July 18 (Bloomberg) -- CIT Group Inc. Chief Executive Officer Jeffrey Peek, under whose leadership the lender’s stock has plunged 98 percent, may be in line ahead of the U.S. government to be paid if CIT files for bankruptcy protection.

Peek is owed $14.7 million if he’s terminated or there’s a change of control at CIT. A compensation claim would put him ahead of shareholders -- including the U.S. Treasury -- in the event of liquidation, Scott Peltz, managing director of the corporate restructuring group at RSM McGladrey, said in an interview.

“He’s an employee, and employees in bankruptcy have a priority,” Peltz said. Peek’s compensation claim “would be before the preferred and common and probably with some of the bondholders.”

Peek’s employment contract is among agreements that would end up in court in the event CIT files for protection, and the amount of a payout would depend on a judge. The 101-year-old commercial lender, which has failed to convince the government to provide it with another federal bailout, is short of cash and may need $6 billion, according to CreditSights Inc.

The lender hasn’t been given access to the Federal Deposit Insurance Corp.’s debt-guarantee program. CIT received $2.33 billion in funds from the U.S. Treasury in December in exchange for preferred shares.

“If he has a claim for $14.7 million, he would either have an unsecured claim or the company could reject his contract” in the event of a filing, Peltz said yesterday in an interview.

Compensation Agreement

Peek’s compensation agreement includes $8.8 million in severance, $1.4 million in unvested equity options, $4.4 million in pension and $119,000 in health benefits, according to an April regulatory filing.

“If you have contracts, the judge has to decide whether the obligations can be met, but keep in mind you’ve got agreements with bondholders and all kinds of agreements out there that have to be decided upon,” said David Schmidt, a senior consultant at executive pay firm James F. Reda & Associates. “The only place you don’t have agreements is with shareholders.”

Peek, 62, joined CIT in 2003. On his watch, the shares soared to a record $61.59 in February 2007, before plunging as CIT reported $3 billion of losses in the last eight quarters. The shares traded at 70 cents yesterday on the New York Stock Exchange.

CIT’s advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender in case of a filing, according to people with knowledge of the matter. The company is also trying to arrange for rescue financing, the people said.

‘Contract Can Be Voided’

CIT finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc. It is “continuing to evaluate alternatives,” according to a statement July 16. Curt Ritter, a CIT spokesman, didn’t immediately return a call for comment.

“Technically any contract can be voided by the court” in a bankruptcy, said Graef Crystal, a former compensation consultant and the author of “The Crystal Report on Executive Compensation.” Peek will get “probably nowhere near $14 million, unless he arranges to get fired right this minute.”

If Peek were to be fired before New York-based CIT filed for protection and he received his agreed-upon compensation, then the creditors in Chapter 11 may demand it be given back.

“Whether he’s fired or they simply deny him that payment, he sits at a pretty low level with a significant risk as to collection,” Peltz said. “If the bonds are selling at 50 cents, the recovery would be questionable.”

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: July 18, 2009 00:00 EDT