A company executive fired summarily can later negotiate a separation agreement without fear of being forced to repay severance as a fraudulent transfer, at least in the Tenth Circuit.
Without telling the chief executive in advance about a brewing coup, the board fired the CEO. Afraid that a messy separation would spoil negotiations on an $80 million bank financing, a month later the company negotiated and signed a separation agreement giving the former CEO $375,000 over 18 months for an agreement not to compete and to waive claims for improper termination.
When the company went bankrupt about a year later, the trustee sued for a constructive fraudulent transfer under Section 548, claiming that the company did not receive reasonably equivalent value. Upheld later by the bankruptcy appellate panel, the bankruptcy judge ruled in favor of the former CEO by dismissing the suit after trial.
On a second appeal, the trustee relied on two bankruptcy court opinions from other circuits holding that noncompetition agreements of the sort “are valueless.” Writing for the Tenth Circuit in an Oct. 15 opinion, Circuit Judge Gregory A. Phillips disagreed.
Based on the bankruptcy court’s findings of fact, Judge Phillips said that paying $375,000 over 18 months “looked like a pretty good trade” from the company’s point of view by removing a threat to financing negotiations. He said that no reasonable court, given the facts, could find a lack of reasonably equivalent value.
Since the former CEO had been fired before negotiating severance, he was no longer a statutory insider, thus rendering Section 548(a)(1)(B)(i) and (ii) inapplicable. That section was added to the Code to prevent insiders from landing sweetheart deals on the eve of bankruptcy.