A bankruptcy can be hazardous to the health of an executive’s bonus check. Sometimes, however, an executive can survive an attack on a bonus in a bankruptcy, and come out clean on the other side. For example, we covered here how one executive succeeded in keeping most of his incentive payments based on the timing of those payments.
Now, we have another lesson in how executives can keep their bonus checks despite a bankruptcy, from Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware. The company at issue in the case was Energy Future Holdings, Corp. (EFH), a holding company with a portfolio of Texas electricity retailers. EFH filed for Chapter 11 bankruptcy in April of this year.
Firing a key executive can have repercussions beyond a severance dispute or a wrongful termination or discrimination claim by the executive. American Apparel’s recent termination of its CEO, Dov Charney, provides the latest example of the wide-ranging consequences that can arise when a C-level employee is let go. In American Apparel’s case, the consequences have included the threat of default on a $15 million loan and a resulting shareholder lawsuit.
How did this happen? According to the New York Post, when Lion Capital LLC lent American Apparel the $15 million, the two entered into a lending agreement that said American Apparel would be in default if it fired Charney. After American Apparel’s board told Charney it was going to fire him in 30 days, Lion Capital accelerated its demand for payment on the loan, threatening the company with bankruptcy. American Apparel argued in an SEC filing that it wasn’t in default because Charney was still technically CEO. However, it continued to work behind the scenes to remedy the situation. Now, the company now appears to have struck a deal with a hedge fund to save it from Chapter 11.
An executive’s right to severance payments isn’t always written in stone, even if his employer agrees to provide them. In this post, we described how one exec lost his severance pay after the Federal Reserve decided that his employer, a bank, was in a “troubled condition” at the time.
A recent decision from the U.S. Bankruptcy Appellate Panel of the Tenth Circuit, In re Adam Aircraft Industries, Inc., illustrates another scenario in which an executive’s golden parachute can collapse around him. Joseph Walker was the president of Adam Aircraft, an airplane designer and manufacturer. He was terminated in February 2007, and was allowed to resign, after which he negotiated a healthy severance package. Over the next year, Adam Aircraft paid him $250,000 in severance, $100,002 to repurchase his stock, and $105,704 as a refund on a deposit he had made on a plane.
It’s been a busy week here at the Suits-by-Suits Global Executive Employment Dispute Centre in Washington, D.C., what with interesting Supreme Court arguments being heard, the famous Cherry Blossoms about to blossom, our beloved Nationals putting final touches on their pitching rotation, and even some more snow from the winter without end.
But none of that matters next to what’s really important about this week: which is that Monday marked thirty years (!) since the fabled “Breakfast Club” met for detention on a dreary Saturday, March 24, 1984, (at Shermer High School, Shermer, Illinois…). In celebration of the great teen-angst classic, we’re using quotes from the film to introduce this week's collection of interesting news notes from the world of executive-level employment disputes. So here they are, framed by the work of the movie’s writer and director, the late, great John Hughes:
Here at the Suits by Suits Worldwide Operations Center, weather continues to have us flummoxed, vexed, and annoyed: even though a famous Pennsylvania rodent discerned that we would have six more weeks of our brutal winter, we’ve had a pleasant warm spell that is about to come to a crushing end due to a storm front that goes by the curious name of "Texas Hooker" (we did not make that up). And we’re about to be plunged back into the depths of the polar vortex yet again – although our earlier bouts with the grim chill may have wiped out our area’s growing population of stink bugs.
In any event, we always take shelter from the storms, the cold, and the heat by digging into our Inbox of interesting developments in executive employment disputes and the issues that surround them, including:
Neither snow nor rain nor heat nor gloom of night – and certainly not a batch of freezing rain and ice that’s currently paralyzing the greater Baltimore-Washington area right now – stays your trusty editors from the swift completion of their appointed rounds; namely, bringing you the weekly roundup of Suits by Suits:
We write frequently about severance pay for executives – a subject near and dear to the hearts, and wallets, of executives and the companies that hire and fire them. Today, we’re going to take this a step further – beyond the severance agreement itself – and look at an interesting case that raises the question of whether a company’s severance payments to an executive are covered losses under that company’s fiduciary liability insurance if the company becomes unable to make those payments.
It’s a neat case from a lot of perspectives, even if there aren’t too many clear answers. It’s an interesting issue for companies that enter into severance agreements and then can’t follow through with the money due to a bankruptcy. Today’s case is especially relevant for us at Suits by Suits because the policyholder is a law firm that – gasp! – went into liquidation, and the executive claiming the severance benefits is a former partner at the firm. Personally, I like it because the focus of my work is insurance coverage disputes like this – figuring out what’s covered (or not) under insurance policies.
This week, we celebrate the Declaration of Independence – the document that set out the principles on which the United States claimed its independence from Great Britain. Since then, while we’ve crafted a “special relationship” with our former colonial master, we’ve gone our own way in some particulars – such as getting rid of extra vowels in some of our words and changing some spellings, and driving on the right.
One way in which our two nations are similar, however, is that severance pay that is perceived as excessive can stir public controversy.
American Airlines’ CEO, Tom Horton, moved one step closer to receiving the $20 million severance payment he’s negotiated with the bankrupt airline. On Tuesday, the bankruptcy judge hearing American’s case allowed the payment to stay in the airline’s disclosure statement (approval of the statement is a predicate step to ultimately “reorganizing” and exiting bankruptcy). The approval comes over strenuous objections by the U. S. Trustee, who argued that Horton’s payment violated bankruptcy law. The judge’s decision isn’t final, and the issue can be revisited down the road, but the fact that it stayed in the disclosure statement (and will be presented to the airlines’ creditors for approval) is one more hurdle cleared for Horton.
We’ve written about this payment here, here, and here. And, no, we don’t write about it so much because we’re jealous of the substantial payment Horton may receive; it’s what this case says about severance and golden parachutes generally. Although the lifetime of free travel he and his wife would also receive under his severance agreement is, frankly, kind of cool.
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.
John J. Connolly
Partner
Email | +1 410.949.1149
Andrew N. Goldfarb
Partner
Email | +1 202.778.1822
Sara Alpert Lawson
Partner
Email | +1 410.949.1181
Nicholas M. DiCarlo
Associate
Email | +1 202.778.1835