In a recent decision by the Delaware Bankruptcy Court, the Court held that a person holding the title of an officer, including vice president, is presumptively what he or she appears to be — an officer and, thus, an insider.  See In re: Foothills Texas, Inc. et al. (Bankr. D. Del. 09-10542)

In Foothills Texas, the Debtors are independent energy companies engaged in the acquisition, exploration, exploitation and devlopment of oil and natural gas properties, and have 10 employees.  Two of the employees have the title of Vice President, and have a prepetition employment agreement (the “Employment Agreements”) that, if the agreements were assumed by the Debtors, would provide a retention payment to each of those employees.

The Debtors sought to assume the Employment Agreements, but the United States Trustee objected on the grounds that (i) the employees are insiders, (ii) the payments to be made under the Employment Agreement, if assumed, would be retention payments, and thus, (iii) the Debtors need to satisfy Section 503(c)(1) of the Code.  Section 503(c)(1) prohibits the payment to an retention payment to an insider unless a debtor proves that (A) the individual has a bona fide job offer from another business at the same or greater compensation; (B) the services of the individual are essential to the survival of the debtor’s business; and (C) either (i) the payment is not greater than 10 times the amount of the mean payment to nonmanagement; or (ii) if no payments made to nonmanagement employees, then no more than 25% of the amount paid to such insider.  In practice, this is a very difficult standard to satisfy, and, Section 503(c)(1)(A) has proven virtually impossible for debtors to meet. 

The Debtors argued, among other things, that the employees, despite their title of vice president, are not officers, and thus, not insiders, and thus, the more liberal standard of Section 503(c)(3) (i.e., payments made outside the ordinary course of business for the benefit of officers, managers and consultants) is applicable.  [NB:  Payment made to insiders that are incentive payments are permitted — see In re Nellson Nutraceutical, 369 B.R. 787 (Bankr. D. Del. 2007).]

The Court analyzed the plain meaning of the word officer and concluded that a vice president is presumptively an officer, and thus, an insider; however, the presumption can be rebutted by evidence sufficient to establish that the “officer” does not, in fact, participate in the management of the debtor.  However, in Foothills Texas, the Court focused on the job responsibilities of the two employees:  both had positions of broad responsibility that focused on the core essence of the Debtors’ existence — that is, compliance with state and federal laws and regulation, oil and gases leases and production, evaluation of reserves, technical reporting and development of capital spending projects.  The Court also noted that both of these employees reported directly to the Debtors’ President.  Based on the evidence, the Court found that the Debtors were unable to rebut the presuption that the two employees were officers, and thus, insiders, and subject to the more difficult standard of 503(c)(1).  

The Court also held that obtaining authority to make retention payments that are prohibited by Section 503(c)(1) is not a responable exercise of the Debtors’ business judgment to assume the agreements (and make the payments).  Accordingly, the Court denied the Debtors’ motion, and consequently, the vice presidents, because they were deemed to be officers, didn’t get the money they would have received had the company not been in bankruptcy.    

Would this case have turned out differently if the employees did not have a title or were merely referred to as managers?  Perhaps, but in all likelihood the Court would still have focused on the specific facts of the case and looked beyond the titles of the employees.  That said, keep in mind that there may be a cost (albeit possibly and, indeed, probably unknown) to having an officer’s title for those working for a company in distress.