In Re: Gen Datacomm ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
5-18-2005
In Re: Gen Datacomm
Precedential or Non-Precedential: Precedential
Docket No. 04-1710
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AMENDED PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-1710
__________
IN RE: GENERAL DATACOMM INDUSTRIES, INC.,
Debtor
__________
GENERAL DATACOMM INDUSTRIES, INC.,
Appellant
v.
JAMES R. ARCARA, FREDERICK R. CRONIN,
ROBERT S. SMITH, and THOMAS L. THOMPSON
Appellees
DAVID BUCHBINDER,
Trustee
On Appeal from the United States District Court
for the District of Delaware
(Civ. A. No. 02-1373)
District Judge: Honorable Kent A. Jordan
___________
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Argued: December 15, 2004
___________
BEFORE: NYGAARD and GARTH, Circuit Judges
and POLLAK * , District Judge.
(Filed: May 16, 2005)
________
OPINION
_________
Joseph A. Malfitano, Esq.
Joel A. Waite, Esq.
Michael R. Nestor, Esq.
Young Conaway Stargatt & Taylor, LLP
The Brandywine Building
1000 West Street, 17 th Floor
Wilmington, Delaware 19801
John B. Sherman, Esq. (Argued)
Weisman Celler Spett & Modlin, P.C.
445 Park Avenue, 15 th Floor
New York, New York 10022
Counsel for Appellant
Eric G. Waxman III, Esq.
Daniel M. Kolko, Esq. (Argued)
*
Honorable Louis H. Pollak, District Judge for the
United States District Court for the Eastern District of
Pennsylvania, sitting by designation.
-2-
Phillips Nizer LLP
600 Old Country Road, Suite 241
Garden City, New York 11530
Christopher S. Sontchi, Esq.
Ricardo Palacio, Esq.
Ashby & Geddes
222 Delaware Avenue, 17 th Floor
P.O. Box 1150
Wilmington, Delaware 19899
Counsel for Appellees
GARTH, Circuit Judge:
Both the Bankruptcy and District Courts here held that
Appellees James R. Arcara, Frederick R. Cronin, Robert S.
Smith and Thomas L. Thompson (collectively, the “Appellees”)
– former long-term senior executives of Appellant General
Datacomm Industries Inc. and its affiliates (“DataComm”) –
were “retired employees” within the meaning of 11 U.S.C. §
1114 and were therefore entitled to their retiree benefits.
Section 1114 of the United States Bankruptcy Code
(“Bankruptcy Code”) affords certain procedural protections to
“retired employees” of Chapter 11 debtors. See 11 U.S.C. §
1114(a), (e). When applicable, these procedural protections are
held to override the provisions of 11 U.S.C. § 365, which
generally allow a debtor in possession, subject to the court’s
approval, to reject any executory contract of the debtor in order
to relieve the estate of onerous and burdensome future
obligations. See 11 U.S.C. § 365(a).
The questions presented in this appeal are: (1) whether
the term “retired employees,” as contemplated by § 1114,
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encompasses the concept of “forced retirement,” at least in
situations where, as here, employees on the verge of voluntary
retirement are strategically and deliberately terminated without
cause by a debtor; and (2) if so, may DataComm’s executory
agreement providing benefits for retirees be rejected pursuant to
11 U.S.C. § 365. As stated, both courts rejected DataComm’s
attempt to terminate or otherwise modify the Appellees’ retiree
benefits without first complying with the mandates and
procedural requirements of § 1114.
We hold that involuntary termination of employees on the
verge of retirement cannot deprive such employees of the
procedural protections of § 1114. Accordingly, the District
Court did not err in affirming the Bankruptcy Court’s order,
which denied rejection of DataComm’s agreement to provide
such benefits.
I.
A.
The material facts on appeal are not in dispute. On or
about September 4, 1997, the Board of Directors of DataComm
approved a “Benefit Agreement for Long Term Senior
Executive Officers and Other Senior Level Employees” (the
“Benefit Plan”). DataComm originally entered into the Benefit
Plan with Appellees Arcara, Cronin, and Smith. Thompson, the
remaining Appellee, was added as an Eligible Executive 1
1
Eligible Executives included the individuals designated
in the Benefit Plan (i.e., Arcara, Cronin, Johnson), as well as any
other senior corporate officer elected to the office of Senior
Vice President or any higher office, and any other senior level
employee of DataComm designated by the Board of Directors
as an Eligible Executive who had been employed by the
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subsequent to the establishment of the Benefit Plan.
The Benefit Plan provided for two discrete forms of
benefits. First, DataComm was required to pay the annual
premiums of up to $7,000 for Long Term Care insurance
coverage for the lifetime of each Eligible Executive and his
spouse (“Long Term Care Benefits”).2 Second, the Benefit Plan
also provided that, upon retirement, each Eligible Executive and
his spouse would receive, at DataComm’s sole cost, a lifetime
continuation of the health insurance benefits that DataComm
was then furnishing to the Eligible Executive (“Retirement
Health Benefits”).3
company for more than 25 years, and was 60 years of age or
older. Benefit Plan ¶ 2(a).
2
“Long Term Care: Effective upon approval by the
Board of Directors of this Plan, the Corporation shall pay the
annual premiums of up to an annual maximum amount of
$7,000 (the ‘cap’), for Long Term Care insurance coverage in
the amount specified in Schedule A to the Plan, for each Eligible
Executive and his or her spouse for the remainder of their
respective lives.” Benefit Plan ¶ 3.
As more fully explained in note 13 infra, DataComm has
waived the argument that the Long Term Care Benefits are not
“retiree benefits” within the meaning of § 1114. Thus, while the
issue has been raised in this appeal, we neither consider nor
decide it here.
3
“Retirement Health Benefits: Upon an Eligible
Executive’s retirement, the Eligible Executive and his or her
spouse shall thereafter receive for the remainder of the lives of
the Eligible Executive and his or her spouse, a continuation of
the health insurance benefits the Corporation was then
furnishing the Eligible Executive, at the Corporation’s sole
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The Benefit Plan listed at least five actions which, if
taken by Eligible Executives, would lead to discharge and loss
of all benefits. It essentially provided that DataComm, in its
sole judgment, could effectively terminate all benefits
thereunder if, among other things, the Eligible Executive
violated any confidentiality agreement; disclosed any proprietary
information; refused cooperation with DataComm in litigation;
directly or indirectly became employed by, or purchased stock
of a competitor; brought suit against DataComm (except as to
claims relating to the Benefit Plan); or disparaged the company.
Benefit Plan ¶ 6.4 Aside from the grounds for terminating
cost.” Benefit Plan ¶ 4.
4
Paragraph 6 provides:
In the event in the sole judgment of the Board of
Directors of the Corporation, an Eligible
Executive or his or her spouse directly or
indirectly, (i) becomes employed by or performs
consulting or other services to, or becomes a
director of, or makes or retains any investment in
or loan to, a competitor of the Corporation
(provided the foregoing shall not be deemed a
breach if the eligible executive was unaware such
entity was a competitor provided he or she
promptly divests himself or herself of any such
investment upon learning of such event and
further provided the foregoing shall not apply to
an investment in securities listed on a national
securities exchange or NASDAQ where the
aggregate investment is less than $10,000), or, (ii)
violates any confidentiality or similar agreement
with the Corporation or discloses or uses any
confidential or proprietary information of the
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benefits specified in Paragraph 6 of the Benefit Plan,
DataComm reserved no other right to rescind or amend the
Benefit Plan.
B.
On November 2, 2001, DataComm filed for relief under
Chapter 11 of the Bankruptcy Code, and pursuant to Sections
1107 and 1108 of the Bankruptcy Code, DataComm continued
to possess its properties and manage its businesses as debtor(s)
in possession. Thereafter, on November 19, 2001, DataComm
advised the Appellees that they would be terminated on
Corporation other than on behalf of the
Corporation, or (iii) institutes or otherwise
participates or assists in any litigation or
proceedings against or on behalf of the
Corporation, its officers or directors, (other than
with respect to claims under this Plan or for
salaries or fees owed by the Corporation for
services actually rendered), or (iv) refuses to
reasonably cooperate at the Corporation’s
expense, with the Corporation in the prosecution
or defense of any litigation or proceeding, or (v)
uses, communicates, publishes or otherwise
transmits, in any manner whatsoever, negative
comments regarding the Corporation or otherwise
disparages the Corporation, its products, services,
officers or directors, then, in any such event, the
Board of Directors may terminate the status of
such person as an Eligible Executive hereunder
and all benefits hereunder for such Eligible
Employee and his or her spouse shall terminate.
Benefit Plan ¶ 6.
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November 30, 2001, and that the Benefit Plan would be
terminated on that same date.
Ten days later, on November 29, 2001, DataComm filed
its motion with the Bankruptcy Court to reject the Benefit Plan
pursuant to Section 365 of the Bankruptcy Code (the “365
Motion”). A day later, on November 30, 2001, the Appellees
were formally terminated. DataComm concedes that the
termination was without cause. At the time of their termination,
the Appellees were all over 65 years of age: Thompson was 71,
Cronin was nearly 70, Smith was over 68, and Arcara was near
67.
The Appellees objected to the 365 Motion, claiming that
the Benefit Plan qualified for treatment under § 1114 of the
Bankruptcy Code, and that DataComm was therefore required
to comply with the procedural requirements of that statute
before terminating or modifying the Benefit Plan. The
Bankruptcy Court conducted a hearing on April 25, 2002 to
determine whether § 365 or § 1114 governed the Benefit Plan.
The Bankruptcy Court held that § 1114 governed, and entered
an Order denying DataComm’s motion to reject the Benefit
Plan. The Bankruptcy Court stated that “[i]n the event . . .
[DataComm] seek[s] to terminate or otherwise modify any of the
benefits of [the Appellees] provided for in the [Benefit Plan] .
. . [DataComm] shall be required to first comply with the
mandates and procedural requirements of 11 U.S.C. § 1114.”
The District Court affirmed the decision of the
Bankruptcy Court, essentially holding that the Appellees were
retirees within the meaning of § 1114 because DataComm’s
action in terminating the Appellees the day after it purported to
reject the Benefit Plan constituted a “forced retirement”. This
timely appeal followed.
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II.
The Bankruptcy Court had jurisdiction under 28 U.S.C.
§§ 157(b) and 1334. The District Court had appellate
jurisdiction pursuant to 28 U.S.C. § 158(a)(1), and we have
jurisdiction under 28 U.S.C. §§ 158(d) and 1291. Exercising the
same standard of review as the District Court, “[w]e review the
bankruptcy court’s legal determinations de novo, its factual
findings for clear error and its exercise of discretion for abuse
thereof.” In re Trans World Airlines, Inc., 145 F.3d 124, 130-31
(3d Cir. 1998) (citing In re Engel, 124 F.3d 567, 571 (3d Cir.
1997); Fellheimer, Eichen & Braverman, P.C. v. Charter
Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995)). Inasmuch as
the parties agree that there are no relevant facts in dispute, our
review is limited to the legal determinations of the Bankruptcy
Court as affirmed by the District Court. We will thus employ a
de novo review of those legal determinations.III.
Section 365(a) of the Bankruptcy Code provides: “Except
as provided in sections 765 and 766 of this title and in
subsections (b), (c), and (d) of this section, the trustee, subject
to the court’s approval, may assume or reject any executory
contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a).
(The exceptions noted in § 365 have no relevance in this case).
On the other hand, section 1114 of the Bankruptcy Code
“was enacted to protect the interests of retirees of chapter 11
debtors.” 7 Collier on Bankruptcy, ¶ 1114.02[1] (15th ed.
2002). That section prohibits a debtor in possession or a trustee
from unilaterally modifying or terminating retirement benefits
unless (1) the court orders modification or (2) the trustee and the
authorized representative of the retired employees agree to
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modification. 11 U.S.C. § 1114(e)(1).5 Prior to filing an
application seeking court-imposed modification, the trustee must
engage in good faith negotiations with the authorized
representative of the trustee regarding the proposed
modification, and must provide the authorized representative
with relevant information to allow for fair evaluation of the
5
11 U.S.C. § 1114(e)(1) provides:
Notwithstanding any other provision of this title,
the debtor in possession, or the trustee if one has
been appointed under the provisions of this
chapter (hereinafter in this section "trustee" shall
include a debtor in possession), shall timely pay
and shall not modify any retiree benefits, except
that--
(A) the court, on motion of the trustee or
authorized representative, and after notice
and a hearing, may order modification of
such payments, pursuant to the provisions
of subsections (g) and (h) of this section,
or
(B) the trustee and the authorized
representative of the recipients of those
benefits may agree to modification of such
payments
after which such benefits as modified shall
continue to be paid by the trustee.
(emphasis added).
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proposal. Id. § 1114(f)(1).6 Only after the foregoing
requirements have been met, and such good-faith negotiations
have occurred, is the court empowered to grant the modification
motion, if, among other things, modification is necessary to
permit reorganization of the debtor. Id. § 1114(g).7
6
11 U.S.C. § 1114(f)(1) provides:
Subsequent to filing a petition and prior to filing
an application seeking modification of the retiree
benefits, the trustee shall--
(A) make a proposal to the authorized
representative of the retirees, based on the
most complete and reliable information
available at the time of such proposal,
which provides for those necessary
modifications in the retiree benefits that
are necessary to permit the reorganization
of the debtor and assures that all creditors,
the debtor and all of the affected parties
are treated fairly and equitably . . .
(emphasis added).
7
11 U.S.C. § 1114(g) provides:
The court shall enter an order providing for
modification in the payment of retiree benefits if
the court finds that--
(1) the trustee has, prior to the hearing,
made a proposal that fulfills the
requirements of subsection (f);
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Accordingly, a debtor in possession or the trustee must continue
to pay retiree benefits unless modification of such payments has
been ordered by the court or the trustee and the authorized
representative of the retired employees have agreed to such
modification. Id. § 1114(e)(1).8
The procedural protections of § 1114 apply to “retiree
benefits,” which are defined with reference to the class of
persons entitled to the benefits, i.e., “retired employees.” 9 As
(2) the authorized representative of the
retirees has refused to accept such
proposal without good cause; and
(3) such modification is necessary to
permit the reorganization of the debtor and
assures that all creditors, the debtor, and
all of the affected parties are treated fairly
and equitably, and is clearly favored by the
balance of the equities . . . ,
8
See note 5 supra for the statutory text of § 1114(e)(1).
9
Section 1114(a) defines “retiree benefits” as:
payments to any entity or person for the purpose
of providing or reimbursing payments for retired
employees and their spouses and dependents, for
medical, surgical, or hospital care benefits, or
benefits in the event of sickness, accident,
disability, or death under any plan, fund or
program (through the purchase of insurance or
otherwise) maintained or established in whole or
in part by the debtor prior to filing a petition
commencing a case under this title
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we have indicated, the overarching question here is whether the
provisions of § 1114 apply to the Benefit Plan. Stated
differently, the question is whether the Appellees constitute
“retired employees” for purposes of invoking the protections of
the statute.
DataComm’s main contention on appeal is that Appellees
never retired, but rather were still employed and were terminated
as employees without cause. As such, DataComm argues, the
provisions of § 1114, which accord protection only to “retired
employees,” never come into play here, leaving § 365
(permitting rejection of executory contracts) as the only
operative statute. We are persuaded that this contention elevates
form over substance, and is thus unavailing and unacceptable.10
(emphasis added).
10
DataComm also argues that the provisions of § 1114
do not apply here because Appellees were not retired at the time
the 365 Motion [to reject DataComm’s retirement Benefit Plan]
was filed. As we stated, Appellees were terminated the day
after the filing of the 365 Motion. While it is, of course, true
that only retired employees can invoke the protections of § 1114,
see, e.g. In re Crafts Precision Indus., Inc., 244 B.R. 178, 184
(1st Cir. B.A.P. 2000) (“The legislative history of [§ 1114]
clearly reveals that the statute is intended to benefit retirees
specifically.”) (emphasis added), we believe that this argument
suffers from multiple flaws. First, it ignores the fact that
DataComm had notified Appellees of their imminent
termination prior to filing the 365 Motion. The argument, then,
that the Appellees were still employed and not retired for
purposes of determining the application of § 1114 we regard as
specious. Such a result contravenes basic norms of fairness and
undermines the purposes of § 1114, which “was enacted to
protect the interests of retirees of Chapter 11 debtors.” 7 Collier
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Moreover, as a contractual matter, we note that
DataComm cannot escape its obligations under the Benefit Plan
by arguing that Appellees were terminated rather than retired.
As the District Court held, “retirement was the condition
precedent to the Appellees’ receipt of certain benefits under the
[Plan], and [DataComm] prevented the Appellees from
voluntarily retiring by discharging them without cause.” The
Benefit Plan explicitly and unambiguously states that only the
particular proscribed actions by an Eligible Executive could
result in the justifiable forfeiture of retirees’ benefits. We
on Bankruptcy, ¶ 1114.02[1] (15th ed. 2002).
Second, it rests upon a faulty premise. DataComm’s
contention here is that the relevant date for determining the
applicability of § 1114 is the date when the rejection of the Plan
would have become effective, which in this case would be either
the date immediately prior to the petition date, November 2,
2001, or, at the very latest, the filing date of the 365 Motion,
November 29, 2001. This contention fails for a few reasons.
Even assuming, without deciding, that the rejection of an
executory contract under § 365(a) becomes effective upon the
filing of the motion, but see In re Thinking Machines Corp., 67
F.3d 1021, 1028 (1st Cir. 1995) (“[W]e hold that a rejection of
a nonresidential lease under section 365(a) becomes legally
effective only after judicial approval has been obtained.”), that
merely begs the question of whether § 365 governs the Benefit
Plan in the first place. If, as Appellees maintain, § 1114 applies,
then DataComm’s 365 Motion was ineffective, and the decisive
date of any rejection, however defined, could not occur until
after the requirements of § 1114 have been satisfied.
Accordingly, we reject DataComm’s contention that
Appellees were still employed, rather than retired, albeit
involuntarily, at the filing of the 365 Motion and therefore
outside the protective ambit of § 1114.
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believe that the District Court’s reasoning was sound here – the
intent of both DataComm and the Appellees was that the
Appellees would receive the retirement benefits of the Plan
unless they were terminated for cause. They were not. See 13
Williston on Contracts § 39:3 (4th ed.) (“Where a promisor
prevents, hinders, or renders impossible the occurrence of a
condition precedent to his or her promise to perform, or to the
performance of a return promise, the promisor is not relieved of
the obligation to perform. . . .”).
Section 365, when it applies, allows DataComm to
terminate executory contracts, with the bankruptcy court’s
approval, notwithstanding any contractual obligations
thereunder. See, e.g., In re Spectrum Info. Techs., Inc., 190 B.R.
741, 745-46 (Bankr. E.D.N.Y. 1996). At issue then, is whether
Congress intended the term “retired employees” in § 1114 to
encompass the concept of “forced retirement.”
In contending that “forced retirement” does not implicate
the provisions of §1114, DataComm relies heavily on a reductio
ad absurdum. According to DataComm, the District Court’s
holding, taken to its logical conclusion, means that § 1114
would apply to a retirement health benefit when DataComm
discharged an employee without cause at the age of 25.
Recognizing that the employees affected here were all
over the age of 65 (Arcara 66; Smith 68; Cronin 70; Thompson
71), and were purposefully discharged only one day after
DataComm filed its 365 Motion, we can only conclude that
DataComm’s action was taken deliberately and was designed to
thwart the purposes of § 1114. Therefore, accepting the concept
of “forced retirement” does not and cannot lead to the absurd
result posited by DataComm that an employee could be retired
at age 25 if discharged without cause. The contours of such a
concept as “forced retirement” may receive appropriate
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interpretation, when it occurs, by a case-by-case development.
What matters here is that the particular facts of this case are
compelling enough to warrant the application of such a concept.
As the record reflects, the Appellees were on the verge of
retirement, 11 receiving a minimal paycheck for “basically
hanging around.” Tr. of Bankr. Hearing at 27. They were
founders and long-term senior executives of DataComm, and
each was of retirement age and was qualified to warrant
entitlement to the benefits prescribed by DataComm’s Benefit
Plan, which was designed to compensate long-term senior level
employees. See Benefit Plan ¶ 2a. As such, our holding in no
way countenances the 25 year old “horrible” scenario envisaged
by DataComm.
Under the circumstances presented here, to allow
DataComm to deliberately interfere with Appellees’ retirement
benefits would operate to frustrate and nullify the objectives of
§ 1114, which, as we have stated, was “enacted to protect the
interests of retirees of Chapter 11 debtors.” 7 Collier on
Bankruptcy, ¶ 1114.02[1] (15th ed. 2002).
IV.
We address one final issue – an issue not raised or
initially briefed by the parties. At oral argument, we asked the
question whether the Benefit Plan was an executory contract for
purposes of § 365 (which involves only contracts that are
executory in substance and which are not “trumped” by § 1114)
and so could be considered by the Bankruptcy Court for
11
We note that under the Employee Retirement Income
Security Act of 1974, the age of “[n]ormal retirement” is sixty-
five. Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 281 n.3 (3d
Cir. 1988) (citing 29 U.S.C. § 1002(24)).
-16-
rejection on an appropriate application. If the Benefit Plan was
not executory, § 365 would have no application as it could not
be rejected under that section. We requested supplemental
briefing on the question. After reviewing the parties’
submissions, we are satisfied that the Benefit Plan is indeed an
executory contract.
We set forth the controlling definition of “executory
contract” in Sharon Steel Corp. v. National Fuel Gas
Distribution Corp., 872 F.2d 36 (3d Cir. 1989): “[An executory
contract is] a contract under which the obligation of both the
bankrupt and the other party to the contract are so far
unperformed that the failure of either to complete performance
would constitute a material breach excusing performance of the
other.” Id. at 39 (citations and internal quotations omitted).
The crucial issue for determining whether the instant
Benefit Plan was executory is whether the Appellees had
material obligations that remain unperformed at the time the
bankruptcy petition was filed. See In re Columbia Gas System
Inc., 50 F.3d 233, 240 (3d Cir. 1995) (“The time for testing
whether there are material unperformed obligations on both
sides is when the bankruptcy petition is filed.”) (citations
omitted). Thus, our focus is on the restrictive covenant
obligations of the Appellees, i.e., their obligations, set forth in
Paragraph 6 of the Benefit Plan (see note 4 supra). Paragraph
6, among other things, requires Eligible Executives: to not
compete; to maintain confidentiality; to refrain from instituting
litigation; to agree to participate in litigation initiated by
Datacomm; and to refrain from negative publicity.
While we have held that the determination of what
constitutes a material breach under the Sharon Steel definition
is governed by relevant state law, In re Columbia Gas System
Inc., 50 F.3d at 240 n.10, we need not look beyond the Benefit
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Plan itself to make that determination. The Benefit Plan
expressly defines certain acts or events as constituting material
breaches of the contract. It states that:
[i]n the event in the sole judgment of the Board of
Directors of the Corporation, an Eligible
Executive or his spouse directly or indirectly
[fails to comply with any of the covenants set
forth in Paragraph 6], then, in any such event, the
Board of Directors may terminate the status of
such person as an Eligible Executive hereunder
and all benefits hereunder for such Eligible
Employee and his or her spouse shall terminate.
Benefit Plan ¶ 6 and note 4 supra.12 Thus, if an Eligible
12
Our dissenting colleague has discussed the issue of
“materiality” at length, but he has made no reference to the very
terms of the Benefit Plan itself. It is that Plan, as we have
stated, which defines the “materiality” of the Appellees’
obligations – it explicitly provides that the failure of an Eligible
Executive to comply with the covenants of Paragraph 6 excuses
the future performance of DataComm. We are satisfied that the
parties intended the provisions of Paragraph 6 to be material.
No further analysis is therefore required. As such, the
dissenting opinion’s analysis, while perhaps thorough,
substitutes its own views on materiality for what the parties
explicitly and formally agreed to as being “material” and vital to
their contract.
We also find the dissent’s reliance on In re Columbia
Gas Sys., Inc., 50 F.3d 233 (3d Cir. 1995), to be misplaced.
That case stands for the proposition that where the remaining
obligations in a contract are mere conditions, not duties, a
contract cannot be considered executory for purposes of § 365.
The distinction between conditions and duties, essential to the
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Executive breached one of those provisions, it would excuse the
future performance of DataComm. By contractual definition,
therefore, such obligations are material. See generally
Restatement (Second) of Contracts § 237 (1981) (uncured
material breach by one party discharges other party’s duty under
contract); see also 23 Williston on Contracts § 63:3 (4th ed.)
(“Where the contract itself is clear in making a certain event a
material breach of that contract, a court must ordinarily respect
that contractual provision.”). We are thus satisfied that the
Appellees’ obligations are material, and that the Benefit Plan is
an executory contract.
V.
We conclude that deliberate and involuntary termination
of an employee on the verge of retirement, where the employee
has otherwise met all qualifications for retirement, cannot
deprive such an employee of the procedural protections of §
1114. We therefore hold that the DataComm Appellees are
“retired employees” within the meaning of § 1114. This being
so, DataComm’s Benefit Plan providing retirement benefits to
such employees was an executory agreement and could not be
rejected pursuant to § 365. Accordingly, we will affirm the
judgment of the District Court in favor of the Appellees.13
holding in In re Columbia Gas Sys., is simply inapposite here.
13
DataComm raises an additional issue for the first time
on appeal – whether § 1114 applies to the Long Term Care
Benefits in particular and, if it does not, whether DataComm can
sever them for purposes of proceeding under § 365.
DataComm’s position is that the Long Term Care Benefits did
not qualify as “retiree benefits” since they were payable during
Appellees’ employment. DataComm offers no exceptional
circumstances to excuse its failure to raise this argument in the
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Bankruptcy Court and the District Court. Gleason v. Norwest
Mortgage, Inc., 243 F.3d 130, 142 (3d Cir. 2001) (“Generally,
barring exceptional circumstances, like an intervening change in
the law or the lack of representation by an attorney, this Court
does not review issues raised for the first time at the appellate
level.”) (citations omitted); Brown v. Philip Morris Inc., 250
F.3d 789, 799 (3d Cir. 2001) (“[A]rguments asserted for the first
time on appeal are deemed to be waived and consequently are
not susceptible of review in this Court absent exceptional
circumstances (e.g., the public interest requires that the issues be
heard or manifest injustice would result from the failure to
consider such issues).”) (citations omitted). Indeed, it appears
that DataComm became aware of the argument only after the
District Court alluded to the legal issue in its order affirming the
Bankruptcy Court. Although DataComm’s Reply Brief claims
that the District Court held that § 1114 is not applicable to the
Long Term Care Benefits contained in Paragraph 3 of the
Benefit Plan, it appears that DataComm has misstated the
District Court’s action. In fact, the District Court, in footnote 8
of its unpublished opinion, stated that it would not address the
issue because it had not been raised by DataComm. We, too,
express no opinion on this matter, as it has clearly been waived.
-20-
Pollak, J., concurring
I concur in the court’s judgment in all but one small
particular.14 But I do not join the court’s opinion.
I arrive at substantially the same end-point as the court –
i.e., I agree with the court that the Bankruptcy Court and the
District Court were right in disallowing DataComm’s proposed
rejection of appellees’ Benefit Plan. But I arrive at the same
destination via a different route: I do not agree with the court
that 11 U.S.C. § 1114 protects the appellees from DataComm’s
intended unilateral rejection of the Benefit Plan; in my view,
appellees are not protected by § 1114 because they were not
“retired employees” – the category of persons sheltered by §
1114 – at the time DataComm undertook to terminate the
Benefit Plan. However, I conclude that DataComm could not
reject the Benefit Plan pursuant to 11 U.S.C. § 365, because that
provision authorizes rejection of an “executory contract” and, in
my view, the Benefit Plan was not an executory contract.
I.
The court affirms that portion of the Bankruptcy Court
order requiring DataComm to abide by the provisions of 11
14
The judgment of the Bankruptcy Court, affirmed by the
District Court and now by this court, denies the motion filed by
DataComm under 11 U.S.C. § 365. This I agree with. The
Bankruptcy Court’s judgment also enjoins DataComm from
modifying appellees’ Benefit Plan without following the
procedures called for by 11 U.S.C. § 1114. Since, as this opinion
explains, I am of the view that § 1114 does not cover appellees,
I would strike that portion of the Bankruptcy Court’s judgment.
-21-
U.S.C. § 1114, which provides procedural safeguards against
modification of benefits for “retired employees.” Adverting to
the purpose of § 1114, which was “enacted to protect the
interests of retirees of Chapter 11 debtors,” 7 Collier on
Bankruptcy, ¶ 1114.02[1] (15 th ed. 2002), and pointing to
appellees’ termination without cause, the court holds that
appellees ought to be considered retirees within the meaning of
§ 1114. The court’s argument in favor of treating appellees as,
in effect, constructive “retirees” cannot fail to strike a
sympathetic chord. Nonetheless, I am not persuaded that
appellees can properly be deemed as coming within the category
of individuals protected by the statute.
Section 1114 is entitled, “Payment of insurance benefits
to retired employees,” id. (emphasis added), signifying that it is
the status of the employee, and not the nature of the benefit, that
determines the scope of § 1114. The wording of § 1114 cannot
be said to give definitive guidance on whether, to claim § 1114's
protections, employees must have retired by the date that their
employer files for bankruptcy or, alternatively, whether they
must have retired by the date upon which the debtor seeks to
terminate retiree benefits.15 The relevant point for purposes of
15
Some of the statutory language can be said to support
the view that the drafters had in mind scenarios in which, after
filing for bankruptcy, an employer undertakes to reduce, or
entirely abrogate, benefits of employees who had retired prior
to the bankruptcy filing. Thus, § 1114(l) provides:
This section shall not apply to any retiree, or the
spouse or dependents of such retiree, if such
retiree's gross income for the twelve months
preceding the filing of the bankruptcy petition
equals or exceeds $ 250,000, unless such retiree
can demonstrate to the satisfaction of the court
that he is unable to obtain health, medical, life,
-22-
this appeal, however, is that appellees had not retired by either
date: appellees were employees of DataComm when DataComm
filed under Chapter 11, and they remained employees until they
were dismissed one day after DataComm filed its 365 motion
seeking to terminate the Benefit Plan.
To be sure, the court does not argue that appellees had in
fact retired by either date. Instead, it adopts the District Court’s
argument, which relies on the prevention doctrine, and
concludes that appellees are constructive retirees who ought thus
to receive § 1114's protections. The prevention doctrine states
that “[i]t is a principle of fundamental justice that if a promisor
and disability coverage for himself, his spouse,
and his dependents who would otherwise be
covered by the employer's insurance plan,
comparable to the coverage provided by the
employer on the day before the filing of a petition
under this title.
11 U.S.C. § 1114(l) (emphasis added). A similar perspective is
to be found in the legislative history; see Senate Report 100-
119's statement that the “bill requires that such benefits,
provided to retired employees, their spouses and dependents
pursuant to a plan in effect at the time of [sic] a Chapter 11
proceeding is commenced, will continue to be paid when the
employer providing those benefits files ... a petition under
Chapter 11 of the Bankruptcy Code, until or unless a
modification is agreed to by the parties or ordered by the court.”
S. Rep. No. 100-119, at 3 (1988), reprinted in 1988
U.S.C.C.A.N. 683, 685 (May 26, 1988) (emphasis added).
On the other hand, it is not clearly apparent that Congress
would have had any policy reason to exclude from the protection
of § 1114 employees who had retired after the debtor-employer
filed for bankruptcy but before it moved to jettison its
retirement-benefits liabilities.
-23-
is himself the cause of the failure of performance, either of an
obligation due him or of a condition upon which his own
liability depends, he cannot take advantage of the failure.” 5
Williston, Contracts 677, at 224 (3d ed. 1961); see also Apalucci
v. Agora Syndicate, 145 F.3d 630, 634 (3d Cir. 1998) (“when
one party to a contract unilaterally prevents the performance of
a condition upon which his own liability depends, the culpable
party may not then capitalize on that failure.”). The court argues
that, since retirement was the condition precedent to receipt of
benefits, and since DataComm willfully thwarted fulfillment of
this condition when it dismissed appellees (who were at or near
retirement age) on the day after DataComm filed its 365 Motion,
appellees ought to be considered “retirees” within the meaning
of § 1114.
While the pedigree and wisdom of the prevention
doctrine are unquestionable, the conclusion that the court draws
from it – namely, that § 1114 ought to extend to appellees – is
unwarranted. The prevention doctrine entails that, where one
party to a contract takes an action that prevents the other party
from being able to fulfill a condition precedent to that contract,
the first party may not use its own action as a mechanism for
avoiding performance of its contractual obligations. The
prevention doctrine does not entail that, as a result of the first
party’s culpable obstruction, that party is not entitled to avoid
performance of its obligations for any reason. There may well
be reasons other than the failure of the condition precedent that
would allow the first party to withdraw permissibly from the
duties it contracted to perform.
Applying the prevention doctrine here signifies that
DataComm could not use the fact that appellees had not retired
as a ground for withdrawing from its obligation to pay retiree
benefits, since DataComm, by firing appellees, prevented them
from retiring on the day of their dismissal or at any subsequent
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time. On the basis of the prevention doctrine, then, the Benefit
Plan remained in place despite appellees’ non-retirement. But
there might have been other reasons lending support for
DataComm’s asserted entitlement to withdraw. (Indeed,
DataComm claims that § 365 provides one such reason.) Thus,
the prevention doctrine does not lead to the conclusion that
appellees are (or ought to be treated as) retirees or the
conclusion that § 1114 ought to apply to appellees. The
prevention doctrine can do no more than return the parties to the
situation that existed prior to appellees’ dismissal. Since, for the
reasons advanced above, that situation cannot be characterized
as one in which appellees had retired, the prevention doctrine
does not afford appellees the protections of § 1114.
In sum, § 1114 applies only if the beneficiaries of the
agreement in question have retired before their employer seeks
to terminate or otherwise modify that agreement. Since that is
not the situation here, I conclude that § 1114 is inapplicable.
II.
The court finds that § 1114 applies to appellees and
trumps 11 U.S.C. § 365. Accordingly, the court holds that the
protections conferred by § 1114 prohibit rejection of the Benefit
Plan pursuant to § 365, and require compliance with the terms
of § 1114 prior to any modification of the Plan. I agree that
DataComm may not reject the Benefit Plan, but I rest this
conclusion on the ground that the Benefit Plan was not an
“executory contract,” and hence fell outside the coverage of §
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365.16
An executory contract is “‘a contract under which the
obligation of both the bankrupt and the other party to the
contract are so far unperformed that the failure of either to
complete performance would constitute a material breach
excusing the performance of the other.’” Sharon Steel Corp. v.
National Fuel Gas Distribution Corp., 872 F.2d 36, 39 (3d Cir.
1989) (citing V. Countryman, Executory Contracts in
Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973)). Thus, for
purposes of ascertaining the nature of the Benefit Plan, the
relevant question is whether the obligations enumerated in
Paragraph 6 of the Plan, which requires that the Plan’s
beneficiaries forbear from competing with or disparaging the
company, are material.
State law determines whether breach of a contract
provision is material. See, e.g., Fineman v. Armstrong World
Indus., 980 F.2d 171 (3d Cir. 1992). Delaware, where the
underlying dispute arose, incorporates the test of materiality
found in the Restatement. See BioLife Solutions, Inc. v.
Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003);
SLMsoft.com, Inc. v. Cross Country Bank, 2003 Del. Super.
LEXIS 112, 51-52 (Del. Super. Ct. 2003). To define
“materiality,” the Restatement provides a list of “circumstances”
deemed to be “significant” in an assessment of “whether a
failure to render or to offer performance is material,”
Restatement (Second) of Contracts § 241:
(a) the extent to which the injured party will be
16
See 11 U.S.C. § 365 (“[T]he trustee, subject to the
court's approval, may assume or reject any executory contract or
unexpired lease of the debtor.”).
-26-
deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be
adequately compensated for the part of that
benefit of which he will be deprived;
(c) the extent to which the party failing to perform
or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform
or to offer to perform will cure his failure, taking
account of all the circumstances including any
reasonable assurances;
(e) the extent to which the behavior of the party
failing to perform or to offer to perform comports
with standards of good faith and fair dealing. Id.Taking these circumstances one by one, I conclude that
the balance of considerations lies on the side of non-materiality:
a) Benefit reasonably expected from the agreement: While
DataComm likely expected adherence to the restrictions
encompassed in Paragraph 6, it would have harbored this
expectation prior to and independent of the Benefit Plan. Some
of the obligations contained in this Paragraph simply incorporate
prior agreements – for example, the confidentiality agreements
in clause (ii)17 – and it would be these earlier agreements that
17
Clause (ii) of Paragraph 6 references “violat[ions] of
any confidentiality or similar agreements with the Corporation
...”
-27-
justified the expectation. Other obligations are so intertwined
with the executives’ pre-existing duties of good faith and loyalty
– e.g., forbearance from investing in a competitor (clause (i)) or
disparaging the company (clause (iii)) – that, here too,
DataComm’s expectation would not have been rooted in the
Benefits Plan. In sum, since DataComm would have received
the benefit flowing from appellees’ performance of these
obligations independent of the Benefit Plan, it does not make
sense to consider that performance a benefit that DataComm
reasonably expected from the agreement. Or, to put the point in
the terms the Restatement uses, performance of the obligations
was not a benefit of the agreement.
b) Adequacy of Compensation: The Restatement states that
“[t]he second circumstance, the extent to which the injured party
can be adequately compensated for his loss of benefit
(Subsection (b)), is a corollary of the first.” § 241 cmt. c. For the
reasons set forth in the previous paragraph, then, this
circumstance also does not support a finding of materiality.
c) Forfeiture: The Benefit Plan permits DataComm to terminate
the Plan’s benefits in the face of an eligible executive’s breach
of Paragraph 6; it does not state that termination will
automatically follow. The fact that an executive could fail to
comply with one of the restrictions in Paragraph 6 and still
continue to receive the benefits package further supports a
finding that the restrictions are not material.
d) Likelihood of cure: In describing this circumstance, the
Restatement states that “[t]he fact that the injured party already
has some security for the other party's performance argues
against a determination that the failure is material.” § 241 cmt.
e. Here, DataComm would have had some security for the
executives’ adherence to Paragraph 6: Again, some of the
obligations contained there (e.g., obligations of confidentiality)
-28-
hinge upon prior agreements, breach of which may entail
penalties rooted in those agreements. Similarly, legal sanctions
for breach of the duty of loyalty would motivate adherence to
some of the other restrictions (e.g., those against competition
and disparagement).
e) Good faith and fair dealing: The Restatement states that
“[a]dherence to the standards stated in Subsection (e) is not
conclusive, since other circumstances may cause a failure to be
material in spite of such adherence. Nor is non-adherence
conclusive, and other circumstances may cause a failure not to
be material in spite of such non-adherence.” § 241 cmt. f. In
other words, this is a less probative consideration than the
others. In the absence of an actual breach of Paragraph 6 by any
of the appellees, the implications of this consideration for the
materiality of the appellees’ obligations would be purely
speculative.
In sum, the circumstances supporting a finding of
materiality do not appear to be present here.
More generally, we can distill from the Restatement’s list
the defining feature of materiality – viz., the connection between
materiality and consideration. More to the point, the
Restatement will deem one party’s obligation material where it
serves as consideration for the other party’s promised
performance. Compare Frank Felix Assocs. v. Austin Drugs,
111 F.3d 284, 289 (2d Cir. 1997) (“Under New York law, for a
breach of a contract to be material, it must go to the root of the
agreement between the parties.”) (citation omitted). Thus, the
first element of § 241 of the Restatement is “the extent to which
the injured party will be deprived of the benefit which he
reasonably expected,” and “the benefit which he reasonably
expected” is the consideration that the contract provides, § 241;
see also § 241 cmt. b (“Since the purpose of the rules stated in
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§§ 237 and 238 is to secure the parties' expectation of an
exchange of performances, an important circumstance in
determining whether a failure is material is the extent to which
the injured party will be deprived of the benefit which he
reasonably expected from the exchange (Subsection (a)). If the
consideration given by either party consists partly of some
performance and only partly of a promise (see Comment a to §
232), regard must be had to the entire exchange, including that
performance, in applying this criterion.”) (emphasis added); § 81
(“In most commercial bargains the consideration is the object of
the promisor's desire and that desire is a material motive or
cause inducing the making of the promise, and the reciprocal
desire of the promisee for the making of the promise similarly
induces the furnishing of the consideration.”). Cf. id. at § 162
cmt. c. (“a misrepresentation is material if it would be likely to
induce a reasonable person to manifest his assent ... [or] if the
maker knows that for some special reason it is likely to induce
the particular recipient to manifest his assent.”). Indeed, the
Reporter’s notes to the chapter of the Restatement containing
§241 explain that the term “failure of performance,” when used
in that chapter, see, e.g., id. at §237,18 replace the term “failure
of consideration.” See Restat. (2d) Contracts, ch. 10,
Introductory Note. In sum, a party’s obligation to perform or
18
Section 237 qualifies the phrase “failure of
performance” with the word “material.” See id. (“it is a
condition of each party's remaining duties to render
performances to be exchanged under an exchange of promises
that there be no uncured material failure by the other party to
render any such performance due at an earlier time.”) (emphasis
added). Section 241 also pertains to material failures of
performance (i.e., what were formerly referred to as “failures of
consideration”), although its language is somewhat more
elaborate. See § 241 (describing “whether a failure to render or
to offer performance is material.”).
-30-
forbear will be material if it functioned as consideration, or as
the reason inducing the other party’s entry into the contract.
It seems improbable that the obligations contained in
Paragraph 6 functioned in some significant way as consideration
for the benefits conferred by the Benefit Plan. The appellees’
obligations are set forth in the Benefit Plan in a manner that
appears to make them subsidiary to the Plan’s central purpose.
More specifically, the bulk of this eight-paragraph contract is
devoted to setting forth DataComm’s obligations (Paragraphs 3,
4 and 7), describing the benefits that the eligible executives will
receive (Paragraphs 3 and 4), and specifying the protections
available to these executives in the event that DataComm
undergoes a change in control (Paragraph 5).19 Paragraph 6 is
the only paragraph addressing the executives’ obligations; it sets
forth a list of restrictions on the eligible executives’ conduct, but
it does so by embedding this list within a provision stating that
DataComm may terminate the benefits of an executive who fails
to fulfill one of these obligations. This placement of appellees’
obligations suggests that appellees’ forbearance is not what
motivates or compensates DataComm’s performance. Instead,
the Plan memorialized a promise by DataComm to furnish its
long-standing executives with certain benefits.
Indeed, the Plan’s preamble amply supports this reading,
as it contains language signifying that the purpose of the Plan is
to compensate appellees for their past years of service to
DataComm. See App. at 44 (“WHEREAS, the Corporation
19
The remaining paragraphs specify the names of the
eligible executives (Paragraph 1), define terms used in the Plan
(Paragraph 2), permit DataComm to terminate an executive’s
benefits in the event that he violates a restriction described in
the Agreement (Paragraph 6), and provide for the severability of
any provision deemed unenforceable (Paragraph 8).
-31-
desires to provide to certain of its employees (the “Eligible
Executives”) with [sic] certain additional benefits based upon
their many years of service to the Corporation”) (emphasis
added). The preamble makes no mention of an intent to secure
appellees’ compliance with the restrictive provisions of
Paragraph 6, or to otherwise bind appellees in any way. The real
crux of the agreement, then, is a commitment undertaken by
DataComm to reward appellees’ for past consideration.
Finally, Third Circuit precedent further supports a finding
that the obligations set forth in Paragraph 6 are not material. In
Enterprise Energy Corp. v. United States (In re Columbia Gas
Sys.), 50 F.3d 233 (3d Cir. 1995), this court appealed to the
Restatement to evaluate materiality:
In order to determine the materiality of the class
members' obligations, we turn first to basic
contract principles. There is a distinction in the
law between failure of a condition and a breach of
a duty: ‘Non-occurrence of a condition is not a
breach by a party unless he is under a duty that the
condition occur.’ Restatement (Second) of
Contracts § 225(3) (1981). This distinction
between a condition and a duty (or promise) is
important here. The Restatement makes clear that
while ‘a contracting party's failure to fulfill a
condition excuses performance by the other party
whose performance is so conditioned, it is not,
without an independent promise to perform the
condition, a breach of contract subjecting the
nonfulfilling party to liability for damages.’
Merritt Hill Vineyards, Inc. v. Windy Heights
Vineyard, Inc., 61 N.Y.2d 106, 460 N.E.2d 1077,
1081-82, 472 N.Y.S.2d 592 (N.Y. 1984) (citing
Restatement (Second) of Contracts § 225).
-32-
50 F.3d at 241 (footnotes omitted).20 Columbia Gas greatly
clarifies the nature of appellees’ obligations under the Benefit
Plan. Paragraph 6 permits DataComm to terminate an
executive’s benefits should that executive have been found to
have violated one of the listed restrictions. In other words, a
breach by one of the appellees would excuse continued
performance by DataComm. However, such a breach would not,
by itself,21 subject the “nonfulfilling” executive to liability for
damages. Accordingly, the appellees’ obligations should be seen
as conditions, and not duties. And, “if the remaining obligations
in the contract are mere conditions, not duties, then the contract
cannot be executory for purposes of § 365 because no material
breach could occur.” Id. at 241.
For the foregoing reasons, I conclude that the Benefit
Plan was not executory. Since section 365 permits rejection only
of those contracts that are executory, I would affirm denial of
appellants’ 365 Motion on the ground that section 365 does not
apply to the contract at issue. Accordingly, I concur in the
judgment of the court, subject to the small reservation noted in
footnote 1, supra.20
As the Columbia court noted, “[t]he Restatement has
dropped the term ‘condition precedent’ in favor of simply
stating it as ‘condition.’ E. Allen Farnsworth, 2 Farnsworth on
Contracts § 8.2, at 349 (1990).” 50 F.3d at 241 n. 15.
21
The confidentiality agreements cited in the Plan or the
doctrine of loyalty might have subjected an executive who
breached his duty of confidentiality or loyalty to liability, but
this consequence would have emerged from a legal relationship
that existed independent of the relationship forged by the Plan.
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