UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

IN RE:

BLACK DIAMOND MINING COMPANY, LLC, et al.

DEBTORS                                                                CASE Nos. 08-70066, 08-70067, and 08-70069 through 08-70073

                                                                                  Jointly Administered

MEMORANDUM OPINION AND ORDER

           This matter is before the court on the Objection of BD Acquisition LLC (“BDA”) to the Application of David C. Hegger (“Hegger”) for Allowed Administrative Claim (Doc. # 1680). BDA objects to Hegger’s Application for Allowed Administrative Claim (“the Application”)(Doc. # 1635) as well as his Proof of Claim No. 1073. Hegger seeks $362,296.15 ($302,296.15 for termination damages and $60,000.00 for a withheld bonus payment). BDA contends that Hegger is only entitled to a priority claim of $3,257.69 and a general unsecured claim of $56,742.31, and that all other amounts he seeks should be disallowed. The matter was heard on December 15, 2009 and taken under consideration for decision.

           1.        Factual and procedural background

           On July 26, 2006, Hegger and Black Diamond Resources, LLC (“BDR”) entered into an Employment Agreement naming Hegger as Chief Financial Officer of BDR and its subsidiaries, including Black Diamond Mining, LLC (“BDM”). After Hegger was hired, BDM implemented the 2007 Bonus Stay Program (“the Bonus Program”) which provided for certain payments for eligible employees still employed by BDM on three target dates. Hegger received $20,000.00 bonus payments on October 15, 2007 and December 15, 2007, but did not receive the $60,000.00 bonus payment due on February 15, 2009 (hereinafter “the bonus payment”).

           On February 19, 2008, involuntary petitions for relief were filed against the Debtors herein. Orders for relief were entered on March 11, 2008, authorizing the Debtors’ cases to proceed under Chapter 11 of the Bankruptcy Code. The Debtors operated their businesses as debtors and debtors-in-possession under the sole authority of a court-appointed Chief Restructuring Officer (“the CRO”) pursuant to the CRO Order entered on February 27, 2008. On March 19, 2008, the court entered an order authorizing the Debtors to pay certain pre-relief wages, payroll taxes and employee benefits pursuant to Code section 507(a)(4); Hegger received $7,692.31 under the terms of this order.

           Hegger’s employment was terminated on or around April 4, 2008. At that time he was presented with a “Separation Agreement and General Release” which he declined to sign. Hegger received his regular salary through his termination date. Proof of Claim 1073 asserts a super-priority secured claim in the amount of $339,782.00 based upon the statutory lien provided by KRS 376.150 (“the Secured Claim”) and a priority claim in the amount of $10,950.00 pursuant to Code section 507(a)(4) (“the Priority Claim”). Of this total, $60,000.00 is attributable to discounted “future wages and benefits pursuant to Employment Agreement” (“the Termination Payment”).

           On July 23, 2009, the Debtors’ Third Amended Joint Plan of Liquidation (“the Plan”) was confirmed. On September 28, 2009, Hegger filed the Application asserting that the Termination Payment (no longer discounted and in the amount of $302,206.15) is entitled to administrative expense priority because it is based on “wrongful termination,” and that the bonus payment is also entitled to administrative priority based on the principle of “equality of distribution.”  

           2.        Discussion

           Requests for administrative expenses are authorized under Bankruptcy Code section 503 which provides in pertinent part:

(b) After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including–

(1)(A) the actual, necessary costs and expenses of preserving the estate, including–

(I) wages, salaries, and commissions for services rendered after the commencement of the case; . . .

11 U.S.C. § 503(b)(1)(A). In order to qualify as an “actual, necessary” administrative expense, a debt must have arisen from a post-petition transaction with the debtor, and have directly and substantially benefitted the estate. In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997). The Sunarhauserman court stated that “the proper standard for determining [a] claim’s administrative priority looks to when the acts giving rise to a liability took place, not when they accrued.” Id. at 818.

                       a.        Wrongful termination claim

           Hegger contends that there is liability for what he characterizes as his “wrongful termination” which places his claim within the exception provided for in Reading Co. v. Brown, 391 U.S. 471, 88 S. Ct. 1759 (1968). In that case the Supreme Court “held that a creditor’s postpetition negligence claims against a bankruptcy receiver were proper administrative expenses of the estate, even though the estate received no substantial benefit.” In re Economy Lodging Sys., Inc., 234 B.R. 691, 697 (6^th Cir. B.A.P. 1999). The Economy Lodging court went on to observe that “courts have actively limited Reading to tort cases or cases of intentional misconduct on the part of the trustee or debtor in possession.” Id.

           BDA argues that the wrongful termination claim Hegger asserts does not fit within the Reading exception because Hegger does not have a judgment for wrongful termination, has not brought suit for wrongful termination, and presents no evidence or facts sufficient to prove wrongful termination. BDA states that whatever liability the Debtors may have as a result of Hegger’s termination is contractual in nature and not tortious. Hegger contends that his termination satisfies the elements of the tort of “wrongful termination” because it was without cause, done without valid corporate authority, “possibly” based on the self-interest of the CRO and/or Alvarez & Marsal, and “possibly” demanded by CIT.

           Of the elements Hegger asserts, the last two are complete conjecture and will not be considered. As for his termination having been without cause and without valid corporate authority, the court must first look to the terms of his contract, the Employment Agreement. Section 11(a) of the Employment Agreement sets out four events of termination: death, disability, for “cause,” and the expiration of the employment term as therein defined. Section 11(b) which deals with compensation upon termination provides in pertinent part: “Should Executive’s employment be terminated for any other reason. . .” BDA contends that this language includes termination without cause.

           In addition, Kentucky law upholds an employer’s right to terminate an employee for any cause, or no cause. “Ordinarily, an employer may discharge his at-will employee for good cause, for no cause, or for a cause that some might view as morally indefensible.” Bishop v. Manpower, Inc. of Cent. Kentucky, 211 S.W.3d 71, 74 (Ky.App. 2006), citing Firestone Textile Co. v. Meadows, 666 S.W.2d 730, 731 (Ky. 1983). BDA contends that both the Employment Agreement and Kentucky law make it clear that Hegger has no claim for wrongful termination. It points out that wrongful discharge is only considered tortious when the discharge “violates a constitutionally protected right implicit in a statute.” Id. The court agrees with BDA that Hegger has not established a claim for wrongful termination, and that he therefore does not fall into the Reading exception to the “benefit to the estate” requirement of administrative claim allowances.

           As concerns Hegger’s allegation that his termination was done without valid corporate authority, he presents no argument in support of such allegation beyond a bare statement that “Debtors’ management

. . . had no authority to terminate a BDR contract.” BDA states that Hegger was the Chief Financial Officer of both BDR and BDM and the other affiliated Debtors. Further, the Application provides at ¶ 6 that Hegger was terminated by Larry Hull, the Chief Executive Officer of BDR as of the termination date. BDA contends that even if the CRO terminated Hegger, he also had the requisite corporate authority to take this action pursuant to the CRO Order. The court agrees that Hegger has not established that his termination was done without corporate authority.

                       b.        The Bonus Payment

           Hegger contends that he was entitled to receive the bonus payment on February 15, 2008. He states that other eligible employees received their bonuses during the gap period between February 19 and March 10, 2008. He characterizes the Debtors’ failure to pay him the bonus payment as “wrongful refusal and dissimilar treatment,” and contends that the Debtors were required to compensate him in the same manner as other eligible employees in order to maintain “equality of distribution.” BDA responds that the bonus payment was both earned and accrued pre-petition, and is therefore a pre-petition unsecured claim bearing none of the earmarks of an administrative claim. BDA points out that Hegger cites no authority for the proposition that a general notion of “equality of distribution” trumps the requirements for demonstrating entitlement to administrative priority. This court agrees with BDA that Hegger has not established a right to administrative priority treatment of this claim.

           At the conclusion of the Application Hegger asks for alternative treatment of his claim in the event “some portion” is disallowed as an administrative claim. He states that his claim should be preserved “to also be considered as a partially (sic) ‘priority’ claim as well as an allowed, fully ‘secured’ claim.” He does not elaborate or support this assertion, and the court declines to consider it. In view of all of the foregoing, it is the opinion of this court that Hegger’s Application for Allowed Administrative Claim should be, and it hereby is, OVERRULED.

Copies to:

Laura Day DelCotto, Esq.

Robert J. Brown, Esq.