On July 28, 2026, Judge Kyu Young Paek overruled the United States Trustee’s objection to Sleep Number’s Non-Insider Retention Plan and authorized $1.825 million in retention awards to 38 employees. The court overruled the objection on the record following oral argument and issued the written memorandum the same day. The decision is designated for publication.

The ruling came three days before the scheduled closing of a going-concern sale that produced a winning bid of $701,800,000. The prepetition secured lenders are owed approximately $672.5 million. The 38 employees promised awards for staying through that sale process are the ones the United States Trustee argued should not receive them.

Two things remain open. The sale was scheduled to close on or around July 31, 2026, subject to ongoing negotiations with landlords, vendors, and other contract counterparties. And the sale order carved out a separate dispute between the United States Trustee and the debtors over whether the buyer’s satisfaction of severance obligations owed to officers and directors is proper. That matter was set for hearing on August 3, 2026.

Sleep Number Corporation is a retail mattress company that assembles and sells adjustable smart beds directly to customers. It employs just under 3,000 people. The debtors filed Chapter 11 petitions in the Southern District of New York on June 12, 2026, and the cases are jointly administered before Judge Paek. Davis Polk & Wardwell LLP serves as debtors’ counsel.

The corporate hierarchy is central to the dispute. Authority runs through four levels, and the decision maps them precisely.

Every member of the Executive Leadership Team other than the CEO carried a second title of executive vice president or senior vice president. That is the structural fact that gives the case its shape. At Sleep Number, the vice president label sits at the very top of the company and also several rungs below it, which means the word by itself carries no information about where a given employee falls.

This is a sale case, and it was a sale case before it was a bankruptcy case. The memorandum decision does not catalog the operational causes of the filing. What it establishes instead is the posture: the debtors had been running a months-long marketing process to sell the company as a going concern, and they filed Chapter 11 to effectuate that sale.

The prepetition secured lenders, owed approximately $672.5 million, supported the process and agreed to fund up to $65 million in additional financing in bankruptcy. That backing set the schedule. Bidding procedures and a stalking horse asset purchase agreement with SNBR Inc. were approved on July 2, 2026, less than three weeks after the petition date. The stalking horse bid guaranteed the estates a floor of $415 million.

The auction on July 13 ran multiple rounds. SNBR emerged as the winning bidder at $701,800,000, exceeding the guaranteed floor by $286.8 million.

The decision does not describe the composition of the winning bid or how proceeds will be allocated. The figures below are benchmarks within the sale process, not a statement of creditor recoveries.

The Official Committee of Unsecured Creditors was appointed June 23, 2026. In its joinder supporting the retention plan, the Committee stated that completion of the sale to SNBR would be a resounding success to all constituents in the cases, including general unsecured creditors. The Committee’s position matters to the retention analysis because the fiduciary for the creditors whose recovery the awards would reduce supported the awards.

Senior leadership formulated the plan in May 2026, before the petition date, with the assistance of compensation advisors and attorneys. Award letters went out on or around May 26, 2026, roughly two and a half weeks before the filing. The awards vest on continued active employment through December 31, 2026, and accelerate on a change in control, which meant the participants stood to be paid on completion of the sale rather than at year end.

The 38 participants break into three groups by title, and the composition is what the United States Trustee attacked.

Nine participants have vice president in their titles. None of the nine is an officer for purposes of Section 16 of the Securities Exchange Act of 1934, and all Sleep Number vice presidents report to senior or executive vice presidents. Thirteen have director or senior director in their titles. None sits on the board, and all thirteen are junior in seniority to the nine vice presidents. The remaining sixteen provide various management and support functions. None of the 38 sits on the board, the Executive Leadership Team, or the Management Committee. None was appointed by the board. None is involved in setting corporate policy.

Authorization for the retention payments was included in the debtors’ first-day employee motion, which sought the ordinary relief of paying prepetition wages and maintaining benefits programs. The United States Trustee objected on July 14, 2026, and made two arguments in the alternative.

The procedural sequence is worth noting on its own. The debtors filed a reply brief and a supporting declaration on July 19. The court took live testimony on July 20 and allowed full cross-examination. Both parties filed supplemental submissions on July 27. Oral argument followed on July 28. A dispute over $1.825 million in a case with a $701.8 million sale received an evidentiary hearing, supplemental briefing, oral argument, and a published opinion.

Everything turns on this threshold. If the participants are insiders, the retention payments run into 11 U.S.C. § 503(c)(1), which conditions payment on a bona fide competing job offer at equal or greater compensation, a finding that the services are essential to the survival of the business, and a hard cap tied to a multiple of what nonmanagement employees received. A debtor’s ability to pay a retention bonus to an insider is severely restricted, as the court put it, quoting Global Home Products.

Section 101(31)(B) defines insider for a corporate debtor to include directors, officers, and persons in control. Neither director nor officer is defined in the Bankruptcy Code, and the case law fills the gap. A director is understood as an individual who sits on the board. An officer is a person elected or appointed by the board to manage daily operations. Title alone is insufficient to establish either.

The court reached the same answer under both tests. Under the objective criterion from LSC Communications, the participants are not insiders because the board did not appoint them. Under the functional approach, they are not insiders because they lack the authority to dictate corporate policy. The decision rests on both grounds rather than either alone.

The United States Trustee’s most interesting theory was that at least some participants are insiders because they report directly to insiders and perform work for them. The CFO testified that some participants provide direct support to Sleep Number officers, so the factual premise was conceded.

The court rejected the inference. Directors and officers do not work in isolation when making important decisions for a corporation, and it should come as no surprise that officers receive contribution from corporate subordinates.

The distinction the court drew is between authority and proximity to authority. Section 101(31)(B) reaches directors, officers, and persons in control. Supporting an insider does not place an employee in any of those three categories.

Clearing the insider hurdle does not end the inquiry. Section 503(c)(3) bars transfers outside the ordinary course of business that are not justified by the facts and circumstances of the case. Courts in the Southern District of New York treat that test as no different than the business judgment standard under section 363(b), following Endo International, Velo Holdings, and Borders Group. The operative framework is the six-factor test from Dana Corp. The court found the plan satisfies that test. Its written analysis addresses the first four factors expressly and treats the remaining two through the same record evidence regarding how the plan was formulated.

Factor one had direct evidentiary support. During testimony on July 20, the CFO disclosed that one of the participants had resigned that same day.

The United States Trustee’s last argument was practical rather than doctrinal. The sale would close within days. Most participants would likely be offered jobs with the buyer. Retention money paid at that point buys nothing, because there is nothing left to retain them for.

The court measured the plan against the moment it was adopted, not the moment the objection was heard. Success was far from certain in May 2026 when senior management formulated the plan. The purpose was to stabilize operations, prevent value erosion, and ease the transition to a purchaser, and all three objectives were live risks at the time the award letters went out. The court declined to treat the outcome of the sale process as evidence that the incentive had been unnecessary.

The court closed with an equitable point. Having received the benefit of the participants’ contribution to what the court called a remarkably successful sale process, it would be wholly inequitable to renege on the incentive offered to them for providing it.

Forty-six days separate the petition date from the memorandum decision. The retention dispute was fully briefed, tried, argued, and decided while the sale process ran to completion.

The doctrinal holdings here are not new. Titles do not create insider status, and the business judgment standard governs section 503(c)(3). What the decision supplies is a clean, published application of both propositions to a sale case, with a record detailed enough to serve as a template.

Build the record on structure, not adjectives

The declaration did not assert that the participants were unimportant. It asserted the opposite, that they were critical to the business, and then separately established that none was appointed by the board, none sat on any of the three governance bodies, none set corporate policy, and none was a Section 16 officer. Criticality supports the section 503(c)(3) case. Absence of appointment and authority defeats the insider case. Those are different showings and the declaration made both.

Explain your title conventions before someone else does

The reason the vice president and director titles did not sink the plan is that the record explained what those words mean at this company: that all vice presidents report to senior or executive vice presidents, that the directors are junior to the vice presidents, and that every executive who is genuinely senior carries an executive vice president or senior vice president title. The court relied on that testimony in concluding that the titles signified increased responsibility or supervisory role rather than insider status.

LSC Communications cuts both ways, and you should say so

The district court’s objective criterion is usually invoked against debtors, because board appointment ends the analysis for anyone who has it. Sleep Number ran it in the other direction. If board appointment is dispositive of insider status, the absence of board appointment resolves the question the other way under the same framework, and the functional analysis only comes into play as a second line of defense. Resolving the question under both frameworks, as the court did here, produces a result that does not depend on which line of authority controls.

Get an economic stakeholder to say it

The committee’s joinder did real work in the section 503(c)(3) analysis. The court noted that no party who could possibly be pecuniarily affected by the loss of $1.825 million from the estates had objected, and that the fiduciary for unsecured creditors had affirmatively supported the plan and opined that the payments were within the range expected under similar programs. The court treated the absence of objection from any pecuniarily affected party, together with the Committee’s affirmative support, as material to the cost analysis.

Adopt the plan early and be able to prove when

The timing argument failed because the plan was formulated in May, before the petition and before the outcome was knowable. The prepetition award letters allowed the court to measure business judgment against the uncertainty that existed when the plan was adopted rather than against the result it produced.

The retention question is resolved at the bankruptcy court level. The awards are payable on completion of the sale, and the sale was scheduled to close on or around July 31, 2026. The court noted that the actual payout will be less than $1.825 million because of the July 20 resignation.

The related fight is not resolved. The sale order carved out a dispute between the United States Trustee and the debtors over whether the buyer’s satisfaction of severance obligations owed to officers and directors is proper. That hearing was set for August 3, 2026. The decision addressed in this report concerns payments to employees the court found are not insiders. The carved-out dispute concerns severance obligations owed to officers and directors, and the memorandum decision does not reach it.