debtor’s normal payroll process with the next regular
payroll scheduled for January 21, 2021 (with processing beginning earlier that week), the Debtor requests expedited relief on this Motion. In addition, if expedited relief is not granted, payments of Employee Funds or other amounts owed to benefit providers may be further disrupted, and coverage jeopardized. As described herein, employee morale and retention is critical in this case, and both will likely falter if the Employees do not receive timely payment for their work.
Thus, the Debtor seeks expedited relief so that the regular payroll process and payments to benefit providers can proceed without interruption. In addition, the granting of this Motion on an expedited basis is critical to ensuring the confidence of the Employees and the continuity of business operations.
52. Pursuant to Local Rule 9013-2(a), this Motion is verified and is accompanied by a memorandum of law, a proposed order, and proof of service.
53. Pursuant to Local Rule 9013-2(c), the Debtor gives notice that they may, if necessary, call one or more of the following to testify regarding the facts set forth in this Motion:
(a) Matthew Whebbe, the Chief Executive Officer of the Debtor, whose business address is 2600 Eagan Woods Drive, Suite 120, Eagan, MN 55121 and (b) Michael Wesley, a Partner at Clear Thinking Group, the Chief Restructuring Officer and Financial Advisor to the Debtor, whose business address is 401 Towne Centre Drive, Hillsborough, NJ 08844.
REQUEST FOR WAIVER OF STAY
54. In addition, by this Motion, the Debtor seeks a waiver of any stay of the effectiveness of the order approving this Motion. Pursuant to Bankruptcy Rule 6004(h), “[a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise.” As set forth above, the Debtor requires immediate relief to continue ordinary business operations for the
benefit of all parties in interest. Accordingly, the Debtor submits that ample cause exists to justify a waiver of the 14-day stay imposed by Bankruptcy Rule 6004(h), to the extent that it applies.
55. No previous request for the relief sought herein has been made by the Debtor to this or any other court.
WHEREFORE, the Debtor moves the Court for an order:
A. Granting expedited relief;
B. Authorizing the Debtor to pay the Prepetition Employee Obligations, including employee compensation and benefits that accrued prepetition and are unpaid; C. Authorizing the Debtor to continue to maintain and pay all Prepetition Employee Obligations in the ordinary course of business;
D. Authorizing the Debtor to continue, modify, cancel, discontinue, and/or replace any policies, plans, offerings or programs relating to Prepetition Employee Obligations as it deems appropriate, and to pay any amounts necessary to effect such modification, cancellation, discontinuance, or replacement in the ordinary course of business without the need for further Court approval;
E. Authorizing and directing the Payroll Provider and banks that maintain the Debtor’s payroll and operating accounts to honor checks or fund transfer requests to pay the obligations described herein;
F. Waiving any stay or delay required under Bankruptcy Rules 6003 and 6004(h), to extent such rules apply; and
G. Granting such other relief as the Court may deem just and equitable.
Dated: January 11, 2021 /e/ Steven R. Kinsella
Clinton E. Cutler (#0158094)
James C. Brand (#0387362)
Steven R. Kinsella (#0392289)
Samuel M. Andre (#0399669)
FREDRIKSON & BYRON, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, MN 55402-1425
PROPOSED ATTORNEYS FOR THE
I, Matthew Whebbe, the Chairman and Chief Executive Officer of Tea Olive I, LLC (the “Debtor”), declare under penalty of perjury that the facts set forth in the preceding motion are true and correct according to the best of my knowledge, information, and belief, including based on information provided to me by other representatives of the Debtor and the Debtor’s professional advisors.
Dated: January 10, 2021
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MINNESOTA
Case No.: 21-30037
Tea Olive I, LLC d/b/a Stock+Field,
Chapter 11 Case
MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR ORDER (I) GRANTING EXPEDITED RELIEF; (II) AUTHORIZING DEBTOR TO PAY PREPETITION EMPLOYEE COMPENSATION, BENEFITS, WORKERS’ COMPENSATION
OBLIGATIONS, AND OTHER RELATED AMOUNTS; AND (III) AUTHORIZING PAYROLL PROVIDER AND FINANCIAL INSTITUTIONS TO HONOR AND
PROCESS CHECKS AND TRANSFERS RELATED TO SUCH RELIEF
Tea Olive I, LLC d/b/a Stock+Field, (the “Debtor”) submits this memorandum of law in support of its motion seeking authorization to pay accrued prepetition wages and employee benefits, and to continue employee compensation and benefit programs in the ordinary course of business (the “Motion”). The Motion should be granted because the Debtor has a compelling business justification for paying these obligations. Namely, the Debtor will lose the goodwill of its employees and may permanently lose the employees if these payments are not made, which would interrupt the Debtor’s business operations and harm the value of its assets. Thus, the payment of these amounts and continuation of these programs is critical to the Debtor’s ongoing operations and effective resolution of this case.
The facts supporting the Motion and referenced herein are set forth in the verified Motion. All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Motion.
I. THE DEBTOR’S REQUEST FOR EXPEDITED RELIEF SHOULD BE GRANTED.
Pursuant to Fed. R. Bankr. P. 9006(c) and Local Rule 9006-1(d), the Debtor’s request an order for expedited relief on this Motion. Local Rule 9006-1(b) provides that “moving documents shall be filed and served . . . not later than fourteen days before the hearing date.” Local Rule 9006-1(e), however, provides that a court may reduce notice for cause. Cause exists to reduce notice of the hearing on this Motion. The relief sought herein is designed to ease the Debtor’s transition to chapter 11 and minimize disruptions to the Debtor’s business operations.
Given the Debtor’s critical need to continue its operations uninterrupted, the Court should reduce notice of the hearing on this Motion.
II. THE COURT HAS AUTHORITY TO APPROVE A POSTPETITION PAYMENT OF A PREPETITION CLAIM.
Nowhere in the Bankruptcy Code is a debtor expressly prohibited from making postpetition payment of a prepetition claim, as the Debtor proposes to do here. Two provisions of the Bankruptcy Code, however, suggest that obtaining court approval is required or, at least, prudent. Section 363(b) of the Bankruptcy Code provides that after notice and a hearing, the debtor may use property of the estate other than in the ordinary course of business and section 549 of the Bankruptcy Code allows a debtor to avoid the postpetition transfer of property that is not authorized by the Bankruptcy Code or by the court. Thus, the Bankruptcy Code, including these provisions, establishes this Court’s authority to approve a postpetition payment of a prepetition claim, as the Debtor proposes here.
A. The Bankruptcy Code Authorizes Payment of Certain Prepetition Claims.
Section 363 of the Bankruptcy Code allows a debtor to pay claims not in the ordinary course of business with court authorization. It is in the ordinary course of business for a company to pay wages, salaries, and employee benefits. See In re Tusa-Expo Holdings, Inc., 2008 WL 4857954, *4 (Bankr. N.D. Tex. 2008). Several courts have suggested, however, that satisfaction of such an obligation that accrued prepetition is not in the ordinary course, and therefore requires court approval. See In re K-Mart Corp., 359 F.3d 866, 872 (7th Cir. 2004); In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989). Chapter 11 practice in this District and elsewhere has also generally accepted this understanding, and debtors frequently request court authorization to pay wages, salaries, and employee benefits that accrued prepetition. Paying employee claims that accrued prepetition, like any other use of property outside the ordinary course of business, is appropriate if the debtor demonstrates a “business justification” for making such payments. As stated by the court in the Ionosphere Clubs case, “[s]ection 363(b) gives the court broad flexibility in tailoring its orders to meet a wide variety of circumstances.” In re Ionosphere Clubs, Inc., 98 B.R. at 175.
However, the debtor must articulate some business justification, other than mere appeasement of major creditors, for using, selling or leasing property out of the ordinary course of business, before the court may permit such disposition under section 363(b). Id.; see also Mich. Bureau of Workers’ Disability Comp. v. Chateaugay Corp. (In re Chateaugay Corp.), 80 B.R. 279, 281 (Bankr. S.D.N.Y. 1987) (noting that court allowed the debtor to continue payment of prepetition wages and salary, and other benefits with an aggregate value exceeding $250,000,000 because it was consistent with the debtor’s “imperatives”). Payment of prepetition claims is appropriate when payment will help to “stabilize [the] debtor’s business relationships
without significantly hurting any party.” Russell A. Eisenberg and Frances F. Gecker, The Doctrine of Necessity and Its Parameters, 73 Marq. L. Rev. 1, 2 (1989); see also In re UNR Indus., Inc., 143 B.R. 506, 520 (Bankr. N.D. Ill. 1992) (reversed on other grounds). Thus, where a debtor can establish the above factors, a court should approve the postpetition payment of prepetition accrued employee wages, benefits, and commissions.
B. The Code Recognizes the “Doctrine of Necessity,” which Authorizes Payment of Certain Prepetition Claims.
The “doctrine of necessity” recognizes that in certain circumstances it is in the best interest of all concerned to pay certain prepetition creditors out of turn, as an inducement to them to continue working for, or doing business with, the debtor. See Miltenberger v. Logansport, 106 U.S. 286, 310 (1882). As the above citation indicates, this doctrine predated the Bankruptcy Code by many years. Nonetheless, the idea that it is in the best interests of all concerned to pay such claims as are necessary to keep the debtor in business, and to keep the debtor in business and its employees in wage-paying jobs, has survived and has been recognized under the Bankruptcy Code. See, e.g., In re Payless Cashways, Inc., 268 B.R. 543, 546 (Bankr. W.D. Mo.
2001); see also In re Just For Feet, 242 B.R. 821, 824 (D. Del. 1999); In re Equal Net Commc’ns Corp., 258 B.R. 368, 369 (Bankr. S.D. Tex. 2000); In re Gulf Air, Inc., 112 B.R. 152, 153 (Bankr. W.D. La. 1989); In re Ionosphere Clubs, Inc., 98 B.R. at 175. Furthermore, in applying the “doctrine of necessity,” courts have relied on section 105 of the Bankruptcy Code.
Section 105(a) of the Bankruptcy Code grants the court authority to issue any order “necessary or appropriate to carry out the provisions” of the Bankruptcy Code, and also provides a basis for authorizing the debtor to pay accrued prepetition wages, salary and benefits. See In re Ionosphere Clubs, Inc., 98 B.R. at 175; see also In re Quality Interiors, Inc., 127 B.R. 391, 396 (Bankr. N.D. Ohio 1991).
Thus, the Bankruptcy Code furnishes a basis for postpetition payment of prepetition claims in the right circumstances. This is true notwithstanding the decision in the case of In re K-Mart Corp., 359 F.3d at 866. In K-Mart, the court questioned whether the bankruptcy court had authority to approve payments to “critical vendors.” In that case, the appellate court ruled that the court had not established its authority to do so. In so ruling, however, the court also recognized that section 363(b) of the Bankruptcy Code might provide a basis for authorizing such payments in the right circumstance. In re K-Mart Corp., 359 F.3d at 872. The court suggested that to justify a request for authority to pay prepetition claims, the debtor should demonstrate that it will suffer damage if the payment is not made,1 and that other creditors will be as well-off with the payment as without. Id. Where a debtor can make such a showing, it appears that even the Seventh Circuit would overcome its skepticism and allow postpetition payment of a prepetition claim.
Moreover, as the court recognized in In re Tusa-Expo Holdings, 2008 WL4857954 at *2 (Bankr. N.D. Tex. 2008), employees are not situated similarly with other unsecured creditors.
Congress has given a preferred status to employee claims in section 507(a)(4) and (5) of the Bankruptcy Code, and payment of these claims in advance of dealing with claims of lesser status does not disadvantage unsecured creditors. Id. Even though the wage motion in TusaExpo was not opposed, the court deemed it important “that a prospective chapter 11 debtor be confident that, absent a question as to whether continuation of its operations is appropriate, prepetition wage and benefit obligations will continue during chapter 11 to be honored on a timely basis . . .
1 The K-Mart case dealt with payment to critical vendors, and the court suggested that the debtor would need to make a showing that vendors not paid for prepetition deliveries will refuse to make postpetition deliveries. In the employee situation, an analogous damage to the Debtor would be the risk of employees terminating their employment or harboring ill-will which adversely affects performance or operations. Such factors are present here.
it would be an abuse of discretion not to grant the payment of the priority prepetition wages within the statutory limit . . . .” Id. at *1. The Debtor believes that many of its Prepetition Employee Obligations constitute priority claims. Thus, the payment of such claims would not harm the Debtor’s general unsecured creditors.
In the overwhelming majority of large corporate chapter 11 filings, including in this district, courts have approved payment of employee prepetition claims for compensation, benefits and expense reimbursements similar to those described herein. See, e.g., In re Gander Mountain Co., No. 17-30673 (MER) (Bankr. D. Minn. Mar. 15, 2017), ECF No. 93; In re Archdiocese of Saint Paul and Minneapolis, No. 15-30125 (RJK) (Bankr. D. Minn. Jan. 20, 2015), ECF No. 47; In re SCICOM Data Servs., Ltd., No. 13-43894 (MER) (Bankr. D. Minn.
Aug. 20, 2013), ECF No. 19; In re Wagstaff Minn. Inc., No. 11-43073 (KAC) (Bankr. D. Minn.
May 5, 2011), ECF No. 33; In re Duke & King Acquisition Corp., No. 10-38652 (GFK) (Bankr.
D. Minn. Dec.8, 2010), ECF No. 37; In re Schwing Am., Inc., No. 09-36760 (NCD) (Bankr. D.
Minn. Oct. 2, 2009), ECF No. 17; In re Genmar Holdings, Inc., No. 09-43537 (KAC) (Bankr. D.
Minn. June 4, 2009), ECF No. 25; In re Polaroid Corp., No. 08-46617 (GFK) (Bankr. D. Minn.
Dec. 23, 2008), ECF No. 22.
II. POSTPETITION PAYMENT OF PREPETITION CLAIMS IS APPROPRIATE IN THIS CASE.
In applying the provisions of the Bankruptcy Code and the “doctrine of necessity” discussed above, the Court should be guided by practicality and common sense. In re Payless Cashways, 268 B.R. at 547. This is particularly important when the Court considers payment to employees whose livelihood depends on a debtor’s payments. Courts have long recognized the importance of maintaining the goodwill of employees. In LTV Corp. v. Aetna Cas. & Sur. Co. (In re Chateaugay Corp.), 116 B.R. 887, 898 (Bankr. S.D.N.Y. 1990), the court stated:
Additionally, employee good will and contentment in an asset which is vital to the continuation of a debtor’s business operation and its ability to effectively reorganize during the Chapter 11 process.
As the court noted in Tusa-Expo:
Clearly a debtor’s employees are among those creditors with whom the debtor must deal. Absent competent personnel, it is doubtful that any debtor would be able to operate its business as contemplated by Code section 110 . . . [A]s a practical matter no debtor can afford to lose very many of its employees, especially in a chapter 11 case’s early days . . . Second, continuity of conduct of business is important in a newly filed Chapter 11 case…. Employees familiar with the debtor’s operations and history will be essential to [all of the early case responsibilities] . . . Third, even if employees remain with a debtor notwithstanding non-payment of prepetition wages and benefits, it is probable that their work would be [adversely] affected by their loss of income.
In re Tusa-Expo Holdings, 2008 WL4857954 at *2-3.
In the Debtor’s case, the Employees are critical to the Debtor’s ability to continue its business operations without interruption and to maximize the value of its assets. If payment of wages and benefits are postponed to when a plan is confirmed, the Debtor’s reorganization efforts and going-concern value will be threatened by employee losses and a severe disruption to the provision of goods and services. To the extent the Debtor’s operations suffer, creditors also suffer and estate assets will be diminished. It is in the best interest of creditors that wages and benefits be paid to employees to maintain their good will. The issue is really one of timing of payment, and creditors are not harmed; rather, they will benefit by payment of the Prepetition Employee Obligations as the Debtor proposes in the Motion.
III. WAIVER OF STAY IS WARRANTED.
Pursuant to Bankruptcy Rule 6004(h), “[a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise.” Bankruptcy Rule 6003 provides:
Except to the extent that relief is necessary to avoid immediate and irreparable harm, the court shall not, within 21 days after the filing of the petition, issue an order granting the following:
(a) an application under Rule 2014;
(b) a motion to use, sell, lease, or otherwise incur an obligation regarding property of the estate, including a motion to pay all or part of a claim that arose before the filing of the petition, but not a motion under Rule 4001; or (c) a motion to assume or assign an executory contract or unexpired lease in accordance with §365.
Fed. R. Bankr. P. 6003. As set forth in the Motion, the Debtor requires immediate relief to continue ordinary business operations for the benefit of all parties in interest, including the safety of in-store customers and employees. Accordingly, the Debtor submits that ample cause exists to enter an order granting the Motion prior to the conclusion of the 21-day period of Bankruptcy Rule 6003 and to justify a waiver of the 14-day stay imposed by Bankruptcy Rule 6004(h), to the extent that it applies.
The proposed payments are supported by a good business justification and are consistent with the priority scheme designed by Congress. For these reasons, this Court should enter an order authorizing the Debtor to pay the Prepetition Employee Obligations, and to continue the plans, practices, programs and policies underlying the Prepetition Employee Obligations for its Employees.
Dated: January 11, 2021 /e/ Steven R. Kinsella
Clinton E. Cutler (#0158094)
James C. Brand (#0387362)
Steven R. Kinsella (#0392289)
Samuel M. Andre (#0399669)
FREDRIKSON & BYRON, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, MN 55402-1425
PROPOSED ATTORNEYS FOR THE
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MINNESOTA
Case No.: 21-30037
Tea Olive I, LLC d/b/a Stock+Field,
Chapter 11 Case
ORDER GRANTING EXPEDITED RELIEF AND AUTHORIZING DEBTOR TO PAY PREPETITION EMPLOYEE COMPENSATION, BENEFITS, WORKERS’
COMPENSATION OBLIGATIONS, AND OTHER RELATED AMOUNTS
This case came before the court on the Motion for Order (I) Granting Expedited Relief; (II) Authorizing Debtor to Pay Prepetition Employee Compensation, Benefits, Workers’ Compensation Obligations, and Other Related Amounts; and (III) Authorizing Payroll Provider and Financial Institutions to Honor and Process Checks and Transfers Related to Such Relief (the “Motion”) filed by the above-captioned debtor (the “Debtor”). Based on the Motion and the record,
IT IS ORDERED:
1. The request for expedited relief is granted.
2. The Debtor is authorized, but not required, to pay or cause to be paid, in its sole discretion, all amounts required under or related to the Prepetition Employee Obligations, as defined and described in the Motion.
3. The Debtor is authorized, but not required, to continue to pay and honor, in its sole discretion, its obligations arising under or related to its plans, practices, programs and policies for its Employees as set forth in the Motion, including, without limitation, those giving rise to the Prepetition Employee Obligations (collectively, the “Employee Programs”), as those Employee
Programs were in effect as of January 10, 2021 (the “Filing Date”) and as such Employee Programs may be modified, terminated, amended, or supplemented from time to time in the ordinary course of the debtor’s business.
4. The Debtor is authorized, but not required, to pay, in its sole discretion, prepetition amounts owing in the ordinary course of business to third parties in connection with administering and maintaining the Employee Programs.
5. Payroll provider PEOPLE Etc., and all applicable banks and other financial institutions, are authorized to receive, process, honor and pay any and all checks, drafts, wires, check transfer requests or automated clearing house transfers evidencing amounts paid by the debtor under this Order whether presented prior to or after the Filing Date to the extent the Debtor has good funds standing to its credit with such bank or other financial institution. PEOPLE Etc.
and such banks and financial institutions are authorized to rely on the representations of the Debtor as to which checks are issued or authorized to be paid pursuant to this order without any duty of further inquiry and without liability for following the Debtor’s instructions.
6. Notwithstanding anything to the contrary contained in this order, any payment made or to be made under this order, any authorization contained in this order, or any claim for which payment is authorized under this order, shall be subject to any orders of this court approving any use of cash collateral by the debtor and the budget governing such use of cash collateral.
7. Nothing in the Motion or this order, nor any payments made pursuant to this order, shall be deemed to be, or constitute, (a) an admission as to the validity or priority of any claim against the Debtor, (b) an assumption or postpetition reaffirmation of any agreement, plan, practice, program, policy, executory contract, or unexpired lease pursuant to 11 U.S.C. § 365,
(c) a grant of third-party beneficiary status or bestowal of any additional rights on any third party or (d) a waiver of any rights, claims, or defenses of the Debtor.
8. Nothing in the Motion or this order shall impair the ability of the debtor to contest the validity or amount of any payment made pursuant to this order.
9. Nothing in the motion or this order shall be construed as impairing the Debtor’s right to contest the validity or amount of any Prepetition Employee Obligation, including payroll taxes that may be due to any taxing authority.
10. Notwithstanding Fed. R. Bankr. P. 6003 and the possible applicability of Fed. R.
Bankr. P. 6004(h), the terms and conditions of this Order shall be immediately effective and enforceable upon its entry.
11. This Court shall retain jurisdiction over any and all matters arising from or related to the implementation or interpretation of this Order.
William J. Fisher
United States Bankruptcy Judge