• Former Debtor Executives' Claims Capped Under Bankruptcy Code § 502(B) (7) Because Change in Control Agreements Were Part of Employment Contracts
  • July 11, 2012
  • Law Firm: Morris James LLP - Wilmington Office
  • In re: VeraSun Energy Corp., Case No. 08-12606 (BLS), March 26, 2012

    Debtor VeraSun Energy Corp. sought to limit its former executives (the “Executives”) claims arguing that they exceeded the cap that § 502(b)(7) of the Bankruptcy Code imposes on claims resulting from the termination of employment contracts. In November of 2007, VeraSun sought to merge with U.S. BioEnergy. As the negotiations progressed, VeraSun’s board of directors received a recommendation from its committee on compensation that its senior managers should enter into “change in control” (“CIC”) agreements to keep the Executives with the company following the merger. The CIC agreements provided the Executives with benefits including cash payments equal to two times - or three times in the case of the CEO - base salary and target annual bonus if they were later terminated. The Executives were also provided with medical benefits and payments for unused vacations.

    Less than twenty-four hours after signing the CIC agreements, on November 29, 2007, VeraSun executed the merger with U.S. BioEnergy. Six months later, a shareholder vote made the merger official. On October 31, 2008, VeraSun filed for chapter 11 protection (the “Petition Date”). As for the Executives, two were terminated soon after the Petition Date and two others stayed until May 2009, until they too were let go. All four men filed timely proofs of claims. Taken together, the Executives’ claims exceeded $7.3 million. Verasun timely objected arguing that the cap provided in § 502(b)(7) of the Bankruptcy Code caps claims resulting from the termination of employment contracts at one year’s salary and fringe benefits (plus any earned but unpaid compensation) and therefore, the Executive claims must be reduced and the surplus disallowed.

    The Executives argued that the CIC agreements were not employment agreements subject to the cap. The Court disagreed. The Executives entered into employment contracts that were modified by later agreement (i.e., the CIC agreements) - making the employment contracts and the CIC agreements one contract. The subject matter was clearly the same and the CIC agreements added “new elements” and provisions into the employment relationship between Verasun and the Executives.

    Since the CIC agreements were employment contracts under § 502(b)(7), the Court then looked to whether the Executives’ claims resulted from the termination of those contracts. Section 502(b)(7), “was designed to limit the claims of key executives who had been able to negotiate contracts with very beneficial terms.” Protarga Inc. v. Webb (In re Protarga Inc.), 329 B.R. 451, 465 (Bankr. D.Del. 2005). The claims were for unpaid severance benefits subject to the cap. The CIC agreements provided that severance pay was provided “in lieu of any further salary for periods subsequent to the date of termination.” The benefits were triggered upon termination. Such prospective compensation was not compensation for amounts already earned, services already performed and consideration already provided and therefore, the Court cap applied to the Executives’ claims.