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Full title: Notice of Hearing and Motion for Order Approving Key Employee Retention Plan and Key Employee Incentive Plan filed by Tea Olive I, LLC . An affidavit or verification, Memorandum of law, Proposed order. Hearing scheduled 2/16/2021 at 10:00 AM at *TELEPHONIC HEARING* with Judge William J. Fisher (St Paul). (Barbie MNBS) (Entered: 01/26/2021)
Document posted on Jan 25, 2021 in the bankruptcy, 33 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
Due to these expanded responsibilities and the uncertainty regarding the Debtor’s financial future, the Debtor believes the payments under the KERP are necessary to ensure the KERP Participants continue to work for the Debtor and continue to focus their efforts on maximizing estate value.To that end, the Debtor worked with its advisors to design the KERP, beginning prior to the Filing Date and continuing after the Filing Date, with the goal of maximizing the value of the bankruptcy estate for the benefit of all interested parties and ensuring that the Debtor’s operations will continue to be conducted in an effective and stable manner while the Debtor completes its “store closing” and similar sales processes. Based on this review, the Debtor found the design and cost of the proposed KEIP to be reasonable and appropriate for the unique challenges of the Debtor’s case and to be within range of the market practices as compared to plans that were approved in comparable chapter 11 cases.For these reasons, the Debtor has determined that the KEIP, as well as the KERP, are reasonable and appropriate for the Debtor’s circumstances and are in the best interests of the Debtor’s estate and all parties in interest. Therefore, the costs associated with the KERP and KEIP are reasonable and necessary and are justified by the benefits that the Debtor will realize as a result of the services of the KERP and KEIP Participants.
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UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA In re: Case No.: 21-30037 Tea Olive I, LLC d/b/a Stock+Field, Chapter 11 Case Debtor. NOTICE OF HEARING AND MOTION FOR ORDER APPROVING KEY EMPLOYEE RETENTION PLAN AND KEY EMPLOYEE INCENTIVE PLAN TO: The parties in interest as specified in Local Rule 9013-3(a)(2). 1. The above-captioned debtor (the “Debtor”) hereby moves this Court for the relief requested below and gives notice of hearing. 2. The Court will hold a hearing on this Motion at 10:00 a.m. on Tuesday, February 16, 2021, in 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. Any response to the Motion must be filed and served no later than Thursday, February 11, 2021, pursuant to the applicable Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) and the Local Rules. UNLESS A RESPONSE OPPOSING THE MOTION IS TIMELY FILED, THE COURT MAY GRANT THE MOTION WITHOUT A HEARING.Page 2
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, 2020 (the “Filing Date”). The case is currently pending in this Court. 5. This motion arises under 11 U.S.C. §§ 363 and 503(c)(3). The Debtor requests an order of this Court approving the Debtor’s key employee retention plan (the “KERP”) and key employee incentive plan (the “KEIP”). BACKGROUND 6. On the Filing Date, the Debtor filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). The Debtor has continued in possession of its respective assets and the management of 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 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. 8. The Debtor is a Minnesota limited liability company formed in 2018 and headquartered in St. Paul, Minnesota. It is a farm, home, and outdoor retailer, currently operating 25 stores across Illinois, Indiana, Ohio, Wisconsin, and Michigan. The Debtor’s primary merchandise categories include: pet and animal supplies; sporting goods; farm and agricultural products; lawn, garden, and patio products; apparel; firearms and ammunition; home, toys, andPage 3
seasonal products; consumables; tools, hardware, and paint; plumbing, electrical, and HVAC; footwear; and automotive products. 9. The Debtor’s predecessor was originally founded in 1964 under the name “Big R Stores” by Bill and Pat Crabtree. The first store was located in Watseka, Illinois, but eventually stores opened in Illinois, Indiana, Ohio, Wisconsin, and Michigan. On August 17, 2018, the Debtor purchased the “BigR Stores” business. 10. After the acquisition in 2018, the Debtor made significant upgrades to the management team, moved the corporate office to Minnesota, and improved operations and strategy initiatives. In 2018, the Debtor had revenues of $176,649,284 and adjusted EBITDA of $5,164,598. 11. On July 17, 2019, the Debtor changed its name from “Big R Stores” to “Stock+Field.” The Debtor re-branded to eliminate confusion with eight other unrelated “Big R” entities in the United States and limitations on the intellectual property rights of the “Big R” name and marks. The Debtor made this change with long-term growth goals and the expectation that the business could suffer in the short term. In 2019, the Debtor had revenues of $173,907,245 and adjusted EBITDA of $1,629,503. 12. In the beginning of 2020, the Debtor continued its rebranding efforts and expected the business to grow throughout the year. However, the Covid-19 pandemic unexpectedly changed all expectations for 2020. All of the Debtor’s 25 stores were either closed entirely or, at a minimum, under strict capacity and operating hour restrictions due to the pandemic. Additionally, the pandemic itself has altered the shopping behaviors of the Debtor’s consumers, with some customers not feeling comfortable entering physical stores to shop. While the Debtor sells some products online, the majority of its products are sold solely in stores. Due to this unprecedentedPage 4
pandemic, the Debtor estimates that its revenues will be $141,543,348 and adjusted EBITDA will be -$2,261,691. 13. In this challenging environment, the Debtor commenced this case with the goal of selling a substantial portion of its assets through a series of “store closing” sales on an accelerated basis. The Debtor, together with its advisors, must act quickly in order to maximize the value of its bankruptcy estate for the benefit of all creditors. The Debtor must accomplish this in an environment of unprecedented volatility in retail, which has created an extremely challenging operating environment, adversely affecting employee morale and the attractiveness of a career in retail, while at the same time maximizing proceeds from “store closing” sales to be conducted at a time when the market has seen an unprecedented number of recently completed or planned liquidation sales of similar sporting goods, apparel, and footwear retailers. 14. In order to overcome these challenges and achieve these goals for the benefit of all parties in interest, the Debtor requires the ongoing commitment of its employees and executives in maintaining the stability of day-to-day operations while it manages a “store closing” and similar sales processes, preserves valuable relationships with key vendors, and maximizes its business proceeds while preserving its brand value. The Debtor believes that the success of the restructuring goals described above hinges in vital respects on the Debtor’s ability to continue to retain and incentivize its key employees and executives to perform at high levels under difficult circumstances. I. THE DEBTOR’S KEY EMPLOYEE RETENTION PLAN. 15. The Debtor has identified certain key, non-insider employees whose unique institutional and operational knowledge and skill, and continuity throughout the process, are essential to the Debtor’s ability to manage its business and maximize the value of its estate duringPage 5
the pendency of this case (the “KERP Participants”). The number of KERP Participants is currently eight.1 16. None of the KERP Participants are “insiders” as that term is defined in 11 U.S.C. § 101(31)(B). Although the KERP Participants play a vital role in the Debtor’s day-to-day business operations and will play a similarly vital role during the Debtor’s bankruptcy case, the KERP Participants do not have access to complete, high-level strategic inside information. None of the KERP Participants attended meetings of the Debtor’s board of directors unless invited to make a specific presentation and, after which, they exited. None of the KERP Participants have been aware of, or participated in, previous discussions with potential strategic or financial partners and each of the KERP Participants has a limited and very defined scope of authority subject to the oversight from the Debtor’s most senior executives. 17. The KERP Participants will perform their normal job responsibilities related to the Debtor’s ordinary course operations, but the KERP Participants will, and in most cases already have, assumed significant additional responsibilities as a result of the Debtor’s filing for chapter 11 protection. The KERP Participants’ contributions are essential to maximize the value of the Debtor’s business during the sale process and ensure that the Debtor’s business will continue to operate during the pendency of the case. Due to these expanded responsibilities and the uncertainty regarding the Debtor’s financial future, the Debtor believes the payments under the KERP are necessary to ensure the KERP Participants continue to work for the Debtor and continue to focus their efforts on maximizing estate value. Losing any of these key employees would significantly 1 The Debtor is in possession of a list of the KERP Participants. However, the list contains confidential and personal information regarding the KERP Participants. Consequently, the Debtor will not file the list with this Motion. However, any party-in-interest may contact the Debtor’s counsel to review the list.Page 6
harm the Debtor’s business as it would be highly unlikely that the Debtor could recruit under the circumstances of its bankruptcy filing similarly experienced and skilled replacements at less cost or within the time frame under which the Debtor’s case is structured. 18. Furthermore, the Debtor is currently managing a number of simultaneous “store closing” or similar sales. The continued commitment of the KERP Participants will be a major component in the Debtor’s ability to maximize the value of its bankruptcy estate for the benefit of all creditors. 19. To that end, the Debtor worked with its advisors to design the KERP, beginning prior to the Filing Date and continuing after the Filing Date, with the goal of maximizing the value of the bankruptcy estate for the benefit of all interested parties and ensuring that the Debtor’s operations will continue to be conducted in an effective and stable manner while the Debtor completes its “store closing” and similar sales processes. The Debtor has also disclosed the terms of the KERP to the Debtor’s pre-petition secured lenders and the KERP payments are included in the cash collateral budget. The Debtor believes that the KERP is a reasonable, cost-effective way to ensure the commitment of the KERP Participants, which is essential to the Debtor’s success in this case and its ability to generate significant proceeds and preserve brand equity during its “store closing” sale process. The KERP Participants are further aware of the KERP, have reviewed its terms, and have agreed to the terms of the KERP, subject to the Court’s final approval. 20. With input from its legal and financial advisors, the Debtor has surveyed information on KERPs approved in similar size cases and in similar industries to determine that the KERP proposed herein is market competitive.Page 7
21. The KERP specifically contains the following terms2: a. KERP Bonus Payment. KERP Participants are eligible to earn total KERP bonus payments equal to between 12.5%-15% of their current base salary, payable in three cash payments as follows: i. If the KERP Participant is employed by the Debtor as of February 3, 2021, the Participant will receive a cash payment equal to 1/3 of the Participant’s total bonus opportunity payable by February 5, 2021. ii. If the KERP Participant is employed by the Debtor as of March 3, 2021, the Participant will receive a cash payment equal to 1/3 of the Participant’s total bonus opportunity payable by March 5, 2021. iii. If the KERP Participant is employed by the Debtor as of April 30, 2021, the Participant will receive a cash payment equal to 1/3 of the Participant’s total bonus opportunity payable by April 30, 2021. iv. The date on which a KERP bonus payment is earned shall be the “Bonus Date.” b. Additional Payment Provisions. If a KERP Participant is terminated without “cause” prior to a Bonus Date, the Participant will receive any remaining unpaid portion of the Participant’s bonus opportunity on a prorated basis considering the portion of the time the Participant was employed from the Filing Date to the date the award would have been earned. If the Participant voluntarily leaves or is terminated for “cause,” the Participant shall forfeit any right to any unpaid portion of the Participant’s award under the 2 This summary is not intended to modify or supersede the terms of the KERP and, to the extent there is a discrepancy, the provisions of the KERP control. A copy of the KERP is attached as Exhibit A.Page 8
KERP. The Debtor shall have no obligation to make any bonus payment unless the Participant executes a release of claims in customary form reasonably satisfactory to the Debtor. c. Miscellaneous. During the KERP Participant’s employment, the Participant agrees not to disclose any confidential or proprietary information of the Debtor, except as required in connection with the Participant’s duties. The KERP Agreement is not an employment agreement and does not change the nature of the Participant’s employment with the Debtor. 22. Without the retention bonuses under the proposed KERP, the KERP Participants are more likely to seek alternative employment prior to the conclusion of the Debtor’s “store closing” process, substantially decreasing the Debtor’s ability to effectively manage a large number of simultaneous “store closing” or similar sales, and its ability to maximize the value of the estate for the benefit of all parties in interest. 23. The total amount owed collectively to the KERP Participants if all KERP Participants earn their KERP bonus is $123,075. II. THE DEBTOR’S KEY EMPLOYEE INCENTIVE PROGRAM. 24. The Debtor also proposes to implement the KEIP for two participants: (a) a vice president in charge of corporate and inventory operations and (b) an executive vice president in charge of marketing (together, the “KEIP Participants”). A copy of the KEIP is attached to this Motion as Exhibit B. 25. The KEIP Participants are two senior executives of the Debtor; they each have deep industry knowledge and specific skills and expertise that, along with a familiarity and understanding of the operations, customer and supplier relationships, lender and landlordPage 9
relationships, employee relationships, and infrastructure of the Debtor, are critical to the daily operation of the Debtor’s business and also the Debtor’s ability to maximize the value of the estate. The role of the KEIP Participants in the leading of the Debtor’s “store closing” and sales process, and in preparing the Debtor for entry into this case, has been vital. 26. The KEIP Participants are highly accomplished and capable professional managers employed by the Debtor. In order to overcome the significant challenges facing the Debtor’s restructuring and “store closing” plans and to achieve the desired results for the benefit of all parties in interest, the Debtor believes it is vital to incentivize the ongoing commitment of its senior executives. The best and sustained efforts of the KEIP Participants is absolutely necessary in maintaining stability of the Debtor’s day-to-day operations during the “store closing” process, operating the Debtor’s business under current operating conditions such as operating in bankruptcy and during the COVID-19 pandemic, encouraging and fostering the continued retention of the Debtor’s employees (including the KERP Participants), and preserving valuable relationships with key industry vendors. The continued participation of the KEIP Participants in this process is vital to its organization and ultimate success. 27. The KEIP is purely an incentive-based, and not a retention-based,3 plan that rewards the KEIP Participants only if the Debtor achieves the operational and financial benchmarks that are directly related to maximizing the net proceeds from the going out of business sales. 28. The Debtor worked with its financial and legal advisors to formulate and structure a KEIP reflecting the current realities and establishing award metrics that are both difficult to achieve and will significantly benefit all creditors involved in this case. The Debtor began working 3 The KEIP Participants are also KERP Participants.Page 10
on the KEIP prior to the Filing Date and continued to work on the KEIP after the Filing Date, in consultation with its advisors. The Debtor previously discussed a bonus program for the KEIP Participants prior to the Filing Date, and the KEIP Participants are aware of the proposed KEIP terms, subject to the Court’s final approval. 29. The KEIP Participants must significantly expand their pre-bankruptcy job responsibilities to achieve the KEIP bonus payments. The KEIP Participants have and continue to play a vital role in organizing and overseeing the Debtor’s going-out-of-business (“GOB”) sales. 30. The KEIP contains the following terms4: a. KEIP Bonus Payment. KEIP Participants are eligible to earn total KEIP bonus payments up to 45% of their current base salary, payable in three cash payments as follows: i. If the net revenue5 generated by the going-out-of-business (“GOB”) sales conducted by the Debtor and Tiger Capital Group, LLC and B. Riley Retail Solutions, LLC (together, the “Liquidating Consultant”) exceeds the projected net revenue contained in the final cash collateral budget approved by the Court (the “Budget”) by $3.5 million, the KEIP Participant will receive payment of 15% of his or her current base salary; ii. If the net revenue generated by the GOB sales conducted by the Debtor and Liquidating Consultant exceeds the projected net revenue contained in 4 This summary is not intended to modify or supersede the KEIP terms and, to the extent there is a discrepancy, the provisions of the KEIP control. 5 Net revenue shall be calculated by taking all revenue generated through the GOB sales and subtracting the GOB sale expenses.Page 11
the Budget by $7 million, the KEIP Participant will receive an additional payment of 15% of his or her current base salary; and iii. If the net revenue generated by the GOB sales conducted by the Debtor and Liquidating Consultant exceeds the projected net revenue contained in the Budget by $10 million, the KEIP Participant will receive an additional payment of 15% of his or her current base salary. iv. The first day after the final GOB sale is completed, the final GOB sale revenues have been received by the Debtor, and the total net revenue from GOB sales has been calculated shall be the “Bonus Date.” b. Additional Payment Provisions. If a KEIP Participants are terminated without “cause” prior to a Bonus Date, he or she will receive a prorated portion of any bonus payment owed pursuant to the KEIP Agreement based on the following calculation: Number of Days Employed By Company After Bankruptcy Court Approves the Agreement / Number of Days Between the Bonus Date and the Date the Bankruptcy Court Approves the Agreement. If a KEIP Participant voluntarily leaves or is terminated for “cause,” he or she shall forfeit any right to any portion of an award under the KEIP. The Debtor shall have no obligation to make any bonus payment unless the KEIP Participant executes a release of claims in customary form reasonably satisfactory to the Debtor. 31. The Debtor, in its business judgment, and with extensive input from financial advisors and restructuring counsel, has designed the KEIP as a reasonable way to incentivize the KEIP Participants to maximize the value of the bankruptcy estate. The Debtor restricted participation in the KEIP to only two employees and structured the KEIP around benchmarks related to the performance of the GOB sales process.Page 12
32. The KEIP terms were reviewed and approved by the Debtor’s CRO, who is disinterested in the terms and payments proposed under the KEIP. In evaluating the KEIP terms, the CRO requested input and advice from the Debtor’s legal professionals and surveyed market data for KEIP terms for companies of similar size and scope. The Debtor has also disclosed the terms of the KEIP to the Debtor’s pre-petition secured lenders. 33. The Debtor’s financial and legal advisors conducted due diligence in assessing the need for, and designing the terms of, the KEIP. Based on this review, the Debtor found the design and cost of the proposed KEIP to be reasonable and appropriate for the unique challenges of the Debtor’s case and to be within range of the market practices as compared to plans that were approved in comparable chapter 11 cases. The total cost of the proposed KEIP is $164,700 if all three net revenue goals are satisfied by the KERP Participants, with each goal resulting in an aggregate bonus of $54,900 to the KERP Participants. 34. Based on the foregoing, the Debtor has determined that the design and cost of the KEIP is appropriate in the Debtor’s circumstances. Without the expertise of the Debtor’s two executives to efficiently and effectively operate the Debtor’s business and without appropriate incentives to induce them to commit the additional time and efforts necessary to successfully manage all aspects of the Debtor during its “store closing” process and this chapter 11 case. For these reasons, the Debtor has determined that the KEIP, as well as the KERP, are reasonable and appropriate for the Debtor’s circumstances and are in the best interests of the Debtor’s estate and all parties in interest. RELIEF REQUESTED 35. Under 11 U.S.C. § 363(b), the Debtor is authorized to use property of the estate outside of the ordinary course of business after notice and a hearing.Page 13
36. The KERP and KEIP are not prohibited by 11 U.S.C. § 503(c)(3) and are the product of the proper exercise of the Debtor’s business judgment. 37. By this Motion, the Debtor seeks entry of an order approving the Debtor’s KERP and KEIP. 38. The Debtor requests waiver of the 14-day stay that would otherwise apply to the Court’s approval of the KERP and KEIP pursuant to Bankruptcy Rule 6004(h). In order to implement the KERP and KEIP successfully, the Debtor must be able to provide certainty to the KERP and KEIP Participants that they will be compensated for their efforts to maximize the value of the Debtor’s estate. Pursuant to Local Rule 9013-2(a), this verified Motion is accompanied by a memorandum of law, a proposed order, and proof service. 39. 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. WHEREFORE, the Debtor respectfully moves the Court for an order approving the Debtor’s KERP and KEIP and granting such other relief as the Court may deem just and equitable.Page 14
Dated: January 26, 2021 /e/ Steven R. Kinsella Clinton E. Cutler (#0158094) Steven R. Kinsella (#0392289) James C. Brand (#387362) Samuel M. Andre (#0399669) FREDRIKSON & BYRON, P.A. 200 South Sixth Street, Suite 4000 Minneapolis, MN 55402-1425 612.492.7000 ccutler@fredlaw.com skinsella@fredlaw.com jbrand@fredlaw.com sandre@fredlaw.com PROPOSED ATTORNEYS FOR DEBTORPage 15
VERIFICATION 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 26, 2021 Matthew WhebbePage 16
EXHIBIT APage 17
To: [Name Participant] Tea Olive, LLC d/b/a Stock+Field (the “Company”) is instituting this Key Employee Retention Plan (“KERP”) to recognize and reward a select group of our team whose contributions are key to our continued performance and success (“Key Employees”). After the Company files its petition for relief under chapter 11 of the Bankruptcy Code (the “Filing Date”), the Company shall seek bankruptcy court approval of the KERP and this KERP Agreement. This KERP Agreement is contingent on that approval. 1. KERP Bonus Payment. You are eligible to earn total KERP bonus payments equal to [12.5%-15%] of your current base salary, payable in three cash payments as set forth herein: Current Base Salary [12.5%-15%] of Current Base Salary A. You will be entitled to receive your KERP bonus payments pursuant to the following: 1. If you are employed by the Company as of February 3, 2021, you will receive a cash payment equal to 1/3 of your total bonus opportunity payable by February 5, 2021. 2. If you are employed by the Company as of March 3, 2021, you will receive a cash payment equal to 1/3 of your total bonus opportunity payable by March 5, 2021. 3. If you are employed by the Company as of April 30, 2021, you will receive a cash payment equal to 1/3 of your total bonus opportunity payable by April 30, 2021. B. The date on which a KERP bonus payment is earned under Section 1.A shall be the “Bonus Date.” 2. Additional Payment Provisions. If you are terminated without “cause” prior to a Bonus Date, you will receive any remaining unpaid portion of your bonus opportunity on a prorated basis considering the portion of the time you were employed from the Filing Date to the date the award would have been earned. If you voluntarily leave or are terminated for “cause,” you shall forfeit any right to any unpaid portion of your award under the KERP. The Company shall have no obligation to make any bonus payment unless you execute a release of claims in customary form reasonably satisfactory to the Company. 3. Miscellaneous. During your employment you agree not to disclose any confidential or proprietary information of the Company, except as required in connection with your duties.Page 18
This KERP Agreement is not an employment agreement and does not change the nature of your employment with the Company. We thank you for all of your past contributions to the Company and we look forward to your continuing contributions. Sincerely, Tea Olive, LLC d/b/a Stock+Field ___________________________ [Signor for Company] I have read, understand, and agree to the terms of this KERP Agreement. ___________________________ Date:______________ [Name of Participant] 71851359 v1Page 19
EXHIBIT BPage 20
To: [Name Participant] Tea Olive, LLC d/b/a Stock+Field (the “Company”) is instituting this Key Employee Incentive Plan (“KEIP”) to recognize and reward a select group of our team whose contributions are key to our continued performance and success (“Key Employees”). After the Company files its petition for relief under chapter 11 of the Bankruptcy Code (the “Filing Date”), the Company shall seek bankruptcy court approval of the KEIP and this KEIP Agreement. This KEIP Agreement is contingent on that approval. 1. KEIP Bonus Payment. You are eligible to earn total KEIP bonus payments equal to 45% of your current base salary, payable in three cash payments as set forth herein: Current Base Salary 45% of Current Base Salary A. You will be entitled to receive your KEIP bonus payments pursuant to the following: i. If the net revenue1 generated by the going-out-of-business (“GOB”) sales conducted by the Company and Tiger Capital Group, LLC and B. Riley Retail Solutions, LLC (together, the “Liquidating Consultant”) exceeds the projected net revenue contained in the final cash collateral budget approved by the bankruptcy court (the “Budget”) by $3.5 million, you will receive payment of 15% of your current base salary; ii. If the net revenue generated by the GOB sales conducted by the Company and Liquidating Consultant exceeds the projected net revenue contained in the Budget by $7 million, you will receive an additional payment of 15% of your current base salary; and iii. If the net revenue generated by the GOB sales conducted by the Company and Liquidating Consultant exceeds the projected net revenue contained in the Budget by $10 million, you will receive an additional payment of 15% of your current base salary. B. The first day after the final GOB sale is completed, the final GOB sale revenues have been received by the Company, and the total net revenue from GOB sales has been calculated shall be the “Bonus Date.” 1 Net revenue shall be calculated by taking all revenue generated through the GOB sales and subtracting the GOB sale expenses.Page 21
2. Additional Payment Provisions. If you are terminated without “cause” prior to a Bonus Date, you will receive a prorated portion of any bonus payment owed to you pursuant to the terms herein based on the following calculation: Number of Days Employed By Company After Bankruptcy Court Approves the Agreement / Number of Days Between the Bonus Date and the Date the Bankruptcy Court Approves the Agreement. If you voluntarily leave or are terminated for “cause,” you shall forfeit any right to any portion of your award under the KEIP. The Company shall have no obligation to make any bonus payment unless you execute a release of claims in customary form reasonably satisfactory to the Company. 3. Miscellaneous. During your employment you agree not to disclose any confidential or proprietary information of the Company, except as required in connection with your duties. This KEIP Agreement is not an employment agreement and does not change the nature of your employment with the Company. We thank you for all of your past contributions to the Company and we look forward to your continuing contributions. Sincerely, Tea Olive, LLC d/b/a Stock+Field ___________________________ [Signor for Company] I have read, understand, and agree to the terms of this KERP Agreement. ___________________________ Date:______________ [Name of Participant]Page 22
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA In re: Case No.: 21-30037 Tea Olive I, LLC d/b/a Stock+Field, Chapter 11 Case Debtor. MEMORANDUM IN SUPPORT OF MOTION FOR ORDERAPPROVING KEY EMPLOYEE RETENTION PLAN AND KEY EMPLOYEE INCENTIVE PLAN Tea Olive I, LLC d/b/a Stock+Field, (the “Debtor”) submits this memorandum of law in support of the motion submitted herewith (the “Motion”) in accordance with Local Rule 9013-2(a). The Debtor seeks the entry of an order substantially in the form filed herewith (i) granting expedited relief and (ii) approving the Debtor’s key employee retention plan (the “KERP”) and key employee incentive plan (the “KEIP”). The Motion should be granted because the relief requested will ensure the ongoing commitment of the Debtor’s key employees and executives in maintaining the stability of day-to-day operations while the Debtor manages a “store closing” process and maximizes its business proceeds. The Court should therefore grant the relief sought. BACKGROUND The supporting facts are set forth in the verified Motion and the Declaration of Matthew Whebbe in Support of Chapter 11 Petition and Initial Motions [Docket No. 22]. All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Motion.Page 23
LEGAL ANALYSIS I. THE KERP IS NOT PROHIBITED BY SECTION 503(C) OF THE BANKRUPTCY CODE. Pursuant to 11 U.S.C. § 363, a debtor in possession may use property of the estate outside the ordinary course of business after appropriate notice and hearing. 11 U.S.C. § 363(b)(1). However, 11 U.S.C. § 503(c) acts as a limitation on that authority by prohibiting “a transfer made to . . . an insider of the debtor for purpose of inducing such person to remain with the debtor’s business” and severance payments made to an insider of the debtor. 11 U.S.C. § 503(c)(1)-(2). The Bankruptcy Code defines an insider as any director, officer, person in control of the debtor, partnership where the debtor is a general partner, general partner of the debtor, or relative of a general partner, director, officer, or person in control of the debtor. 11 U.S.C. § 101(31)(B). Courts have generally held that any person holding an officer’s title is presumptively an officer and thus an insider. In re Foothills Tex., Inc., 408 B.R. 573, 578-79 (Bankr. D. Del. 2009). However, a party may rebut this presumption by presenting “evidence sufficient to establish that the person holds the title of an officer in name only and, in fact, does not meet the substantive definition of the same, i.e., he or she is not taking part in the management of the debtor.” Id. at 574-75; see In re Borders Grp., Inc., 453 B.R. 459, 469 (Bankr. S.D.N.Y. 2011) (declining to find insider status where the scope of the employee’s authority is limited); see also In re NMI Sys., Inc., 179 B.R. 357, 370 (Bankr. D.D.C. 1995) (holding that a vice president was not an insider because he was conferred with the title “for purposes of marketing” only and was not “in the inner circle making the company’s critical financial decisions”). If a director-level employee is not a member of the board, does not participate in corporate governance, does not attend board meetings, and does not report to the board, the employee is not an officer. In re Glob. Aviation Holdings, Inc., 478 B.R. 142, 148 (Bankr. E.D.N.Y. 2012).Page 24
To qualify as a “person in control of the debtor,” the individual must have actual control, which constitutes “the ability . . . to ‘unqualifiably dictate corporate policy and [control] the disposition of corporate assets.’” In re U.S. Med., Inc., 531 F.3d 1272, 1279 (10th Cir. 2008) (quoting In re Three Flint Hill Ltd. P’ship, 213 B.R. 292, 299 (D. Md. 1997)); see also In re Residential Capital, LLC, 491 B.R. 73, 85 (Bankr. S.D.N.Y. 2013) (finding that none of the participants under the proposed KERP had “the ability to dictate overall company policy” and therefore, were not insiders). Here, while several of the KERP Participants have titles that include terms such as “vice president,” “director,” “senior,” or “chief,” none of the KERP Participants are officers of the Debtor. None of the KERP Participants participates in any discussions or negotiations with the Debtor’s lenders. None of the KERP Participants have been aware of, or participated in, previous discussions with potential strategic or financial partners. Each of the KERP Participants has a very limited and defined scope of authority subject to oversight from the Debtor’s senior executives. While the KERP Participants play a vital role in the Debtor’s day-to-day business operations and will play a major role in the Debtor’s bankruptcy case, the KERP Participants do not have the ability to influence the Debtor’s business operations or policies. Consequently, the KERP Participants are not “insiders” pursuant to 11 U.S.C. § 101(31)(B) and the restrictions on retention plans for insiders found in 11 U.S.C. § 503(c) do not apply. II. THE KERP IS A VALID EXERCISE OF THE DEBTOR’S BUSINESS JUDGMENT PURSUANT TO 11 U.S.C. §§ 503(c)(3) AND 363(b). “[T]ransfers or obligations that are outside the ordinary course of business and not justified by the facts and circumstances of the case” are prohibited by 11 U.S.C. § 503(c)(3). In applying this section to non-insider employee retention plans, courts use the business judgment standard ofPage 25
11 U.S.C. § 363(b). In re Patriot Coal Corp., 492 B.R. 518, 530-31 (Bankr. E.D. Mo. 2013); In re Dana Corp., 358 B.R. 567, 576-77 (Bankr. S.D.N.Y. 2006). Section 363(b)(1) of the Bankruptcy Code provides that a debtor, “after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). Under section 363(b), courts generally approve transactions outside of the ordinary course of business as long as a debtor’s decision is supported by some articulated business justification. Four B v. Food Barn Stores, Inc. (In re Food Barn Stores, Inc.), 107 F.3d 558, 567 n.16 (8th Cir. 1997); Fulton State Bank v. Schipper (In re Schipper), 933 F.2d 513, 515 (7th Cir. 1991); In re Cont’l Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986); In re Patriot Coal Corp., 492 B.R. at 530-31. The debtor bears the burden of articulating a valid business justification for the use of estate property. In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). After the debtor articulates a valid business purpose for use of the property, a presumption arises that the debtor’s decision is made on an informed basis, in good faith, and in the honest belief that the action is in the best interest of the debtor. Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (Bankr. S.D.N.Y. 1992). Courts are hesitant to substitute their own judgment for the debtor’s business judgment and give deference to the debtor’s decision making. In re GSC, Inc., 453 B.R. 132, 174 (Bankr. S.D.N.Y. 2011); see also In re LeBlanc, 299 B.R. 546, 552 (Bankr. N.D. Iowa 2003). The implementation of the KERP is a proper exercise of the Debtor’s business judgment. First, the Debtor engaged in a careful process, with the assistance of its advisors, to identify key contributors to the Debtor and the bankruptcy case when selecting the KERP Participants. Second, as described in the Motion, the Debtor and its advisors considered a number of different retentionPage 26
plans approved by other bankruptcy courts and developed the KERP to be comparable in design and scope. The filing of the Debtor’s bankruptcy case has understandably created unease among the Debtor’s employees and harmed employee morale. The Debtor is concerned that the KERP Participants may seek alternative employment. The unease regarding the Debtor’s future, the decline in employee morale, and the potential for the Debtor’s employees to be actively seeking new employment during this bankruptcy case threatens the Debtor’s ability to maximize the value of the bankruptcy estate and completing “store closing” sales. At this critical time in the chapter 11 process, the Debtor requires approval of the KERP to combat these issues and ensure that the KERP Participants will remain with the Debtor and assume greater responsibilities due to the commencement of this bankruptcy case. The KERP Participants’ contributions are essential to ensure that the Debtor’s business will continue to operate and to maximize the value of the Debtor’s business during the “store closing” sales. For these reasons, the Debtor believes that the KERP is reasonable and appropriate in the Debtor’s business judgment and that the requested approval of the KERP will allow the Debtor to retain and motivate employees to maximize the value of the bankruptcy estate. Thus, approval of the KERP is in the best interest of all parties in interest and the Debtor respectfully requests that the Court approve the KERP. III. THE KEIP IS NOT IS NOT PROHIBITED BY SECTION 503(c)(1) OF THE BANKRUPTCY CODE. The restrictions found in section 503(c)(1) of the Bankruptcy Code regarding transfers to insiders of a debtor only apply to retention plans. In re Patriot Coal Corp., 492 B.R. at 531; see also In re Velo Holdings Inc., 472 B.R. 201, 209-10 (Bankr. S.D.N.Y. 2012). A debtor must show that a plan is primarily an incentive plan by a preponderance of the evidence. In re ResidentialPage 27
Capital, LLC, 478 B.R. 154, 170 (Bankr. S.D.N.Y. 2012); see also In re Hawker Beechcraft, Inc., 479 B.R. 308, 313 (Bankr. S.D.N.Y. 2012). A purported key employee incentive plan may have some retentive effect as long as the purpose of the plan is primarily to incentivize. In re Nellson Nutraceutical, Inc., 369 B.R. 787, 802 (Bankr. D. Del. 2007) (citing In re Dana Corp., 358 B.R. 567, 571 (Bankr. S.D.N.Y. 2006)). Generally, if a plan has clear and specific milestones that are not easily achieved, courts have treated the plans as incentive plans. In re Patriot Coal Corp., 492 B.R. at 532-33 (concluding that the plan set specific performance targets and was not primarily retentive); In re Residential Capital, LLC, 491 B.R. at 86-87 (finding that the key employee incentive plan was not primarily retentive because the plan rewarded key employees for achieving specific milestones related to the asset disposition and the efficient management of the estate); In re Mesa Air Grp., No. 10-1018, 2010 WL 3810899, *4 (Bankr. S.D.N.Y. Sept. 24, 2010) (finding that a plan was an incentive plan because it was tied to specific performance goals and overall profits); In re Glob. Home Prods., LLC, 369 B.R. 778, 787 (Bankr. D. Del. 2007) (deciding that a plan paying quarterly incentive payments if minimum earnings and cash flow objectives are met at the end of specific periods was an incentive plan). Here, the KEIP is clearly an incentive plan rather than a retention plan. The KEIP is restricted to pinpointed incentive awards based on the achievement of increased net proceeds from the GOB sales. Attaining these results will require substantial efforts from the KEIP Participants and a significant expansion of their pre-bankruptcy job responsibilities and, importantly, will result in the maximization of the value of the Debtor’s estate. For these reasons, section 503(c)(1) of the Bankruptcy Code does not prohibit the implementation of the KEIP.Page 28
IV. THE KEIP IS A VALID EXERCISE OF THE DEBTOR’S BUSINESS JUDGMENT PURSUANT TO SECTIONS 503(c)(3) AND 363(b) OF THE BANKRUPTCY CODE. Similar to key employee retention plans, when analyzing whether a key employee incentive plan satisfies 11 U.S.C. § 503(c)(3), courts employ the business judgment standard. In re Glob. Home Prod., LLC, 369 B.R. at 786. For key employee incentive plans, courts look to the following non-exclusive factors to determine if the business judgment test is satisfied: (1) is the plan calculated to achieve the desired performance? (2) are the costs of the plan reasonable within the context of the debtor’s assets? (3) is the scope of the plan fair and reasonable? (4) is the plan consistent with industry standards? (5) did the debtor engage in due diligence related to the need for the plan? (6) did the debtor receive independent counsel in performing the due diligence and creating and authorizing the incentive compensation? In re Patriot Coal Corp., 492 B.R. at 530-31; In re Glob. Home Prods., 369 B.R. at 786. The KEIP satisfies these six factors. First, the KEIP is calculated to achieve the desired performance. The independent performance metric that the KEIP Participants may satisfy are specifically designed to maximize the GOB sale process. All of the KEIP performance metrics were designed to promote the maximization of the value of the Debtor’s estate and align the interests of the KEIP Participants with the parties in interest in this case. Second, the costs associated with the KEIP are reasonable and fair. The Debtor conducted due diligence when assessing a need for the KEIP and when designing the KEIP. The Debtor’s financial and legal advisors analyzed plans that were approved in comparable chapter 11 cases. After conducting this analysis, the Debtor determined that the costs associated with the KEIP are within the parameters of KEIPs approved in those other cases and are fair because they are directlyPage 29
tied to the performance metrics and payment of bonus payments under the KEIP will be a direct result of the KEIP Participants’ performance. Third, the KEIP is reasonable in scope because it only applies to the two KEIP Participants. The KEIP Participants are the key drivers of success of the Debtor’s business and success of this bankruptcy case. The KEIP Participants will play a critical role in managing the GOB sales. The Debtor must rely on the efforts of the KEIP Participants and their performance will have the greatest impact on achieving success in this bankruptcy case. Fourth, the KEIP is consistent with industry standards. The Debtor requested advice from its legal and financial advisors and reviewed market data for key employee incentive plan terms for companies of similar size and scope. As noted above, the KEIP compares favorably to key employee incentive plans that have been approved in previous bankruptcy cases. Fifth, the Debtor engaged in substantial due diligence related to the need for the plan. The Debtor conducted a thorough analysis concerning the key employee incentive plans in cases substantially similar to the Debtor’s bankruptcy case. The Debtor also consulted with its legal and financial advisors regarding the need for the KEIP, the terms of the KEIP, and the risk to the Debtor’s estate if the KEIP is not implemented. The Debtor’s analysis of comparable plans and consultation with its advisors is evidence of sufficient due diligence. Sixth, the Debtor received independent counsel when performing its due diligence and when formulating the incentive compensation. The Debtor’s CRO, who is disinterested in the terms and payments proposed under the KEIP, ultimately determined that the design and cost of the KEIP is appropriate in the Debtor’s circumstances. The Debtor’s CRO arrived at this decision after consultation with the Debtor’s legal and financial advisors and after conducting an analysis of similar key employee incentive plans. For these reasons, the implementation of the KEIP is anPage 30
exercise of the Debtor’s sound business judgment and the Debtor believes it will provide substantial benefit to the parties in interest in this bankruptcy case. Consequently, the Debtor respectfully requests that the Court approve the KEIP. V. THE KERP AND KEIP ARE APPROPRIATE UNDER 11 U.S.C. § 105(a). As set forth in more detail above and in the Motion, the KERP is critical to the Debtor’s efforts to maximize the value of its estate during this chapter 11 case. Maintaining employee morale among the KERP Participants and ensuring that the KERP Participants continue to work for the Debtor are critical to maximizing return for the Debtor’s creditors and other parties in interest. Moreover, aligning the KEIP Participants’ interests with the interests of the Debtor’s creditors and other parties in interest and incentivizing the KEIP Participants to satisfy difficult store closing timelines and requirements and maximize the return provides a substantial value to the bankruptcy estate. Therefore, the costs associated with the KERP and KEIP are reasonable and necessary and are justified by the benefits that the Debtor will realize as a result of the services of the KERP and KEIP Participants. VII. WAIVER OF THE 14-DAY STAY IS WARRANTED. Finally, the Debtor requests a waiver of the 14-day stay that would otherwise apply to the Court’s approval of the KERP and KEIP pursuant to Bankruptcy Rule 6004(h). In order to benefit from the KERP and KEIP, the Debtor must implement the KERP and KEIP as soon as possible. Any delay in implementation will likely result in many of the KERP Participants and KEIP Participants seeking new employment. Due to the accelerated “store closing” sales that will begin shortly after the Filing Date, the Debtor requires the KERP Participants and KEIP Participants to be properly motivated. Therefore, the Debtor respectfully requests that the Court approve the waiver of the 14-day stay under Bankruptcy Rule 6004(h).Page 31
CONCLUSION The implementation of the KERP and KEIP is an exercise of the Debtor’s sound business judgment and will provide substantial value to the bankruptcy estate. Consequently, the Debtor respectfully requests that the Court grant the Motion and approve the KERP and KEIP. Dated: January 26, 2021 /e/ Steven R. Kinsella Clinton E. Cutler (#0158094) Steven R. Kinsella (#0392289) James C. Brand (#387362) Samuel M. Andre (#0399669) FREDRIKSON & BYRON, P.A. 200 South Sixth Street, Suite 4000 Minneapolis, MN 55402-1425 612.492.7000 ccutler@fredlaw.com skinsella@fredlaw.com jbrand@fredlaw.com sandre@fredlaw.com PROPOSED ATTORNEYS FOR DEBTOR 71866526 v3Page 32
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA In re: Case No.: 21-30037 Tea Olive I, LLC d/b/a Stock+Field, Chapter 11 Case Debtor. ORDER APPROVING KEY EMPLOYEE RETENTION PLAN AND KEY EMPLOYEE INCENTIVE PLAN This case is before the court on the Motion for Order Approving Key Employee Retention Plan and Key Employee Incentive Plan (the “Motion”) filed by the above-captioned debtor (the “Debtor”). Based on the Motion and the file, IT IS ORDERED: 1. The Key Employee Retention Plan (the “KERP”) is approved on the terms described in the Motion and contained in the form attached as Exhibit A to the Motion. 2. The Debtor is authorized to take any and all actions necessary or appropriate to implement the KERP and to make all payments provided for under the KERP. 3. The Key Employee Incentive Plan (the “KEIP”) is approved on the terms described in the Motion and contained the form attached as Exhibit B to the Motion. 4. The Debtor is authorized to take any and all actions necessary or appropriate to implement the KEIP and to make all payments provided for under the KEIP. 5. All amounts earned and payable under the KERP and KEIP shall have administrative expense priority under sections 503(a) and 507(a)(2) of the Bankruptcy Code for all purposes in the above-captioned bankruptcy case, regardless of whether or not the bankruptcy case is later converted to a case arising under a different chapter of the Bankruptcy Code.Page 33
6. Notwithstanding Bankruptcy Rule 6006(h), the terms and conditions of this order shall be immediately effective and enforceable upon its entry. Dated: William J. Fisher United States Bankruptcy Judge
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