Fairway Markets Says COVID-19 Crisis Justifies Exec Bonuses

By Rick Archer
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Law360 (April 9, 2020, 9:04 PM EDT) -- Fairway Markets has told a New York bankruptcy court that the difficulty of running a grocery chain in Chapter 11 and in the face of the COVID-19 pandemic justifies its proposal to pay $2.3 million in executive bonuses.

In a motion filed Wednesday, Fairway said it had made supplemental filings to answer the U.S. Trustee's Office's request for more information on the bonus programs, and that arguments that the benchmarks for bonus payments are too easy to reach ignore the difficulty of simultaneously arranging the sale of the company's assets and keeping its stores running under the current circumstances.

"As the global pandemic caused by COVID-19 continues to progress, news reports of the danger of non-remote work has made finding replacements an unprecedented struggle — more so than for any Chapter 11 debtor — while, at the same time, the importance of keeping grocery stores accessible and in operation has only grown," it said.

Fairway was asking the court for permission to make $1 million in payments to nine senior executives as part of a key employee incentive plan, or KEIP, and up to $1.3 million in payments to 25 employees as part of a key employee retention plan, or KERP.

Payments under the KEIP are tied to meeting certain financial benchmarks, while KERP payments are tied to employees who remain with the company through the Chapter 11 case.

In Wednesday's motion, the company said five of the original KERP participants have left the company since the motion was filed in February and that another seven names had been submitted in a supplement.

"As a result of the debtors' already lean workforce, the loss of any additional KERP participants will cause further disruption in operations and risk degradation in value of the debtors' estates," it said.

A month ago, the U.S. Trustee's Office filed an objection to the plans, saying Fairway did not provide the identities of the executives who will receive the bonuses and had failed to show that the benchmarks for the incentive plan were difficult enough to reach to justify the bonuses.

The United Food and Commercial Workers union had also filed an objection to the bonuses, but in Wednesday's motion, Fairway said the union had agreed to drop the objection as part of a $70 million pension settlement reached last month.

In the motion, Fairway said it had submitted supplementary declarations detailing the job titles of the bonus program participants. It said it had established that the retention program participants are not insiders and that the cost is reasonable.

It said while both the union and the trustee had questioned whether the benchmarks for the incentive payments were challenging enough — saying the $70 million stalking horse bid the company already has in hand from Village Super Market would be enough to trigger payments — the sale agreement also requires that Fairway stores remain in operation, which has presented a significant challenge under current circumstances.

"To meet the performance metrics, the KEIP participants have been required to work long hours implementing the sale strategy within a compressed timeline while simultaneously dealing with the added pressures and workload brought on by the Chapter 11 cases and the coronavirus pandemic," Fairway said.

Fairway filed for Chapter 11 protection in January with $227 million in debt, blaming liquidity strains caused by a highly competitive grocery market and labor and pension costs for its majority-union workforce.

Counsel for Fairway and the union and representatives of the U.S. Trustee's Office did not immediately respond to requests for comment Thursday.

Fairway is represented by Ray C. Schrock, Sunny Singh and Jared Friedmann of Weil Gotshal & Manges LLP.

The U.S. trustee is represented by Greg M. Zipes.

The UFCW locals are represented by Richard M. Seltzer and Hanan B. Kolk of Cohen Weiss and Simon LLP.

The case is In re: Fairway Group Holdings Corp., case number 20-10161, in the U.S. Bankruptcy Court for the Southern District of New York.

--Editing by Janice Carter Brown.

For a reprint of this article, please contact reprints@law360.com.

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