When an employee brings a lawsuit involving a plan adopted by their employer, one question is whether ERISA—the Employee Retirement Income Security Act of 1974—applies.
ERISA is a federal law that requires a number of disclosures and safeguards for employee benefit plans. ERISA governs both employee welfare benefit plans (such as insurance or sickness plans) and pension benefit plans (such as retirement plans).
But it doesn’t apply to every plan adopted by an employer, as the recent decision in Hall v. Lsref4 Lighthouse Corporate Acquisitions, LLC, 6:16-CV-06461 EAW (W.D.N.Y. Nov. 10, 2016), shows.
When an executive has an employment agreement and his company doesn’t pay, the company might offer a number of excuses based on contract law. One of these contractual defenses is called “impossibility of performance.” Under this defense, when a party enters into a contract and circumstances later change such that the party can’t perform it, the party can be excused from performing.
The Virginia Supreme Court’s recent decision in Hampton Roads Bankshares, Inc. v. Harvard provides a timely example of how this defense actually works in practice. In the Hampton Roads case, the organization established a relationship with government regulators that affected its ability to pay severance. The court held that this change made it impossible for the company to perform an employment agreement, excusing performance.
Love is in the air as couples celebrate Valentine’s Day with chocolates, flowers and romantic dinners. But there’s no love lost between some employers and their executives, as this week’s Inbox shows:
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.
Here's a tip that applies when you're negotiating any contract, although in this case we learn it from a negotiation over a severance contract: it's a rather bad idea to make a material change - like, perhaps, increasing the severance payment from 14 weeks of pay to 104 weeks - and then have the other side sign it, without telling them you inserted that change in their draft.
That tip comes from the Sixth Circuit's decision last week in St. Louis Produce Market v. Hughes. Two other helpful tips come from this case. One, for executives seeking to claim under a severance agreement, is to return any of the company's property if it's a condition precedent to obtaining your severance benefit. The other, for those people and their lawyers, is to not willfully disobey the court's discovery orders if you're litigating over the severance agreement.
Corporate mergers aren’t just about the bottom line. They also have a human side, impacting employees who are laid off as a cost-cutting measure and employees whose responsibilities change as a result of the transition.
Contracts between executives and employers can play a role in this transition. Many employment contracts and benefit plans feature change-in-control provisions. These provisions can allow executives to obtain benefits if they are terminated after a change in corporate control, or even if they resign for “good reason” after their responsibilities are meaningfully altered.
In 2006, John D. Clayton, the Director of Worldwide Acquisitions and Divestitures for Burlington Resources, Inc., had one of these arrangements when Burlington merged with ConocoPhillips. Burlington’s severance plan provided a right to benefits if an employee quit for “good reason” within two years of a change in control. If there was a “substantial reduction” in the employee’s responsibilities, that would be a “good reason” for resigning, entitling the employee to benefits upon resignation.
Just before the March 2006 merger, Conoco offered Clayton a position as its Manager of A&D, and he signed a waiver of benefits under the plan. But then, shortly after the merger, it reassigned him to the position of Manager of Business Development. As Manager of A&D, he would have worked with properties that were already yielding petroleum, while as Manager of Business Development, he would only work with exploratory or developmental properties.
Clayton was disgruntled with the change, and filed a claim for severance benefits – without resigning – in August 2006. The trustee of the severance plan denied the claim because Clayton hadn’t actually quit. Clayton worked for Conoco for two more years, but then resigned in March 2008 (within two years of the change in control) and claimed severance benefits. The trustee denied his claim, determining that he had not suffered a “substantial reduction” in his responsibilities and therefore had not resigned for “good reason.”
Clayton then filed a claim in state court. Conoco, however, removed the dispute to federal court, on the ground that the severance plan required an “ongoing administrative program” and therefore fell within federal jurisdiction under ERISA (the Employee Retirement Income Security Act). And in federal court, Clayton’s claim met its end.
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.
You might think that a company in bankruptcy wouldn’t be able to give its CEO a multi-million-dollar severance payment.
But just because a company is in bankruptcy doesn’t necessarily mean it doesn’t have any money – it just means it doesn’t have enough to pay all of its debts, or to function as a continuing concern. The company may, in fact, have the means to make a rather generous severance payment – like the $20 million American Airlines is proposing to pay its CEO, Tom Horton, as the airline comes out of Chapter 11 and into a merger with US Airways.
This proposed payment, though, has aroused more objection than a lost bag or a missed connection. Indeed, we’ve written about this dispute before at Suits-by-Suits, but like a three-mile-long runway it just keeps going on and on in bankruptcy court. In advance of a hearing on the payment scheduled for tomorrow, it’s time to take a look at where this case has been and what it can teach executives and companies about the turbulence that can happen when bankruptcy law meets severance agreements. In short, executives should know that unlike their seat cushions, their severance agreements may or may not keep them afloat in the event their employer has a crash landing.
Grab your matzoh or Scotch cream eggs or whatever your favorite snack is this time of year and settle in for this week’s Inbox on Suits by Suits:
The U.S. Trustee in American’s Chapter 11 bankruptcy proceedings is challenging American’s $19.8 million golden parachute for its CEO Tom Horton. The Trustee contends that the $19.8 million payment is too much under Section 503(c) of the Bankruptcy Code because $19.8 million is more than 10 times the mean severance payment to non-management employees. American responds that Section 503(c) and its limit on severance payments does not even apply because American – the debtor in the bankruptcy – won’t be paying Horton’s severance. Rather, the $19.8 million will be paid after the proposed merger between American and US Airways is completed by the new company that will be formed in the merger. According to American, because Section 503(c) doesn’t apply, the bankruptcy court should defer to the company’s business judgment regarding Horton’s severance.
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.