Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re ) Chapter 11 ) LOS ANGELES DODGERS LLC., et al., ) Case No. 11-12010(KG) ) (Jointly Administered) Debtors. ) ) Re Dkt No. 1520 MEMORANDUM ORDER REGARDING DEBTORS OBJECTION TO PROOF OF CLAIM NO. 119 FILED BY CHARLES A. STEINBERG The Court has before it the Debtors Objection to Proof of Claim No. 119 Filed by Charles A. Steinberg, Pursuant to Section 502(b) of the Bankruptcy Code and Bankruptcy Rules 3003 and 3007 (the Objection ) (D.I. 1520). Upon review of the pleadings, and following oral argument on the Objection on April 13, 2012, the Court holds that the 502(b)(7) cap on damages is applicable to the claim. The claim will not be subject to any offset, and will be calculated as set forth herein. JURISDICTION The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. 157 and 1334(b). This is a core proceeding under 28 U.S.C. 157(b)(2). Venue is proper pursuant to 28 U.S.C. 1409. The statutory predicate for the relief requested herein is 502(b) of title 11 of the United States Code (the Bankruptcy Code ) and Rules 3003 and 3007 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ).
Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 2 of 7 BACKGROUND On November 22, 2007, the Debtors ( LAD or the Debtors ) employed Dr. Charles A. Steinberg ( Mr. Steinberg ) as its Executive Vice President & Public Relations/Chief Marketing Officer, and subsequently, as Executive Vice President, Creative & Communications. On September 30, 2009, the Debtors terminated Mr. Steinberg s employment in accordance with the terms of his employment agreement (the Employment Agreement ) and the parties entered into a Severance and Release Agreement (the Severance Agreement ). Declaration of Charles A. Steinberg (the Steinberg Declaration ) at 3-4. Under the Severance Agreement, the Debtors agreed to pay Mr. Steinberg the salary that would have been paid to him under his Employment Agreement from the date of his termination through December 31, 2012, an amount equal to $3,278,219.18. Id. at 4-5. Mr. Steinberg was scheduled to receive $1,008,682.82 in salary for the first twelve months following his termination. Los Angeles Dodgers LLC s Reply in Support of Objection to Proof of Claim No. 119 Filed by Charles A. Steinberg, Pursuant to Section 502(b) of the Bankruptcy Code and Bankruptcy Rules 3003 and 3007 (the Reply ) (D.I. 1657) at 14. The Severance Agreement also required Mr. Steinberg to make good faith efforts to obtain any type of employment, including, without limitation, full-time or part-time employment, consulting arrangements, or work as an independent contractor ( Alternative Employment ) as soon as reasonably possible after the termination date. Steinberg Declaration, at 6. The Severance Agreement further provided that any amounts due to Mr. Steinberg would be offset and reduced on a dollar-for-dollar basis by any compensation Mr. Steinberg received from any Alternative Employment. Id. 2
Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 3 of 7 Major League Baseball ( MLB ) employed Mr. Steinberg from March 1, 2010 through December 31, 2012, at a salary of $400,000 per annum. Steinberg Declaration, at 7-8. From June 15, 2011, through February 15, 2012, Mr. Steinberg s salary from MLB was prorated at $266,666.67 per annum, or $33,333.00 monthly for eight months. Steinberg Declaration, at 10. Additionally, on February 16, 2012, the Boston Red Sox hired Mr. Steinberg as a Senior Advisor to the President/CEO from February 16, 2012 through December 31, 2012, at a prorated annual salary of $460,000, or $38,333.33 a month. Steinberg Declaration, at 11-12; Response of Creditor Dr. Charles A. Steinberg to Los Angeles Dodgers LLC s Objection to Proof of Claim No. 119 (the Response ) (D.I. 1611) at 14; Ex. 4 Mar. 16 2012 Letter from Lucchino to Manning. The Debtors assert that this compensation qualifies as Alternative Employment under the terms of the Severance Agreement. On a prorated basis, Mr. Steinberg will earn $402,500 ($38,333.33 x 10.5 months) in salary from the Boston Red Sox from February 16, 2012 through December 31, 2012. Steinberg Declaration, at 12. From October 2009 through June 15, 2011, LAD made payments to Mr. Steinberg under the Severance Agreement. Steinberg Declaration, at 9. On June 30, 2011, the Debtors notified Mr. Steinberg that they were indefinitely suspending all payments to him under the Severance Agreement as a result of the Debtors bankruptcy filing. See Response Ex. 2; June 30, 2011 Letter from Levinson to Steinberg. DISCUSSION When a Debtor objects to a proof of claim filed in a bankruptcy case, the Bankruptcy Code instructs the Court to decide if the claim should be allowed against the estate, and if so, in what amount. 11 U.S.C. 502(b). Typically claims are allowed in the full amount permitted under 3
Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 4 of 7 nonbankruptcy law. See In re S. Side House, LLC, 451 B.R. 248, 260 (Bankr. E.D.N.Y. 2011). Nonetheless, certain claims are capped at amounts set by the Bankruptcy Code itself, regardless of 1 what nonbankruptcy law permits. Bankruptcy Code 502(b)(7) caps claim[s] of an employee for damages resulting from the termination of an employment contract. 11 U.S.C. 502(b)(7). Those claims cannot exceed the compensation provided by such contract, without acceleration, for one year... [plus] any unpaid compensation due under [the] contract, without acceleration.... 11 U.S.C. 502(b)(7)(A). Additionally, the claims are capped at an amount equal to one year of 2 compensation under the contract from the earlier of (1) the date of the filing of the petition, or (2) the termination date. Id.; see also In re Mid-American Waste Sys., 284 B.R. at 65. The termination date occurred prior to the petition date. Therefore, consistent with 502(b)(7)(A), if the cap applies it will be based on an amount equal to one year of compensation under the contract starting from the termination date. Thus, [t]he allowable amount of the claim under 502(b)(7) is any amount up to the cap and the cap includes both wages and benefits. In re Condor, 296 B.R. at13. The Court must determine whether the 502(b)(7) cap applies and, if so, whether it is measured under the Employment Agreement or the Severance Agreement. Additionally, the Court must determine whether Mr. Steinberg s claim should be offset by any compensation he received from Alternative Employment after the Debtors terminated his employment. 1 While a claim is for the total available under substantive nonbankruptcy law... the cap... defines how much of the... claim will be allowed to be paid by the bankruptcy estate[.] Young v. Condor Sys., Inc. (In re Condor Sys., Inc.), 296 B.R. 5, 12 (B.A.P. 9th Cir. 2003) (emphasis in original). 2 Compensation under 502(b)(7) includes wages, salaries, commissions as well as benefits. In re Mid-American Waste Sys., 284 B.R. 53, 65 (Bankr. D. Del. 2002). In re Condor, 296 B.R. at 12; see Anthony v. Interform Corp., 96 F.3d 692, 695 (3d Cir. 1996) (citing In re Johnson, 117 B.R. 461, 465 (Bankr. D. Minn. 1990)) (finding a terminated employee s claim for damages limited by 502(b)(7) to one year s pay plus benefits ). 4
Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 5 of 7 As an initial matter, Mr. Steinberg asserts that the 502(b)(7) cap is inapplicable to his claim because the plain language of 502(b)(7) limits recovery on employee claims for damages resulting from the termination of an employment contract. Mr. Steinberg argues that his damages result not from a breach of his employment agreement, but from LAD s breach of a related, but separate, settlement agreement between Steinberg and LAD. Response, at 17. The Court disagrees with Mr. Steinberg. His damages result from his Employment Agreement and, therefore, are subject to the 502(b)(7) cap. Mr. Steinberg s assertion that the Debtors breached the Severance Agreement is unsupported by the facts. Prepetition, the Debtors were paying Mr. Steinberg all amounts due to him, and only ceased making payments after the filing of the chapter 11 petitions. This does not amount to a breach of the Severance Agreement. A claim for severance pay is for damages resulting from the termination of an employment contract. Therefore, under 502(b)(7), the claim is limited to [the executive s] annual salary under the employment contract.. In re Protarga Inc. v. Webb., 329 B.R. 451, 465-66 (Bankr.D.Del. 2005) (citing In re Uly-Pak, Inc., 128 B.R. 763, 769 (Bankr.S.D.Ill.1991)). Mr. Steinberg s damages are derived from his employment agreement and, as a result, the 502(b)(7) cap applies. Next, after determining that the 502(b)(7) cap applies, the Court must determine whether the cap is measured by reference to Mr. Steinberg s Employment Agreement or the Severance Agreement. The Debtors assert that the 502(b)(7) cap on Mr. Steinberg s claim is measured by an amount equal to one year of compensation under the Severance Agreement. Objection, at 14. Conversely, Mr. Steinberg asserts that if the 502(b)(7) cap applies, the cap is measured by compensation due to him under his Employment Agreement, not the Severance Agreement. 5
Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 6 of 7 Response, at 22. The Court agrees with the Debtors interpretation that the cap applies to Mr. Steinberg s claim. However the Debtors assertion that the cap is measured by reference to the Severance Agreement is unsupported by the statute and the informative case law. The plain language of 502(b)(7) provides that employee claims against a debtor are for damages resulting from the termination of an employment contract.... 502(b)(7) (emphasis added). Several courts that have addressed this issue have determined that the 502(b)(7) cap is measured by reference to the employment agreement. see In re Condor Sys., Inc., 296 B.R. at 12 (stating that [t]he starting place for [calculating the cap ] is [the CEO s] base salar[y] of $350,000/yr.... ); In re Mid-American Waste Sys., 284 B.R. at 65; see also In re Protarga Inc. v. Webb., 329 B.R. at 465-66 (holding that 502(b)(7) focuses on what the employee would have earned if he continued his position for the next 365 days. This concept eliminates any consideration of (a) the severance package (including any bonus opportunity ) )(internal citation omitted); In re Uly-Pak, Inc., 128 B.R. 763, 769 (Bankr.S.D.Ill.1991)(holding that 502(b)(7) s one-year cap limits severance benefits resulting from the termination of an employment contract and noted that a claim for severance pay is for damages resulting from the termination of an employment contract. Therefore, under 502(b)(7), the claim is limited to [the executive s] annual salary under the employment contract. ) (internal citations omitted). This Court agrees with the foregoing analyses, and holds that even if the employee s claim is for severance pay, the appropriate measure of the 502(b)(7) cap is by reference to the employee s compensation and benefits as provided for in the employment agreement. In calculating the cap, Mr. Steinberg s damages will be limited to his annual salary under the Employment Agreement for the 6
Case 11-12010-KG Doc 1758 Filed 05/07/12 Page 7 of 7 first twelve months following his termination, plus any additional benefits. 3 The Debtors argued that the 502(b)(7) cap applies and this Court agrees. However, as previously discussed the 502(b)(7) cap is measured by reference to Mr. Steinberg s Employment Agreement, not the Severance Agreement. Therefore, the provisions of the Severance Agreement that required an offset of Mr. Steinberg s earnings from Alternative Employment are inapplicable for purposes of 502(b)(7). The Court will honor the plain language of 502(b)(7) and is informed only by the four corners of Mr. Steinberg s Employment Agreement. As a result, the Court will not allow any offset and Mr. Steinberg s allowed claim for purposes of the 502(b)(7) cap is $1,008,682.82 ($84,056.90 x 12 months) which is the total amount of salary due to Mr. Steinberg under the Employment Agreement for the twelve months following his termination. SO ORDERED. Dated: May 7, 2012 KEVIN GROSS, U.S.B.J. 3 In In re VeraSun Energy Corp., B.R. 2012 WL 1021788 (Bankr.D.Del. Mar. 26, 2012 BLS), the Court collapsed a change in control agreement into an employment agreement to give effect to the purpose of 502(b)(7). The Court thereby treated the change in control agreement as an employment agreement and subject to the cap. The Court noted that the policy behind the 502(b)(7) was to limit claims of key executives who negotiated favorable severance packages. Here, the former employee, Mr. Steinberg, is claiming the benefit of the Employment Agreement rather than the Severance Agreement. 7