MEMORANDUM

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court on remand from the United States District Court for the District of New Hampshire (the "District Court") is the Debtors' Motion for Order, Pursuant to Bankruptcy Code Sections 363(b) and 503(c) Approving Debtors' Key Employee Incentive Plan and Key Employee Retention Plan (the "Motion to Approve"), filed by the debtors in possession in these jointly administered Chapter 11 cases (the "Debtors," "GTAT"2). After an evidentiary hearing, this Court ruled from the bench, denying the Motion to Approve in its entirety (the "Denial Order"). The Debtors appealed the Denial Order and the District Court, in turn, remanded the matter. In its memorandum of opinion accompanying the order of remand (together, the "Remand Order"), the District Court instructed this Court to elucidate additional facts and analysis of the Motion to Approve with specific reference to extant case law. Having re-reviewed the evidentiary record, the testimony of witnesses, the submitted declarations, and the various legal arguments, the Court welcomes the opportunity to fill in the gaps identified by the District Court, but finds no reason to reach a conclusion different from its initial determination.

I. THE BACKGROUND3

For over 40 years, GTAT operated as a successful and diversified technology company producing advanced materials and equipment for the global consumer electronics, power electronics, solar, and light-emitting diode ("LED") industries. Prior to 2013, GTAT's business lines included the sale of equipment and services employed in the production of high quality polysilicon; the production and sale of silicon casting furnaces to produce multicrystalline ingots used in the production of solar cells; and the design and sale of advanced sapphire crystallization furnaces used to produce sapphire boules. Sapphire is an exceptionally hard substance (second only to diamonds), which gives it certain advantages over strengthened glass or other materials used in the consumer electronics field. It can be fabricated for use in both consumer and industrial applications, and GTAT had developed innovative technologies in connection with the manufacture of the furnaces used to grow sapphire boules. Before 2013, GTAT did not actually grow the boules; it supplied the equipment, service and knowhow for the growth of sapphire boules by others.

All of that changed in the fall of 2013, when GTAT's management decided to go into business with Apple, Inc. ("Apple"). Apple was looking for a reliable supplier of sapphire boules that could adapt the boules for Apple's consumer products, and GTAT was delighted to be presented with an opportunity to develop a long-term business relationship with a customer of Apple's size, resources, and reputation. After some negotiation, a deal was struck. Said perhaps too simply, Apple agreed to advance GTAT up to $578 million dollars (the "Apple Loan"), which GTAT would use to buy materials to manufacture and install 2,036 sapphire furnaces in Mesa, Arizona (the "Mesa Facility"). But, in a divergence from past practice with its other customers, GTAT would not sell the furnaces to Apple, but would use the furnaces to actually grow the sapphire boules, which would then be sold to Apple at a below market cost. It was anticipated that the payments received from Apple for the sapphire boules would be substantial enough to permit GTAT to not only repay the Apple loan, but earn a substantial profit.

It is said that all good things come to an end, but others do not even begin well. The relationship between GTAT and Apple broke down quickly, and GTAT and Apple each place the blame for that breakdown on the other. GTAT says that Apple inappropriately inserted itself into GTAT's operations, bullied its employees, and caused GTAT to devote an inordinate amount of cash and corporate attention to the Mesa Facility, thereby sapping GTAT's resources from other areas of its business. GTAT claims that Apple's de facto takeover threatened the success of the project from the outset, with Apple embedding itself into the build-out of the Mesa facility, making unreasonable demands during the construction process, and insisting that GTAT use costly fabrication equipment that would doom the economic sustainability of the project and conclude in overwhelming long-term losses. The result was an inevitable liquidity crisis. According to GTAT, when approached with GTAT's concerns, Apple refused to negotiate changes or recognize its destructive conduct, while at the same time the GTAT-Apple agreements precluded GTAT from negotiating more advantageous agreements with others. GTAT posits that this impossible quagmire was Apple's design all along — that is, to suck the value out of GTAT and eventually take over GTAT's operations for its own. Indeed, according to GTAT, by the time of the filing of this bankruptcy case, it had suffered over $900 million in losses on account of its relationship with Apple.

Apple tells a different story. It says that it negotiated in good faith, but that GTAT proved not to be up to the task of meeting its obligations to Apple under their agreements. Apple contends that GTAT not only generally conducted itself poorly from a business perspective, but ultimately produced sapphire boules whose quality Apple found completely lacking for their intended use. Accordingly, Apple maintains that it had no option but to seek an alternative supply and demand repayment of the Apple Loan.4

In the midst of this dispute, with enormous losses accruing and without the substantial income anticipated from the Apple agreements, the Debtors commenced their voluntary cases under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code")5 on October 6, 2014. At the time of filing, the Debtors claimed that their assets were valued at over one billion dollars and the total workforce approximated 1000 employees. Since the filing of this case and an eventual settlement with Apple, GTAT has reportedly suffered an additional 300 million dollars in losses and laid off over 800 employees (approximately 70 percent of its workforce). Almost all of the 700 employees in Mesa, Arizona have had their employment discontinued.

A determination of whose story — GTAT's or Apple's — is closer to the truth (or whether they are both substantially true) is not material to the issues before this Court. Nor is it likely that they will ever be the subject of a judicial determination, as, after some particularly heated court filings and negotiations, GTAT and Apple reached a settlement. Again described perhaps a bit too simply, GTAT and Apple agreed to divorce — the assets of their joint concern (the 2,036 sapphire furnaces) are to be disposed of by GTAT and the proceeds divided between Apple and GTAT in a manner not material here. GTAT will abandon the Mesa Facility, which will be turned over to Apple.

GTAT's job is now two-fold. First, it must dispose of the 2,036 furnaces in accordance with its settlement agreement with Apple. Second, it must reorganize its business affairs under Chapter 11 of the Bankruptcy Code to reinvigorate its core legacy businesses in order to achieve some measure of the profitability that it enjoyed prior to its failed marriage with Apple. Against this tableau, the Court considers GTAT's requests to provide what it calls incentive bonuses to its insiders and retention bonuses to certain other employees.

II. THE KEY EMPLOYEE INCENTIVE PLAN

On December 29, 2014, the Debtors filed the Motion to Approve, seeking approval of both a Key Employee Incentive Program (the "KEIP") and a Key Employee Retention Program (the "KERP", discussed more fully in section III, below). The KEIP, as modified, covers nine of the Debtors' insiders (the "Insiders"), providing bonuses based on varying levels of performance with regard to five specific metrics: (1) the value received for GTAT's used furnaces; (2) reductions in the cash operating expense run-rate; (3) the value received for non-furnace assets remaining in the Mesa Facility; (4) advancement of new technology — the so-called Merlin project; and (5) minimization of the costs of deinstalling and crating the furnaces at the Mesa Facility. For each of the metrics, the potential value of the bonuses varies from 19 to 83 percent of the Insiders' base compensation and is measured by the degree of performance within each category. The KEIP sets forth three performance levels — the "threshold," "target," and "stretch" levels — the "threshold" level being the performance required to receive any bonus at all under the KEIP, the "stretch" level representing the highest level of performance and the maximum bonus that could be received, and the "target" level being performance more than "threshold" and less than "stretch." The total cost of the KEIP to be paid to these Insiders if all "threshold" levels are reached amounts to $728,001 and, if the "stretch" level is achieved in all categories, the total cost would rise to $2,160,000

On February 5, 2015, the Court held an evidentiary hearing on the Motion to Approve. In support of the KEIP, the Debtors submitted the various Declarations. The Court also heard testimony from each of the Declarants.

At the conclusion of the Hearing, the Court denied the Motion to Approve. With regard to the KEIP, the Court stated:

Feb. 5, 2015 Hr'g Transcript 165:25-166:21.

A. The KEIP on Remand

In its Remand Order, the District Court held that this Court erred by focusing its remarks largely on the testimony regarding the critical nature of the Insiders' various roles at GTAT. GT Advanced Tech., Inc. v. Harrington, Civil No. 15-cv-069-LM, 2015 WL 4459502, *5 (D.N.H. July 21, 2015). The District Court noted that this Court did not opine on whether or not the performance metrics under the KEIP were "difficult to achieve," and instructed on remand that this Court "determine whether the proposed KEIP has sufficiently stringent metrics to qualify as an incentive plan for the purposes of § 503(c)." Id.

B. The KEIP: Discussion

In 2005, Congress added Section 503(c)(1)6 to the Bankruptcy Code in order to deal with what was thought to be an abuse in the administration of Chapter 11 cases when insiders received substantial postpetition compensation bonuses.7 Section 503(c) distinguishes between those employees who are "insiders" and those who are not. Under § 503(c)(1), bonuses offered to retain the employment of insiders are prohibited unless the debtor is able to meet the strict requirements set forth in § 503(c)(1). Those requirements are extremely difficult to achieve, and it is undisputed that GTAT cannot do so here. Section 503(c)(3) relaxes those requirements with respect to non-insiders, requiring only that the proposed retention payments be "justified by the facts and circumstances of the case."

However, some courts have held that if a debtor can establish, by a preponderance of the evidence, that the purpose of a program that provides bonuses to insiders "is primarily incentivizing and not primarily retentive," then § 503(c)(1) does not prohibit the payment of such bonuses, as "the more permissive section of 503(c)(3) applies." In re Residential Capital, LLC, 475 B.R. 154, 170 (Bankr. S.D.N.Y. 2012) ("Residential I").8 Of course, it would be a bit too easy for a debtor to just call a retention plan an incentive plan in an effort to focus a court's analysis on subsection (c)(3) rather than (c)(1). Accordingly, courts have held that "[a] debtor's label of a plan as incentivizing to avoid the strictures of section 503(c)(1) must be viewed with skepticism; the circumstances under which the proposal is made and the structure of the compensation package control." Residential I, 475 B.R. at 170.

"To determine whether a payment constitutes an incentive payment, the plan must present targets that are difficult to achieve, forcing the executives to work hard to achieve their bonuses." In re Residential Capital, LLC, 491 B.R. 73, 86 (Bankr. S.D.N.Y. 2013) ("Residental II") (noting that debtors carried their burden by explaining in detail why the targeted metrics were challenging and difficult to achieve). "Whether incentive targets require management to `stretch' to meet performance goals is fundamentally a factual question." In re Velo Holdings, Inc., 472 B.R. 201, 207 (Bankr. S.D.N.Y. 2012).

The District Court instructed this Court to determine, based on evidence already submitted, "whether the proposed KEIP has sufficiently stringent metrics to qualify as an incentive plan for the purposes of § 503(c)." GTAT, 2015 WL 4459502 at *6. The short answer is that this Court has no idea, because beyond conclusory opinion, the Debtors provided little information as to how it would achieve its goals and even less on how stringent was the task of moving from "threshold" to "target" to "stretch" levels. The longer answer is that — in addition to the lack of any detailed evidence from which this Court could reasonably determine whether the various performance matrices would be difficult to achieve or how difficult it would be to move from one level to another — the Debtors have failed, for at least two reasons, to demonstrate that the KEIP is primarily incentivizing and not retentive in purpose.

First, the KEIP, as described by Augustine, contains "target" performance metrics that align with estimates and projections contained in the business plan developed by the Debtors after the resolution of the settlement with Apple and intended to provide a foundation for the Debtors' future success, DIP financing, and ultimately, the plan of reorganization.9 See Debtor's Omnibus Reply 17-19, Feb. 3, 2015, ECF No. 1189; Augustine Decl. 9-12; Hr'g Transcript 92:13-16; 96:13-14; 98:12-15; 125:22-24. This means that the KEIP is designed to provide these nine Insiders with some performance bonuses in addition to their base salaries even if their performance meets only the "threshold" level, a level below that provided for in the Debtors' Business Plan.

Furthermore, there is, to this Court, a substantial disconnect between the rewards to which the Insiders may feel entitled by virtue of their proposed postpetition performance and the history of this case. Whether or not the Insiders can be fairly criticized for taking the risks entailed in entering into the business relationship with Apple, the fact remains that they voluntarily chose to do so. Now, in essence, the Insiders seek bonus compensation for doing a job they are already obligated to do — to right the ship — and even for performing below those levels characterized in the Business Plan as necessary to the Debtors' ultimate success. See, e.g. In re Hawker Beechcraft, Inc., 479 B.R. 308, 315 (Bankr. S.D.N.Y. 2012) (where minimum target level matched business plan projections, plan was not incentivizing, but retentive in nature).

Specifics tell the story better. Set forth below are the salaries earned by the top 5 executives in 2013, their current base salaries, and the bonuses to which they would be entitled under the KEIP (total compensation in parentheses).

Interestingly, under the KEIP, the other four Insiders have the ability to earn bonuses that actually exceed their prepetition cash income.10 The Debtors have failed to justify why any of the Insiders should potentially be compensated for their work during this Chapter 11 case in an amount greater than then their prepetition remuneration. While the work of solving the Debtors' problems may be difficult, the mere fact that the Insiders' responsibilities anent the requirements of a Chapter 11 case have increased or changed is alone insufficient to justify increased compensation. See Residential I, 478 B.R. at 168.

Furthermore, assuming Cumberland is correct in his declaration and testimony that the compensation practices under the KEIP are commensurate with market practice, that fact alone is insufficient to warrant approval of the bonuses. While such a finding of reasonableness in comparison to other incentive plans "may be a necessary requirement. . . it is not a sufficient requirement for approval" of a KEIP. Residential I, 478 B.R. at 166. Finally, Cumberland also implies that the proposed bonuses are justified because the Insiders are no longer receiving valuable stock bonuses.11 In so stating, Cumberland manages to overlook the insensitivity of his observations. Thousands of stockholders will likely incur significant losses — many in the pensions that they struggled to create, maintain and increase over their working lives — because of decisions made by the Insiders that turned out to be disastrous. This Court is reasonably confident that the stockholders — the present and perhaps former owners of the company — have no interest in compensating the Insiders in whole or in part for their stock losses as a reward for fixing the problem to which they contributed.

Second, the Court again finds that the repeated statements of counsel and the Declarants regarding the importance of keeping these particular Insiders on board weigh heavily in its conclusion that the KEIP is primarily designed to retain the Insiders and not to incentivize them. See also Hawker Beechcraft, 479 B.R. at 314 (noting that testimony regarding the critical nature of employees' services to company confirmed the retentive nature of a proposed incentive program); Residential I, 478 B.R. at 172 n.24 (noting that the debtor's argument as to the incentivizing nature of its incentive plan was belied by continual emphasis on "how difficult it would be to replace any of the KEIP Participants if they were to leave.").

Specific excerpts from the Hearing testimony are instructive:

Hr'g Transcript, 36:9-38:16.

And so this Court turns to the testimony of Mr. Augustine. With regard to the same question, Augustine testified:

Hr'g Transcript 101:14-22. And later in the Hearing, Augustine again testified to the perceived importance of these specific Insiders:

Hr'g Transcript 123:23-124:6.

This Court finds and rules that the Debtors have failed, by a preponderance of the evidence, to demonstrate that the KEIP is an incentive program. It is primarily a disguised retention plan for these Insiders, and, because all agree that GTAT cannot meet the requirements of § 503(c)(1), the Motion to Approve, with respect to the KEIP, must be denied.

III. THE KEY EMPLOYEE RETENTION PLAN

The proposed KERP provides retention bonuses to 26 employees so long as they remain with the company until the company emerges from bankruptcy or is sold (whichever is earlier). Bonuses under the KERP range from 8 to 48 percent of the participating employees' (the "Participants") base salary. In addition, the KERP establishes a $300,000 discretionary fund that can be used to provide bonuses (not to exceed $50,000 per individual) to other employees at the discretion of the chief executive officer and with the consent of the unsecured creditors' committee (the "Creditors' Committee"). The total cost of the KERP, assuming all proposed payments (including discretionary payments) are made, amounts to $1,550,000.

At the conclusion of the Hearing, this Court denied approval of the KERP, stating:

Hr'g Transcript 166:22-167:21.

A. The KERP on Remand

In its Remand Order, the District Court rejected the Debtors' contention that "the rule of decision comes from 11 U.S.C. § 363(b)(1), which governs the use, sale or lease of property of the bankruptcy estate `other than in the ordinary course of business.'" GTAT, 2015 WL 4459502 at *6. Instead, the court held that "the rule of decision comes from 11 U.S.C. § 503(c)(3), which governs administrative expenses, including `other transfers or obligations that are outside the ordinary course of business.'" Id. The District Court went further, however, and parted company with those courts that equate the § 503(c)(3) standard with the business judgment standard, agreeing instead with the formulation of the "facts and circumstances test" articulated in In re Pilgrim's Pride Corp., 401 B.R. 229 (Bankr. N.D. Tex. 2009):

GTAT, 2015 WL 4459502 at *7 (quoting Pilgrim's Pride, 401 B.R. at 237). Accordingly, the District Court concluded that "§ 503(c)(3) directs courts to give plans such as the KERP in this case more scrutiny than is required by the § 363(b)(1) business judgment test." Id. In its Remand Order, the District Court noted that this Court referred to the "business judgment standard," but found that it was "not clear whether [this Court] applied the highly deferential § 363(b)(1) test or the less deferential test from Pilgrim's Pride," precluding the District Court from "undertak[ing] a meaningful review." Id. at *8.

Having determined the applicable statutory framework, the District Court then "turn[ed] to a more straightforward issue, i.e., the substantive framework for a bankruptcy court's review of a compensation plan under § 503(c)(3)." Id. In this regard, the District Court found this Court's Denial Order lacking in that it failed to articulate an analysis of the KERP with regard to "what have come to be known as the Dana factors":

Id. (quoting In re Patriot Coal Corp., 492 B.R. 518, 536 (Bankr. E.D. Mo. 2013); In re Dana Corp., 358 B.R. 567, 576-77 (Bankr. S.D.N.Y. 2006)).

Accordingly, in its Remand Order, the District Court instructed this Court to: "(1) analyze the proposed KERP in terms of the Dana factors; and (2) do so with the level of scrutiny described in Pilgrim's Pride." Id. at *8.

B. The KERP: Discussion

The higher scrutiny to be applied when analyzing a non-insider retention plan under § 503(c)(3) requires this Court to determine whether the KERP is justified in this case and "will serve the interests of creditors and the debtor's estate," regardless of whether the Debtors have articulated a good business reason for the KERP. Pilgrim's Pride, 401 B.R. at 237. With that standard in mind, the Court turns to the Dana factors.

To begin with, the Court finds that the Debtors, at least at the time the Motion to Approve was filed, were properly concerned about the retention of their employees, a valid concern given the difficulty of finding equally skilled replacements and the potential lure of more stable employment.12 The Debtors were thorough and careful in paring down an initial group of key employees to the 26 deemed "most crucial to GTAT's operations" and ultimately, the Debtors' successful reorganization. Newstead Decl. 4. The KERP went through multiple revisions and was ultimately the product of the Debtors' work with two professional consultants, senior management, Debtors' counsel and the Creditors' Committee, and so clearly also satisfies the Debtors' due diligence duties in that regard. See, e.g., Residential II, 491 B.R. at 86; Velo, 472 B.R. at 213; In re Global Aviation Holdings Inc., 478 B.R. 142, 153, 154 (Bankr. E.D.N.Y. 2012).

But the Court cannot conclude from the record here that the design of the KERP is reasonably related to the results the Debtor is seeking to obtain, that the scope of the plan is fair and reasonable and does not discriminate unfairly, or that the plan is consistent with industry standards. At the Hearing, the Court's remarks in denying approval of the KERP focused on the fact that the proposed retention payments did not appear significant enough to tip the balance toward a Participant's remaining in the Debtors' employ should he or she receive a competing employment offer. The Court reaffirms that conclusion with regard to those employees at the bottom of the KERP payment spectrum. The lowest amounts proposed to be paid under the KERP are roughly equal to the payment the Participant could expect to receive under the Debtors' generally applicable bonus plan — the "MIP."13 For those employees, it seems unlikely that their inclusion in the KERP, which would result in their exclusion from participation in the MIP, will do much, if anything, to sway them from accepting a competing employment offer if they were otherwise so inclined.

What the Court did not address in its Denial Order was the other end of the spectrum — i.e., those Participants who would receive the largest (either by salary percentage or total payment amount) bonuses under the KERP. Several employees are slated under the KERP to receive very sizeable retention bonuses. But as to those payments, the Court cannot determine from the record whether such large bonuses are reasonable or in line with industry or market standards. Evidence was presented that the average compensation of the KERP equates to approximately 27 percent of the Participants' base salaries — an average that is line with KERP plans approved in other Chapter 11 cases. But a comparison of KERP averages does little to inform the Court as to whether the larger bonuses, either as to amount or as to base salary percentage, are reasonable from a market perspective. Perhaps such a determination would have been aided by additional data or other evidence as to whether the KERP Participants' base salaries were above, below, or at market norms — but such evidence was not provided. Accordingly, the Court finds that the Debtors have not adequately demonstrated that the KERP payments are more likely to motivate the Participants to remain with GTAT or, for the largest KERP bonuses, are not excessive under the facts and circumstances of this case.

As to whether the scope of the KERP is fair and reasonable or unfairly discriminatory, the Court is not troubled by the fact that a small number of the Debtors' workforce were identified as KERP Participants. But as to the differential payments (from $10,000 to $100,000) and base salary percentages (from 8 to 48 percent) contained within the KERP, such differential treatment between KERP Participants seems at face value to be unfair and discriminatory without far more information as to what informs the differences. While other Courts have held that differential payments to employees under a retention plan are not per se unreasonable or discriminatory, see, e.g., Global Aviation, 478 B.R. at 152, the variances between amounts and percentages of base pay in the KERP here appears more dramatic than that found in other cases. See, e.g., In re Borders Group, Inc., 453 B.R. 459, 467 (Bankr. S.D.N.Y. 2011) (critical employees would receive approximately 30 percent of base salary under retention plan, amounts ranged from $28,000 to $53,000). In addition, such variances may be expected in larger plans that contain a range of upper-, mid-, and/or low-ranking employees, where one would expect that more critical employees would receive more substantial retention payments. But in this case, the Debtors have argued that the KERP covers only those employees that are crucial to GTAT's success. In light of that representation, the Court is hard-pressed to see the rationale behind providing the Participants such dramatically disparate treatment under the KERP.

And, finally, the Court cannot conclude based on this record that the cost of the KERP is reasonable in the context of the Debtors' assets, liabilities, and earning potential. The Debtors did not provide any specific evidence on that question. The Court notes that, despite the millions of dollars in losses the Debtors have incurred and are continuing to incur each month, Cumberland's summary comparison of the KERP with other approved retention plans reveals that the aggregate amount of the payout falls at the 75th percentile. Ultimately, however, the Debtors failed to demonstrate the reasonableness of the KERP's cost. Compare, e.g., Global Aviation, 478 B.R. at 152 (debtor's evidence demonstrated that total cost of retention plan constituted less than 0.014 percent of debtor's reported revenue); Borders, 453 B.R. at 475 (total cost of both retention and incentive plans represented only 0.17% of previous year's revenue, and only 0.26% of the Debtor's projected revenue after emergence).

In sum, the Court finds that the Debtors have not demonstrated that the KERP is justified under the facts and circumstances of this case or will serve the interests of the creditors and the estate. Accordingly, the Motion to Approve with regard to the KERP must also be denied.

III. CONCLUSION

Because the Court finds that that the KEIP is primarily designed to be retentive, and not as incentive in nature, it cannot be approved because it fails to meet the requirements of § 503(c)(1). And the Court finds and rules that the KERP, as currently formulated, is not justified under the facts and circumstances of this case, the standard required by § 503(c)(3). Accordingly, the Motion to Approve must again be denied in its entirety. An order in conformity with this Memorandum shall issue forthwith.