December 17, 2017

Tenth Circuit: Severance Payments to Terminated President Not Avoidable Under § 548

The Tenth Circuit Court of Appeals issued its opinion in In re Adam Aircraft Industries, Inc.: Weinman v. Walker on Thursday, October 15, 2015.

Joseph Walker was the president and a board member for Adam Aircraft Industries (AAI). On February 1, 2007, George “Rick” Adam, AAI’s board chair, informed Walker that the board had decided to replace him as president and requested his resignation in lieu of terminating his employment. AAI was engaged in debt financing negotiations with Morgan Stanley for an $80 million loan and did not want to imperil its negotiations with bad publicity from Walker’s termination. Walker returned to his office late that night to collect his belongings, and sent an email to the board chair and another board member outlining requests for his resignation. His replacement as president started working for AAI on February 2. Over the next two weeks, AAI and Walker negotiated the terms of his separation and eventually entered into Separation Agreement I and a Memorandum of Understanding (MOU) on February 13, 2007. On March 20, 2007, AAI refunded Walker’s security deposit for an airplane, plus interest, and on May 18, 2007, the parties entered into Separation Agreement II. AAI continued to make twice-monthly severance payments to Walker between February 2007 and February 2008.

On February 15, 2008, AAI filed a voluntary petition for bankruptcy, and the trustee, Weinman, sold substantially all of AAI’s assets for a gross purchase price of $10 million in April 2008. Walker filed a proof of claim in AAI’s bankruptcy case for $134,931.00, including $10,950.00 as a priority-employee claim based on wages, salaries, and commissions under the MOU and Separation Agreements. AAI filed a complaint in January 2010, seeking to avoid and recover transfers to Walker under the MOU and Separation Agreements. The bankruptcy court held a trial in February 2013 and entered its order in June 2013, ruling that Walker ceased to be a statutory insider on February 1, 2007, and did not meet criteria for a non-statutory insider; the transfers to Walker did not occur under an employment contract; and Walker gave reasonably equivalent value for the transfers. AAI appealed to the BAP, which affirmed the bankruptcy court, and again appealed to the Tenth Circuit.

AAI argued to the Tenth Circuit that its transfers to Walker were avoidable under 11 U.S.C. § 548(a)(1). The Circuit iterated five prongs that AAI must meet to prove its transfers were avoidable: (1) the transfers must have occurred within two years of the bankruptcy filing; (2) Walker must have been an insider either when the transfers were negotiated or when the money was paid; (3) the transfers must have been made under an employment contract; (4) AAI must have received less than equivalent value for the transfers; and (5) the transfers must have been made outside the ordinary course of business. The Tenth Circuit noted that the burden was on AAI to prove all five prongs, and failure to prove even one prong would mean AAI could not prevail. Since the parties did not dispute the first factor, the Tenth Circuit began its analysis by looking at whether Walker was an insider when the transfers were negotiated or the money was paid.

The bankruptcy court concluded that Walker’s insider status ceased as of February 1, 2007, and the Tenth Circuit agreed. AAI argued that because the MOU listed March 1, 2007, as Walker’s termination date, the first Separation Agreement and MOU were entered into while Walker retained insider status. The bankruptcy court found, however, that Walker did no further work for AAI after that date, he did not return to the AAI premises, and his replacement started on February 2. The Tenth Circuit found no clear error in the bankruptcy court’s determinations. The bankruptcy court also held Walker could not qualify as a non-statutory insider, which AAI argued was applicable because Walker proposed the initial terms of his separation, which AAI ultimately accepted. The Tenth Circuit found this was insufficient to satisfy AAI’s burden. The Tenth Circuit similarly rejected AAI’s contention that refusing to classify Walker as an insider would frustrate the purpose of BAPCPA, noting it could not imagine Congress intended the BAPCPA to allow businesses to negotiate separation terms with an employee, which the employee fulfilled, then avoid any reciprocal obligations to the employee.

AAI next argued its payments to Walker were recoverable under the “non-insider” portions of § 548. The statute allows avoidance of transfers if AAI received less than equivalent value at the date of each transfer and AAI was insolvent. The Tenth Circuit again noted that failure of one prong would negate the possibility of avoidance. The bankruptcy court had found that the antecedent debt created by the MOU and Separation Agreements for the severance package constituted “reasonably equivalent value” because Walker had agreed to resign instead of facing termination in order not to imperil the debt financing with Morgan Stanley and had not retained employment with competing companies. As for the airplane deposit and stock purchase refund, the Tenth Circuit found no error in the bankruptcy court’s determination that these transactions were not avoidable.

The Tenth Circuit affirmed the bankruptcy court.

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