The story originally ran on May 8 and has been updated.
A US trustee and Quest Diagnostics have asked the US Bankruptcy Court in Delaware to deny Vermillion's plan to award bonuses to its remaining directors while it works through its proposed bankruptcy reorganization.
Last week, Roberta DeAngelis, the trustee appointed by the bankruptcy court to oversee the case, filed an objection to Vermillion's incentive plan, which could provide its directors six-figure bonuses as it seeks Chapter 11 protection, following a similar filing by Quest, a Vermillion creditor.
Vermillion filed for Chapter 11 bankruptcy in late March [see PM 04/02/09] citing a "global liquidity crisis" that prevented it from identifying and accessing necessary sources of capital.
A hearing scheduled for May 11 on Vermillion's filing was canceled. No new date has been set. A call to lawyers for Vermillion was not returned.
Last month, Vermillion asked the bankruptcy court to approve its incentive plan that would pay former CEO Gail Page, now its executive chair, at least $500,000 if its reorganization plan is approved. Its other two directors, James Burns and John Hamilton, would receive at least $250,000 [see PM 04/30/09].
But in documents filed with the court, DeAngelis and Quest asked the court to deny Vermillion's motion, saying that, among other things, the plan violates bankruptcy codes.
In her objection, DeAngelis said that Vermillion has not demonstrated that the proposed bonuses are "appropriate" under bankruptcy code.
In its filing, Vermillion had said that under the bankruptcy code, such bonuses are allowed as long as they can be reasonably justified as a business transaction. "Courts have found that a debtor's use of reasonable performance bonuses and other incentives is a valid exercise of a debtor's business judgment," the company said in its incentive plan proposal to the court.
But according to DeAngelis, Vermillion's plan amounts to a scheme to circumvent the bankruptcy code and to line the pockets of its directors. "Any assertions that [the bankruptcy code] merely imposes the old 'business judgment' standard is misplaced," she said. "Such a position maligns Congress' intent in adopting the new limitations … to rein in the otherwise unchecked retention and bonuses plans structured to handsomely compensate debtor management at the expense of creditors."
Quest added that the bankruptcy code prohibits insider payments and despite Vermillion's attempt to distinguish it from such kinds of payments, "the proposed relief appears strikingly similar to the type of compensation Congress intended to abolish" with legislation passed in 2005.
In justifying its plan, Vermillion said that the bonuses are "designed to maximize the value of [Vermillion's] estates for all constituents." Because the plan would pay Page, Burns, and Hamilton bonuses for achieving specific target goals, they are not "pay-for-play" payments meant to keep them from departing the firm.
DeAngelis refutes that claim. The proposal contains some "limited incentive component," she said, but does not establish a minimum trigger for the payment of the bonuses. As a result, Vermillion's proposal "is factually a creatively titled key employee retention plan," which "guarantees payment of a bonus to [the three directors] based on the first dollar of proceeds received by [Vermillion] from the proposed sale of [its] assets."
Quest raised a similar objection: As directors, Page, Burns, and Hamilton "already owe fiduciary duties to" Vermillion. The company, Quest added, "has submitted no admissible evidence of the necessity of the requested relief."
Both Quest and DeAngelis also said that important information has not yet been provided by Vermilion, including its schedules of assets and liabilities, statement of affairs, and budget. Without such information, the proposed relief is "premature," according to Quest.
Additionally, although Vermillion said that Page is being paid $175 per hour plus certain benefits for providing consultancy services to the company, it has not disclosed how much it may otherwise be paying the three directors; has not provided any information regarding any proposed offers for the sale of the firm's assets or when such offers may have been received; or disclosed "how, if any, performance objectives were established and whether each [director] bears any true performance risk," DeAngelis wrote.
The Vermillion proposal further did not set maximum payment limits for the directors.
"Because it lacks information to allow interested parties an opportunity to properly analyze the proposed Incentive Plan and thus [Vermillion] has failed to meet its legal and factual burden of proof," the firm's proposal should be denied, DeAngelis said in her filing.
In addition to bonuses if its reorganization plan is approved, Vermillion's proposal calls for payments to its directors if the company has to sell assets as part of its reorganization. An asset sale prior to approval from the US Food and Drug Administration for Vermillion's triage ovarian cancer diagnostic called OVA1, would result in a bonus to Page of the lesser of $300,000 or 3 percent of the gross proceeds from the sale. Burns and Hamilton would each receive the lesser of $150,000 or 1.5 percent of gross proceeds.
If assets are sold after FDA approval of the OVA1 test, Page would receive $400,000 or 4 percent of gross proceeds, whichever is greater, while Burns and Hamilton would each be paid the greater of $200,000 or 2 percent of gross proceeds, whichever is greater.
However, if either the company's reorganization plan is rejected or there is no asset sale, none of the directors would be paid a bonus, according to Vermillion's proposal.
In its filing, Vermillion said that as of Sept. 30, 2008, it had assets of $7.2 million and debts of more than $32 million.
Against that backdrop, Quest called the proposed payments "very rich." While Vermillion claims assets of $7.2 million, Quest has at least a $10 million secured claim, it said, and "the proposed Incentive Plan payments are disproportionate to the economics of the case."