Provisions in a KERP remain valid even if they allegedly violate state labor law, according to Delaware Bankruptcy Judge Kevin J. Carey.
In chapter 11, the corporate debtor was losing key managers right and left. To stanch defections, the debtor adopted a key employee retention plan, or KERP. The KERP offered bonuses to eligible employees for staying on the job until completion of a Section 363 sale.
The KERP provided, however, that signing up for bankruptcy retention bonuses automatically waived any bonuses or severance payments that might be due under pre-bankruptcy agreements.
Several California-based workers nonetheless filed proofs of claim for their pre-bankruptcy bonuses, which they claimed were fully vested on the date of bankruptcy. They contended that the waiver provision in the KERP was unenforceable because it violated California law.
The California Labor Code provides that an employer cannot require an employee to provide a release in return for wages that are due, unless the wages are paid in full.
Even assuming that the KERP violated state law, Judge Carey ruled in his June 1 opinion that the concept of conflict preemption precludes enforcement of state labor law.
Judge Carey explained the three types of federal preemption: (1) express preemption; (2) field preemption; and (3) conflict preemption, which applies, he said, “where local law conflicts with federal law such that it is impossible for a party to comply with both or the local law is an obstacle to the achievement of federal objectives.”
Conflict preemption applied to the case at bar, Judge Carey said.
Judge Carey followed In re Old Carco LLC, 442 B.R. 196, 206 (S.D.N.Y. 2010), which dealt with state laws regulating the relationship between auto manufacturers and their dealers.
In Old Carco, the New York district court held that the state laws were subject to conflict preemption because they would make “full enforcement of [orders rejecting dealerships] near impossible.”
Similarly, Judge Carey held that the Bankruptcy Code “preempts application of the California Labor Code.” He ruled that the KERP was “necessary to ensure a stable and efficient sale process, which was in the best interests of the estate and all stakeholders.”
The waivers in the KERP were valid and enforceable, “notwithstanding contrary state law,” Judge Carey said, because the KERP “furthered familiar federal bankruptcy policies under the Bankruptcy Code.”
Even if there were no federal preemption, Judge Carey also ruled that the KERP did not violate state law because conditions to applicability of the California Labor Code had not been met.