IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION : : (Joint Administration Requested)

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1 Case sgj11 Doc 6 Filed 05/05/16 Stephen A. Youngman ( ) WEIL, GOTSHAL & MANGES LLP 200 Crescent Court, Suite 300 Dallas, Texas Telephone: (214) Facsimile: (214) Entered 05/05/16 09:54:33 PageDate 1 offiled: 53 5/5/2016 Docket #0006 Gary T. Holtzer (pro hac vice pending) Kelly DiBlasi (pro hac vice pending) WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York Telephone: (212) Facsimile: (212) Proposed Attorneys for Debtors and Debtors in Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION x : In re: : : CHC GROUP LTD. et al., : : : Debtors. : : x Chapter 11 Case No. 16 ( ) (Joint Administration Requested) MOTION OF DEBTORS FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING DEBTORS TO PAY CERTAIN (A) EMPLOYEE OBLIGATIONS AND (B) INDEPENDENT CONTRACTOR OBLIGATIONS, (II) MODIFYING THE AUTOMATIC STAY, AND (III) AUTHORIZING FINANCIAL INSTITUTIONS TO HONOR AND PROCESS CHECKS AND TRANSFERS RELATED TO SUCH OBLIGATIONS PURSUANT TO SECTIONS 105(a), 363(a), AND 507(a) OF THE BANKRUPTCY CODE AND BANKRUPTCY RULES 6003 AND 6004 TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: CHC Group Ltd. and its above-captioned debtor affiliates, as debtors and debtors in possession (collectively, the Debtors ),1 respectfully represent: 1 A list of the Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, where applicable, is attached hereto as Exhibit A. 1 _2V0%% %\«

2 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 2 of 53 Relief Requested 1. Pursuant to sections 105(a), 363(b), and 507(a) of title 11 of the United States Code (the Bankruptcy Code ) and Rules 6003 and 6004 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), the Debtors request that the Court (i) authorize, but not direct, the Debtors to (a) pay, in their sole discretion, all obligations incurred under or related to Compensation Obligations, Payroll Taxes and Deductions, Expense Reimbursements, PEO Fees, Employee Benefits, and Service Fees (each as hereinafter defined, and collectively, the Employee Obligations ) and all costs incident to the foregoing, and (b) maintain and continue to honor their practices, programs, and policies in place for their employees as they were in effect as of the Petition Date, as such may be modified, amended, or supplemented from time to time in the ordinary course of business, (ii) authorize, but not direct, the Debtors to pay, in their sole discretion, all prepetition claims of Independent Contractors (as hereinafter defined) (the Independent Contractor Obligations ) and (iii) authorize applicable banks and other financial institutions (collectively, the Banks ) to receive, honor, process, and pay all checks issued or to be issued and electronic funds transfers requested or to be requested relating to the above. 2. To the extent any of the Debtors employees hold valid claims related to Workers Compensation Programs (as hereinafter defined), the Debtors also seek authorization to modify the automatic stay imposed by section 362 of the Bankruptcy Code to permit these employees to proceed with their claims related to Workers Compensation (the Workers Compensation Claims ). This modification of the automatic stay pertains solely to Workers Compensation Claims. Any claims relating to any other of the Employee Obligations, Independent Contractor Obligations, or otherwise shall remain subject to the automatic stay. 2

3 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 3 of A proposed form of order approving the relief requested herein on an interim basis is annexed hereto as Exhibit B (the Interim Order ) and, pending a final hearing on the Motion (the Final Hearing ), on a final basis as Exhibit C (the Final Order ). Jurisdiction and Venue 4. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. 157 and 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 and Background 5. On the date hereof (the Petition Date ), each of the Debtors commenced a voluntary case under chapter 11 of the Bankruptcy Code in this Court. The Debtors are authorized to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 6. Contemporaneously herewith, the Debtors filed a motion seeking joint administration of their chapter 11 cases. The Debtors Businesses 7. The Debtors, together with their non-debtor affiliates (collectively, CHC ), comprise a global commercial helicopter service company, primarily engaged in providing helicopter services to the offshore oil and gas industry. CHC also provides helicopter services for search and rescue and emergency medical services to various government agencies. In addition, CHC maintains the industry s largest independent helicopter maintenance, repair, and overhaul business, which services CHC s helicopter fleet as well as third-party customers. CHC manages its domestic and overseas businesses from Irving, Texas and its sales force from an office in Houston, Texas. CHC maintains one of its primary engine overhaul facilities in Fort 3

4 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 4 of 53 Collins, Colorado. Only certain entities within CHC primarily the issuers or guarantors of the Debtors funded debt are Debtors in these proceedings. CHC s other entities, including certain operating entities, are not debtors in these cases and are continuing to conduct their businesses in the ordinary course. 8. Additional information about the Debtors businesses, capital structure, and the circumstances leading to the commencement of these chapter 11 cases can be found in the Declaration of Robert A. Del Genio in Support of the Debtors Chapter 11 Petitions and Request for First Day Relief (the Del Genio Declaration ), filed concurrently herewith. Overview of Employee Obligations 9. As of the Petition Date, the Debtors employ approximately 1,790 Employees through thirteen (13) separate legal entities (collectively, the CHC Employers ) 2 across 20 different countries. 3 The Debtors Employees 4 only account for a portion of CHC s total workforce, with the remainder of the workforce approximately 2,000 employees being employed by non-debtor affiliates (the Non-Debtor Affiliates ). Of the Debtors total 1,790 Employees, approximately 1,740 are full-time Employees and 50 are part-time Employees. 5 Included among these Employees are the Debtors global touring crew (pilots and engineers that 2 These entities are CHC Group Ltd., CHC Helicopter S.A., CHC Global Operations (2008) ULC, CHC Global Operations Canada (2008) ULC, CHC Global Operations International ULC, Lloyd Helicopters Pty. Ltd., CHC Helicopters (Barbados) SRL, CHC Hoofddorp B.V., CHC Leasing (Ireland) Limited, Heli-One (Netherlands) B.V., Heli-One (Norway) AS, Heli-One (UK) Limited, and Heli-One Canada ULC. 3 These countries are Australia, Barbados, Brazil, Canada, Equatorial Guinea, Gabon, Ireland, Kazakhstan, Luxembourg, Malaysia, Mexico, Mozambique, Netherlands, Nigeria, Norway, Romania, Thailand, Timor-Leste, the United Kingdom, and Uruguay. Employees based in several of these counties are part of the touring crew employed by two Canadian Debtors: CHC Global Operations (2008) ULC and CHC Global Operations International ULC. 4 For purposes of this Motion, the term Employees includes all persons, as of the Petition Date, entitled to compensation, benefits, reimbursement, or any other similar payment as a consequence of being employed by the Debtors and does not include Independent Contractors (as hereinafter defined). 5 The 50 part-time Employees include casual employees, as designated in Australia. A casual employee is one who has no guaranteed hours of work and often works at irregular hours, but at higher hourly pay rates than other Employees. 4

5 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 5 of 53 are seconded to various operating jurisdictions), domestic aircrew, mechanics, engineers, and warehousemen, as well as corporate employees in the executive office, finance, information technology, and human resources departments, and various operations personnel. 10. As of the Petition Date, approximately 1,020 of the Debtors Employees are members of unions (the Union Employees ) whose employment agreements and benefits are governed by collective labor agreements (the CLAs ). The unions include, among others, the British Air Line Pilots Association, Unite the Union, the Office and Professional Employees International Union, the Global Helicopter Pilots Association, the Transport Workers Union, the Australian Federation of Air Pilots, the Australian Licensed Aircraft Engineers Association, and the Australian Manufacturing Workers Union. The majority of Union Employees are based in Australia and Norway, while the remaining Union Employees are dispersed throughout various of the Debtors operating jurisdictions depending upon the relevant Employees assignments. The Union Employees predominantly function in service operation roles, serving as captains, first officers, and other aircrew, as well as engineers, technicians, and ground crew. 11. The Debtors have dedicated enormous effort into recruiting and maintaining this team of experienced, motivated, and invaluable Employees many of whom are specialists in the global commercial helicopter service industry. In addition to holding a deep understanding of the Debtors detailed business practices and policies, many have specific skill sets, licenses, and expertise critical to the Debtors operations. Compensation Obligations A. Wages, Commissions, and Executive Service Fees 12. The Debtors typically pay obligations relating to Employee wages and salary (the Wage Obligations ) on a monthly, semimonthly, or biweekly basis, varying based 5

6 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 6 of 53 upon the country in which a given Employee works (the Work Country ) as well as Employee classification. Wage Obligations are paid in several currencies in accordance with the relevant Work Country. 6 Employees are typically paid through a fixed compensation schedule, with certain variable compensation elements such as country-specific allowances. 13. The Debtors estimate their average gross monthly payroll (the Monthly Payroll ) to be approximately $5 million, their average gross semi-monthly payroll (the Semi- Monthly Payroll ) to be approximately$3.5 million, and their average gross bi-weekly payroll (the Bi-Weekly Payroll ) to be approximately $4 million. The Debtors last Monthly Payroll, Semi-Monthly Payroll, and Bi-Weekly Payroll were each made on April 29, The Debtors estimate that as of the Petition Date, there are approximately $5 million of accrued and outstanding Wage Obligations. 7 The Debtors do not believe that any of the Employees are owed prepetition Wage Obligations in an amount exceeding the $12,850 priority cap imposed by section 507(a)(4) of the Bankruptcy Code (the Priority Wage Cap ) and, accordingly, do not seek relief to pay any prepetition Wage Obligations in excess of such cap. The Debtors seek authority, but not direction, to pay all Wage Obligations to the extent permitted by section 507(a)(4) of the Bankruptcy Code and to continue to satisfy all Wage Obligations in the ordinary course of business. 14. Certain sales Employees are entitled to wages based upon a sales commissions program. Wages paid through this program (the Commission Wages ) are paid on a quarterly basis. As of the Petition Date, the Debtors owe approximately $25,000 on account 6 For the purposes of this Motion, all amounts denominated in currencies other than United States dollars have been stated in their United States dollar equivalents. 7 Canadian crew Employees may be entitled to certain foreign tax reconciliations from their 2015 tax returns; however these amounts are not included because such payments are not due at this time. 6

7 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 7 of 53 of Commission Wages. The Debtors do not believe that any of the Employees are owed Commission Wages in an amount exceeding the Priority Wage Cap and, accordingly, do not seek relief to pay any Commission Wages in excess of such cap. Pursuant to this Motion, the Debtors seek authority to continue to pay the Commission Wages in the ordinary course of business, and to pay accrued and unpaid prepetition Commission Wages. 15. CHC Group Ltd. ( CHC Group ), one of the CHC Employers, employs certain of the U.S.-based executive-level Employees (the Executives ). 8 Although these Executives have employment agreements with CHC Group, the Executives receive payroll from CHC Helicopter Support Services (US) Inc. ( CHC Support Services ), a Non-Debtor Affiliate. Periodically, CHC Support Services is reimbursed for the Executives payroll through intercompany service fees (the Executive Service Fees and, collectively with the Wage Obligations and Commission Wages, the Compensation Obligations ) charged in accordance with an intercompany service agreement across several CHC entities, including certain Debtors as well as Non-Debtor Affiliates. During these chapter 11 cases, the Executives will continue to be paid by CHC Support Services and the Debtors request authority to continue to pay their respective Executive Service Fees, which include the U.S. Executive payroll costs, in accordance with the service agreements in the ordinary course of business. B. Payroll Taxes and Deductions 16. In various jurisdictions, the CHC Employers are required by law to withhold amounts from the Compensation Obligations related to income taxes, healthcare taxes, and other social welfare benefits (collectively, the Withholding Taxes ) and to remit the same and certain other amounts to the appropriate taxing authorities (collectively, the Taxing 8 All of CHC s U.S.-based employees are employed by Non-Debtor Affiliates. 7

8 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 8 of 53 Authorities ) according to schedules established by such Taxing Authorities. 9 Additionally, where certain Employees are residents of one jurisdiction while working in another, the CHC Employers are required to remit a separate payment on account of certain foreign taxes, which are not withheld from Employees wages (the Foreign Wage Taxes ). The Debtors estimate that approximately $5 million remains outstanding on account of prepetition Foreign Wage Taxes. 17. In certain circumstances, the CHC Employers are also required to make additional payments from their own funds in connection with the Withholding Taxes (collectively, the Contribution Taxes and, together with the Withholding Taxes and the Foreign Wage Taxes, the Payroll Taxes ). In the aggregate, the Payroll Taxes, including both the Employee and CHC Employer portions, total approximately $2 million for the Monthly Payroll, $1 million for the Semi-Monthly Payroll, and $1.5 million for the Bi-Weekly Payroll. As of the Petition Date, the Debtors estimate that they owe approximately $15 million on account of prepetition Payroll Taxes. 18. The CHC Employers, either directly or through professional employer organizations (the PEOs ), also withhold other amounts from certain Employees paychecks related to various Retirement Plans and other Employee Benefits (each hereinafter defined), loan repayments, and union deductions (collectively the Deductions and, together with the Payroll Taxes, the Payroll Taxes and Deductions ). As of the Petition Date, the Debtors estimate that they owe approximately $4 million on account of prepetition Deductions. 9 By this Motion, the Debtors are not seeking authority to pay any prepetition taxes other than those listed above related to Employee Obligations, which additional taxes are addressed separately in the Motion of Debtors for Entry of Interim and Final Orders (I) Authorizing Debtors to Pay Certain Prepetition Taxes and Assessments and (II) Authorizing Financial Institutions to Honor and Process Related Checks and Transfers Pursuant to Sections 105(a), 363(b,) 507(a)(8) and 541(d) of the Bankruptcy Code, filed contemporaneously herewith. 8

9 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 9 of To the extent any of the Payroll Taxes and Deductions may not have been forwarded to the appropriate third-party recipients or checks or electronic transfers in respect thereof may not have cleared prior to the Petition Date, the Debtors seek authority to remit prepetition Payroll Taxes and Deductions (and to continue to forward Payroll Taxes and Deductions on a postpetition basis whether or not related to the prepetition period) to the applicable third-party recipients in the ordinary course of business and consistent with past practice. C. Expense Reimbursements 20. In the ordinary course of business, certain Employees incur expenses in connection with their employment duties, such as travel and meal expenses. Such expenses incurred in the course of their employment and in furtherance of the Debtors businesses are reimbursed by the CHC Employers (the Expense Reimbursements ) through an automated system. Upon approval by the respective CHC Employers, the Employees receive the Expense Reimbursements as part of their next scheduled paycheck. 21. Because of the irregular nature of requests for Expense Reimbursements, it is difficult to determine the amount of Expense Reimbursements outstanding at any given time. The Debtors, however, estimate that Expense Reimbursements average approximately $500,000 per month, and based on that estimate, approximately $500,000 in accrued Expense Reimbursements remain outstanding as of the Petition Date. The Debtors seek authority, but not direction, to continue to satisfy all Expense Reimbursements in the ordinary course of business. 9

10 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 10 of 53 Professional Employer Organizations 22. In every jurisdiction other than Equatorial Guinea, 10 the Debtors engage PEOs to help administer many of their human resources functions, including calculating and remitting payments related to payroll and benefits. The CHC Employers employ different PEOs in different countries in accordance with the following table: PEO(s) ADP, United Tax Network, Solutions Aberdeen, CIPP, Anderson Anderson Brown Activ Payroll Konnettko Work Country Australia, Canada, Netherlands, Norway, 11 Kazakhstan, United Kingdom Ireland Timor-Leste 23. The PEOs facilitate the administration of payroll and other benefits for the CHC Employers and their Employees. Different CHC Employers contract with different PEOs, and the scope of services provided varies from contract to contract (each a PEO Agreement ). In each instance, the CHC Employers pay monthly service fees to the PEOs (the PEO Fees ), or the same are withdrawn from payroll. 24. Under the agreements between the PEOs and the CHC Employers in Canada, Timor-Leste, the Netherlands, Ireland, and the United Kingdom, the PEOs administer payroll to the Employees, calculate any relevant withholdings, and remit those withholdings to the appropriate parties. To facilitate payments of the Employee Obligations, the Debtors advance funds from the Banks to the PEOs approximately 2 3 days prior to the Debtors 10 CHC Global Operations administers payroll in-house for these Employees. 11 ADP subcontracts the payroll service functions to Blue Garden for CHC Employers in Norway. 10

11 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 11 of 53 regularly scheduled payroll. Subsequently, the PEOs make payments to (i) the Employees, (ii) the Taxing Authorities, and (iii) to certain Benefits Providers (as hereinafter defined). 25. By contrast, under the PEO Agreements with the CHC Employers in Australia, Norway, and Kazakhstan, the PEOs simply calculate the payroll and withholding amounts for the CHC Employers. The CHC Employers then provide direct payments to the Employees, Taxing Authorities, and Benefits Providers and remit withholdings as appropriate. 26. Additionally, pursuant to the PEO Agreement with CHC Helicopter S.A., ADP provides services both to certain CHC Employers 12 and to certain Non-Debtor Affiliates. Under this agreement, the CHC Employers pay the entirety of the PEO Fees and book intercompany claims against the Non-Debtor Affiliates for their proportional usage. 27. The Debtors pay approximately $60,000 per month in aggregate PEO Fees, including the portion owed by Non-Debtor Affiliates through intercompany claims. As of the Petition Date, the Debtors owe approximately $100,000 on account of prepetition PEO Fees and seek authority to honor such obligations and to satisfy all postpetition PEO Fees in the ordinary course of business. Employee Benefit Plans 28. The CHC Employers have established certain benefit plans and policies for their Employees, pursuant to which Employees receive Health Benefits, Risk and Disability Insurance, Retirement Plans, Workers Compensation, PTO Benefits, and Other Benefits (each hereinafter defined, and collectively, the Employee Benefits ). The Employee Benefits are administered by several different providers (collectively the Benefits Providers ), depending upon the benefit and the respective CHC Employer. Included among the Benefits Providers is 12 These are Lloyd Helicopters Pty. Ltd., CHC Hoofddorp B.V., and Heli-One (Netherlands) B.V. 11

12 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 12 of 53 CHC Reinsurance, S.A. ( CHC Reinsurance ) a captive reinsurance company and whollyowned Non-Debtor Affiliate that provides Health Benefits (as hereinafter defined) and Risk and Disability Insurance (as hereinafter defined), among other types of insurance. To comply with regulations in various jurisdictions, however, CHC Reinsurance funds the Employee Benefits using third-party pass-through insurers who charge fees for their services (the Service Fees ). 29. Each Benefits Provider charges the CHC Employers either an annual or a monthly premium for the provision of the Employee Benefits. These premiums are either wholly or partially covered by the CHC Employers. Where the CHC Employers fund only a portion of these premiums, covered Employees contribute their pro rata portion of the remainder, which is withheld from these Employees paychecks. As set forth in more detail below, the Debtors estimate that, on average, a total of approximately $1.8 million is due each month, in addition to $3.5 million in annual payments, from the CHC Employers on account of the Employee Benefits premiums. Pursuant to this Motion, the Debtors seek authority, but not direction, to pay certain prepetition amounts in respect of the Employee Benefits and to continue the Employee Benefits programs in the ordinary course of business, and to make payments thereunder, with the exception of the PTO Cash-Out Benefits as described below. A. Medical and Dental Benefits 30. The CHC Employers administer the following medical and dental plans (the Health Benefits ) to eligible Employees: CHC Employer(s) Type of Benefits Benefits Provider Employer Contribution Lloyd Helicopters Pty. Ltd. Travel Medical 13 Chubb 100% 13 Travel Medical covers emergency health services for Employees who are working outside of their home country. 12

13 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 13 of 53 CHC Employer(s) Type of Benefits Benefits Provider Employer Contribution CHC Helicopters (Barbados) SRL Medical Dental MSH International 100% Travel Medical SSQ 100% Heli-One Canada ULC Medical Dental Sun Life Up to 90% CHC Global Operations (2008) ULC CHC Global Operations International ULC Travel Medical Medical Dental SSQ; MSH International Sun Life; MSH International; Eurasia Sun Life; MSH International 100% % 14 CHC Global Operations Canada (2008) ULC Medical Now Health 100% CHC Leasing (Ireland) Limited Travel Medical Medical Dental CHC Reinsurance (though MSH International) 100% Aviva 100% CHC Hoofddorp B.V. Heli-One (Netherlands) B.V. Travel Medical CHC Reinsurance (through MSH International) 100% Heli-One (Norway) AS Medical Storebrand; BUPA; Protector 100% 14 These CHC Employers provide different levels of contributions for Health Benefits Premiums depending upon the type of Employee. The CHC Employers provide 100% contributions of Health Benefits for crew member Employees, and cover up to 90% of contributions to Health Benefits for non-crew member Employees. 13

14 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 14 of 53 CHC Employer(s) Type of Benefits Benefits Provider Employer Contribution Heli-One (UK) Limited Travel Medical Medical Dental CHC Reinsurance (through MSH International) CHC Reinsurance (through BUPA) 100% 100% 31. The CHC Employers pay premiums related to the Health Benefits (the Health Benefits Premiums ) of approximately $200,000 in the aggregate per year. The percentage of contributions made by the CHC Employers toward the Health Benefits Premiums is provided in the table above. Some Health Benefits Premiums are paid on a monthly basis, whereas others are paid annually. Of the Health Benefits paid in monthly installments, the Debtors pay approximately $5,000 per month, most of which are paid in advance. On account of the Health Benefits Premiums paid annually, the Debtors estimate that approximately $140,000 remains outstanding in prepetition obligations. The Debtors seek by this Motion authority to pay any outstanding prepetition Health Benefits Premiums, and to continue making postpetition payments related to the Health Benefits Premiums in the ordinary course of business. 32. Additionally, the CHC Employers maintain certain pay-as-you-go Health Benefits programs, such as medical and dental coverage, whereby the Debtors bear the costs incurred by Employees who are covered by these programs. Although the costs of the payas-you-go programs (the PAYG Costs ) are variable, the Debtors estimate that the average monthly costs incurred through these programs is approximately $350,000 and based on that estimate, approximately $350,000 of PAYG Costs remain outstanding as of the Petition Date. Pursuant to this Motion, the Debtors seek authority to pay all outstanding prepetition PAYG 14

15 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 15 of 53 Costs, and to continue making payments on account of the PAYG Costs in the ordinary course of business. B. Risk and Disability Insurance 33. The CHC Employers also offer Employees life, accidental death, longterm disability, and certain other risk and disability insurance benefits (collectively, Risk and Disability Insurance ). Generally, CHC Employers offer market-based levels of Risk and Disability Insurance to all Employees. The extent of the Risk and Disability Insurance offered to Employees varies by CHC Employer, but each Employee has access to a similar set of benefits. For example, CHC Hoofddorp B.V. provides Employees with life and accidental death insurance, funded through CHC Reinsurance, which uses Generali Worldwide Insurance Company Limited ( Generali ) as a pass-through insurer, pursuant to which Employees beneficiaries are entitled to receive death benefits in an amount up to approximately $100,000. CHC Hoofddorp B.V. also offers Employees disability insurance, which covers up to 70% of salary where an Employee is fully but temporarily disabled. Pilots are also insured for a capped amount in the event of a loss of license. For example, Lloyd Helicopters Pty. Ltd. provides insurance to captains and co-pilots for up to approximately $267,000 per Employee for loss of license depending on the age of the insured when impacted. As of the Petition Date, there are no prepetition obligations owed on account of loss of license insurance. 34. In order to retain the Risk and Disability Insurance, the CHC Employers are required to pay premiums to various Benefits Providers some on an annual basis and others in monthly installments. On average, the Debtors pay approximately $140,000 per month (in addition to a $1.5 million annual payment) on account of Risk and Disability Insurance premiums. As of the Petition Date, the Debtors estimate they owe approximately $498,000 in 15

16 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 16 of 53 prepetition Risk and Disability Insurance premiums. The Debtors seek authority to pay such prepetition obligations and to continue the Risk and Disability Insurance on a postpetition basis and to make payments thereunder. C. Retirement Plans 35. The CHC Employers also provide certain eligible Employees with retirement benefits as described below. These retirement benefits are provided through various Defined Contribution Plans, the U.K. Pension Scheme, and the Norway Pension Scheme (each hereinafter defined, and collectively the Retirement Plans ). 36. Defined Contribution Plans. Certain CHC Employers participate in defined contribution retirement plans (the Defined Contribution Plans ) for the benefit of Employees in Australia, Canada, Ireland, the Netherlands, and the United Kingdom, as described in the table below: CHC Employer(s) Lloyd Helicopters Pty. Ltd. Provider Employer Contribution (percent of Employee salary) Mercer 9.5% Heli-One Canada ULC Manulife 4% CHC Global Operations (2008) ULC CHC Global Operations International ULC CHC Leasing (Ireland) Limited Manulife (Registered Pension Plan) Fidelity (Group Pension Plan) Merrill Lynch (401(k)) 4% Irish Life 6% CHC Hoofddorp B.V. Heli-One (Netherlands) B.V. BeFrank Variable (by age) Heli-One (UK) Limited Scottish Widows 7 10% 16

17 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 17 of The participating CHC Employers make contributions to the Defined Contribution Plans (the DC Employer Contributions ) at the statutorily mandated rates described above. The Debtors estimate that the aggregate cost of DC Employer Contributions is approximately $1.2 million per month, including associated administration fees paid to the providers. As of the Petition Date, the Debtors estimate that the aggregate amount owed prepetition on account of DC Employer Contributions is approximately $410,000. The Debtors seek authority, but not direction, to continue the Defined Contributions Plans and to make all prepetition and postpetition payments thereunder, including associated administration fees. 38. U.K. Pension Scheme. Certain CHC Employers 15 participate in a defined benefits pension scheme for certain Employees in the United Kingdom (the U.K. Pension Scheme ). Although the U.K. Pension Scheme was closed for new accruals beginning in 2009, the CHC Employers remain obligated for previously accrued benefits. The annual deficit funding contribution into the U.K. Pension Scheme is approximately $9.3 million, payment of which is made quarterly. The Debtors estimate that, as of the Petition Date, the technical provisions funding deficit for the U.K. Pension Scheme is approximately $65.2 million. The Debtors seek authority, but not direction, to continue the U.K. Pension Scheme and to make prepetition and postpetition contributions thereto. 39. Norway Pension Scheme. Heli-One (Norway) AS is also party to a defined benefits pension scheme for certain Employees in Norway (the Norway Pension Scheme ). In addition to providing participating retirees with retirement payments, the Norway Pension Scheme also provides such retired Employees with certain other benefits, such as 15 Debtors Heli-One (UK) Limited and Heli-One (Norway) AS are obligors under the U.K. Pension Scheme, and Debtors Holding SARL, Capital Aviation Services B.V., CHC Helicopter Holding S.à r.l., CHC Leasing (Ireland) Limited, CHC Netherlands B.V., and Heliworld Leasing Limited are guarantors under the U.K. Pension Scheme. 17

18 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 18 of 53 spousal death benefits and long-term disability insurance. Contributions to the Norway Pension Scheme are actuarially calculated at the beginning of each fiscal year, and payments are made on a monthly basis. The estimated annual contribution into the Norway Pension Scheme for 2017 is approximately $2.8 million. As of the Petition Date, the Norway Pension Scheme is fully funded with no outstanding prepetition obligations. The Debtors seek authority, but not direction, to continue the Norway Pension Scheme and to make all prepetition and postpetition payments thereunder. D. Workers Compensation Programs 40. The CHC Employers also provide Employees with workers compensation and employer s liability coverage ( Workers Compensation Programs ). In Australia, Ireland, and the United Kingdom, Workers Compensation Programs are administered through various third-party insurers. In Canada, Workers Compensation Programs are administered through the government. The Netherlands provides for equivalent Workers Compensation Programs benefits through other government programs such as social security, the costs of which are included in the Payroll Taxes and Deductions described above. Employees in Norway are provided with equivalent Workers Compensation Programs benefits through Risk and Disability Insurance, the costs of which are similarly captured by the $1.5 million annual payment described above. In each case, the CHC Employers are responsible for the full amount of the contributions to the Workers Compensation Programs for the benefit of Employees. For Employees in Canada, the CHC Employers pay the provincial governments for Workers Compensation Programs monthly through payroll. In all other jurisdictions, the CHC Employers pay the premiums in discrete annual payments to the respective private insurers. 18

19 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 19 of On average, the Debtors pay approximately $18,000 per month and $2.2 million annually in the aggregate for the Workers Compensation Programs. As of the Petition Date, the Debtors estimate that there is approximately $60,000 in accrued prepetition obligations related to Workers Compensation Programs. The Debtors seek authority, but not direction, to pay any and all prepetition obligations related to Workers Compensation Programs, and to continue the Workers Compensation Programs and make postpetition payments thereunder in the ordinary course of business. E. Paid Time Off 42. The CHC Employers all maintain paid time off policies for Employees (the PTO Benefits ), which policies vary across CHC Employers. Typically, the PTO Benefits are comprised of vacation, holidays, parental leave, bereavement, other personal leave, long service leave, and field leave and, in most cases, with respect to accrued and unused days, the Employees are entitled either (i) to elect a cash payment for some portion of these days (the PTO Cash-Out Benefits ), or (ii) to roll them into the next calendar year. 43. The Debtors estimate that, as of the Petition Date, there is approximately $26 million of accrued obligations related to the PTO Cash-Out Benefits. The Debtors seek authority to continue to offer the PTO Benefits on a postpetition basis; however, with respect to any outstanding prepetition PTO Cash-Out Benefits, the Debtors are not seeking any interim relief. The Debtors will seek relief to honor the prepetition PTO Cash-Out Benefits at the Final Hearing after all parties in interest have received adequate notice of this Motion. F. Other Benefits 44. The CHC Employers also provide a range of other benefits to eligible Employees (collectively, the Other Benefits ). These Other Benefits include reimbursement 19

20 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 20 of 53 for domestic relocation costs, tuition reimbursement for Employees in job-related courses of study, among others. 45. In the aggregate, the CHC Employers pay approximately $10,000 per month on account of all Other Benefits. In the aggregate, the Debtors estimate that there is approximately $5,000 in prepetition obligations related to Other Benefits outstanding. The Debtors seek authority, but not direction, to satisfy all such prepetition obligations and to continue offering the Other Benefits to Employees and making postpetition payments thereunder in the ordinary course of business. Independent Contractor Obligations 46. In addition to Employees, the Debtors utilize various contractors (the Independent Contractors ) to perform a range of functions (including, for example, shortterm projects or flexible hour tasks), each of which is necessary for the operation of the Debtors businesses. Among other positions, the Debtors hire Independent Contractors to serve as co-pilots, technical consultants, finance analysts, and administrative support staff. As of the Petition Date, five (5) of the Debtors 16 have contracted with approximately 16 Independent Contractors, the majority of whom are based in Canada. As with Employees, the CHC Employers pay the Independent Contactors on a salary or wage basis (the Independent Contractor Obligations ). Certain of the Independent Contractors are contracted directly with the relevant CHC Employer and are paid through the same PEO as that employer s Employees. In other instances, the Debtors make payments to third-party placement agencies, which in turn remit wages to the Independent Contractors. 16 These Debtors are CHC Hoofddorp B.V., CHC Global Operations (2008) ULC, Lloyd Helicopters Pty. Ltd., Heli- One Canada ULC, and Heli-One (Norway) AS. 20

21 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 21 of On average, the Debtors pay approximately $122,000 per month with respect to the Independent Contractor Obligations, and estimate that, as of the Petition Date, there are no accrued and outstanding prepetition Independent Contractor Obligations. The Debtors are not seeking any interim relief with respect to the Independent Contractor Obligations. The Debtors will seek authority, but not direction, to make all payments to those Independent Contractors or the applicable third-party placement agencies on account of Independent Contractor Obligations on a postpetition basis at the Final Hearing after all parties in interest have received adequate notice of this Motion. Basis for Relief Requested A. Payment of Employee Obligations is Essential to the Debtors Successful Reorganization 48. Ample authority exists under the Bankruptcy Code to permit the Debtors to pay prepetition and postpetition obligations, as set forth above. Pursuant to section 507(a)(4)(A) of the Bankruptcy Code, claims of Employees for wages, salaries, or commissions, including vacation, severance, and sick leave pay earned within 180 days of the petition date are granted priority unsecured status up to $12,850 per employee. 11 U.S.C. 507(a)(4)(A). Additionally, section 507(a)(5) of the Bankruptcy Code provides that claims for contributions to employee benefit plans are also afforded priority unsecured status up to $12,850 per employee covered by applicable benefits plans, less any amount paid pursuant to section 507(a)(4). 11 U.S.C. 507(a)(5)(A). 49. Many of the prepetition Employee Obligations constitute priority claims under sections 507(a)(4) or (5) of the Bankruptcy Code. As priority claims, the Employee Obligations are entitled to payment in full before any general unsecured claims asserted against the Debtors can be satisfied. Thus, the relief requested largely affects only the timing of the 21

22 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 22 of 53 payment of the priority Employee Obligations and should not prejudice the rights of general unsecured creditors or other parties in interest. 50. The Court may grant the relief requested herein pursuant to section 363(b) of the Bankruptcy Code. Section 363(b) provides, in pertinent part, that [t]he [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). Courts have long recognized that, where a sound business justification can be articulated, payment of prepetition claims under section 363(b) of the Bankruptcy Code is permitted. See In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989) (holding that section 363(b) gives the court broad flexibility to authorize a debtor to expend funds on account of prepetition claims if there is some business justification to justify payment); see also In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. Del. 1999) (use of assets outside the ordinary course of business permitted if sound business purpose justifies such actions ); Comm. of Asbestos-Related Litigants v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 616 (Bankr. S.D.N.Y. 1986) ( Where the debtor articulates a reasonable basis for its business decisions (as distinct from a decision made arbitrarily or capriciously), courts will generally not entertain objections to the debtor s conduct). 51. The Court also may grant the requested relief pursuant to its equitable powers under section 105(a) of the Bankruptcy Code, which provides that [t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. 11 U.S.C. 105(a). Courts generally recognize that payments to prepetition creditors are appropriate pursuant to section 105(a) of the Bankruptcy Code under the doctrine of necessity or the necessity of payment rule, where such payments are necessary to the continued operation of the debtor s business. See, e.g., In re CoServ, L.L.C., 273 B.R. 487, 487 (Bankr. 22

23 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 23 of 53 N.D. Tex. 2002) ( [I]t is only logical that the bankruptcy court be able to use 105(a) of the Bankruptcy Code to authorize satisfaction of the prepetition claim in aid of preservation or enhancement of the estate. ); see also In re Matter of Lehigh & New England Ry. Co., 657 F.2d 570, 581 (3d Cir. 1981) (holding that a court may authorize payment of prepetition claims if such payment is essential to the continued operation of the debtor); In re Friedman s, Inc., 2011 WL , at *3 (Bankr. D. Del. Nov. 30, 2011) ( [M]ost courts will allow payments [for prepetition claims] under the doctrine of necessity, if the debtor establishes that in its business judgment making such payments is critical to the survival of the debtor s business ); In re Just for Feet, Inc., 242 B.R. 821, (D. Del. 1999) (holding that section 105(a) provides a statutory basis for the payment of pre-petition claims under the doctrine of necessity and noting that the Supreme Court accepts the authority of the bankruptcy court to authorize payment of pre-petition claims when such payment is necessary for the debtor s survival during chapter 11. ). Indeed, a bankruptcy court s use of its equitable powers under the doctrine of necessity to authorize the payment of prepetition debt when such payment is needed to facilitate the rehabilitation of the debtor is not a novel concept. In re Ionosphere Clubs, Inc., 98 B.R. at 175. The United States Supreme Court first articulated the equitable common law principle commonly referred to as the doctrine of necessity over 130 years ago in Miltenberger v. Logansport, C. & S.W.R. Co., 106 U.S. 286 (1882). Courts today continue to recognize that the rationale for the doctrine of necessity is consistent with the paramount goal of chapter 11: facilitating the continued operation and rehabilitation of the debtor. In re Ionosphere Clubs, Inc., 98 B.R. at In addition, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, debtors in possession are fiduciaries holding the bankruptcy estate and operating the 23

24 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 24 of 53 business for the benefit of creditors.... In re CoServ, 273 B.R. at 497. Implicit in the duties of a chapter 11 debtor in possession is the duty to protect and preserve the estate, including an operating business s going-concern value. Id. Courts have noted that there are instances in which a debtor in possession can fulfill its fiduciary duty only... by the preplan satisfaction of a prepetition claim. Id.; see also In re Mirant Corp., 296 B.R. 427, (Bankr. N.D. Tex. 2003) (allowing debtors to pay claims reasonably believe[d] to be authorized under the CoServ test or whose payment was necessary in the exercise of their business judgment... in order for [the d]ebtors to continue their respective businesses ). This Court in CoServ noted that preplan satisfaction of prepetition claims would be a valid exercise of a debtor s fiduciary duty when the payment is the only means to effect a substantial enhancement of the estate. In re CoServ, 273 B.R. at 497. The court provided a three-pronged test for determining whether a preplan payment on account of a prepetition claim was a valid exercise of a debtor s fiduciary duty: First, it must be critical that the debtor deal with the claimant. Second, unless it deals with the claimant, the debtor risks the probability of harm, or, alternatively, loss of economic advantage to the estate or the debtor s going concern value, which is disproportionate to the amount of the claimant s prepetition claim. Third, there is no practical or legal alternative by which the debtor can deal with the claimant other than by payment of the claim. Id. at 498. Permitting the Debtors to pay prepetition and postpetition obligations in this instance meets each element of the CoServ test. 53. Accordingly, pursuant to section 105(a), 363(b), 1107(a), and 1108 of the Bankruptcy Code, this Court is empowered to grant the relief requested herein and such relief is necessary, in the Debtors discretion and business judgment, in order to prevent damage to the Debtors businesses. 54. Specifically, providing the Debtors Employees with assurances that they will continue to receive their wages, salaries, and benefits is essential to the continued operation 24

25 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 25 of 53 of the Debtors. Paying the Compensation Obligations will ensure that such employees are able to focus on their immediate tasks during this critical period as the Debtors enter chapter 11 administration. 55. Furthermore, it is necessary that the Debtors continue to contribute to their Employees Retirement Plans. As with the Compensation Obligations, the Retirement Plans emblemize the Debtors appreciation for the work of their Employees, and a disruption to those payments could adversely impact employee morale. Moreover, in the United Kingdom and Norway, the Debtors are required by law to continue making contributions to the respective pension schemes in those countries. The Debtors failure to continue making these payments in the ordinary course of business may result in foreign litigation, which would distract the Debtors from their reorganization efforts. Satisfying prepetition and postpetition obligations related to the Retirement Plans would sustain employee morale, and would ultimately allow the Debtors to focus on effecting a more cost-efficient reorganization. 56. Any delay or failure to pay the Compensation Obligations has the potential to irreparably impair the Employees morale, dedication, confidence, and cooperation, and would adversely impact the Debtors relationship with their Employees at a time when the Employees support is critical to the Debtors success in chapter 11. The Debtors cannot afford to risk sort of disruption to their businesses that would inevitably result from a decline in their Employees morale, or worse, an exodus of Employees seeking other opportunities that may provide greater assurances of regular payment of wages and administration of benefits. Due to the specialized nature of the Debtors businesses and their highly-skilled workforce, Employees of an equivalent level of skill and knowledge would be difficult and costly for the Debtors to find and to integrate into their operations in an efficient manner. As noted, much of the Debtors 25

26 Case sgj11 Doc 6 Filed 05/05/16 Entered 05/05/16 09:54:33 Page 26 of 53 workforce consists of pilots, crew members, engineers, technicians, and ground staff who have specialized skill sets, experience levels, and licenses that are not easily replaced. These Employees have particularized knowledge and experience in commercial helicopter service and repair operations, which is the heart of the Debtors businesses. Likewise, the Debtors sales force has established key relationships with customers that are integral to maintaining these contracts. Moreover, the Debtors executives have accumulated a great deal of industry experience and forged industry connections that would be difficult, if not impossible, to replace. 57. Furthermore, the payment of Payroll Taxes similarly will not prejudice other creditors of the Debtors estates as the relevant Taxing Authorities will generally hold priority claims under section 507(a)(8) of the Bankruptcy Code with respect to the Payroll Taxes. Moreover, the portion of the Payroll Taxes withheld from an Employee s wages on behalf of the applicable Taxing Authority are held in trust by the Debtors, and thus, are not property of the Debtors estate under section 541 of the Bankruptcy Code. See, e.g., Begier v. IRS, 496 U.S. 53, (1990) (holding that withholding taxes are property held by a debtor in trust for another and, as such, are not property of the debtors estates). Additionally, failure to remit Payroll Taxes to a Taxing Authority may give rise to personal liability for the Debtors officers and directors. 26 U.S.C. 6672; see In re DuCharmes & Co., 852 F.2d 194, 196 (6th Cir. 1988) (failure to pay trust fund taxes may give rise to personal liability for a company s officers). As such, payment of Payroll Taxes is reasonable and in the best interest of the Debtors estates and all parties in interest. 58. Additionally, the Debtors believe it is necessary to continue payment of the PEO Fees to the various PEOs in order to maintain the smooth administration of programs related to the Employee Obligations. Without the continued services of the PEOs, the Debtors 26