UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

ASHLAND DIVISION







IN RE:



SPECIAL METALS CORPORATION,

INCO ALLOYS INTERNATIONAL,

d/b/a HUNTINGTON ALLOYS,

SPECIAL METALS DOMESTIC

SALES CORP., and A-1 WIRE

TECH, INC.



DEBTORS CASE NOS. 02-10335 - 02-10338

CHAPTER 11





MEMORANDUM OPINION



This matter is before the court on the debtors' Motion for Authority to Reject Executory Contracts filed here on September 19, 2002, and responses and objections filed by Teresa Daniel ("Daniel") and Francis Suarez ("Suarez") on October 7 and October 8, 2002, respectively. Daniel and Suarez (collectively "the respondents") are former employees of debtor Special Metals Corporation ("Special Metals"). The pre-petition contracts which the debtors seek to reject are employment and severance agreements. Daniel and Suarez raise the threshold issue of whether such agreements are, or can be, executory contracts.

The record in this case shows that the debtors each filed a voluntary petition for relief under Chapter 11 on March 27, 2002. The cases are being jointly administered. The debtors continue to operate their business and affairs in the ordinary course as debtors-in-possession. Special Metals is the parent entity of the other debtors, independent corporations which are wholly owned subsidiaries of Special Metals. The debtors seek authority to reject a pre-petition employment agreement with Daniel and a pre-petition Special Severance and Retention Plan with Suarez.

1. Pre-petition Employment Agreement with Teresa Daniel

Daniel was employed by Special Metals as Vice President and Chief Human Resources Officer pursuant to a December 31, 1999 employment contract, one of several that the debtors entered into with senior level employees. Daniel's position was eliminated due to a reduction in work force and her employment terminated on January 31, 2002. Section 8(c)(ii) of Daniel's employment contract provides:

If the Executive's employment is terminated by the Company without "Cause" (other than by reason of Disability or death) on or after January 1, 2002, but during the Employment Term, the Executive shall (A) continue to receive her Base Salary for one year following the date of such termination, (B) receive a lump sum payment equal to a pro rata portion of any Bonus that the Executive would have been entitled to receive pursuant to Section 4 hereof with respect to the year in which such termination occurs, payable when such Bonus would have otherwise been payable had the Executive's employment not terminated, and (C) be entitled to continue to participate in the health and welfare benefit plans of the Company as in effect immediately prior to such termination, subject to the terms of such plans for one year following the date of such termination.



A January 25, 2002, letter from Special Metals confirmed her separation and provided written notice of her termination from employment effective on January 31, 2002. That letter also confirmed that she would receive the terms and conditions of separation set out in  8(c)(ii) of her employment contract.

After the termination of her employment, Daniel was not to disclose confidential information and was not to compete with her employer for a period of one year. On June 20, 2002, Daniel filed a proof of claim for "severance benefits," characterizing it as an unsecured priority claim in the amount of $233,546.25. The benefits and amounts comprising this total were: $125,000.00 in salary, $36,6000.00 in health benefits, a $4,237.92 "Management Incentive Bonus," $40,625.00 for her pro rata share of the "2001-2002 Performance Unit Plan Award," and $27,546.25 for her pro rata share of the "2002-2003 Performance Unit Plan Award." She did not specify the priority of the claim.

2. Pre-petition Special Severance and Retention Plan - Suarez

Suarez was employed by Special Metals as a metallurgist. His employment was also terminated on January 31, 2002, after his position was eliminated due to a reduction in work force. Suarez states that he then entered into a Separation Agreement and General Release ("Separation Agreement") with Special Metals (he provides only an unexecuted copy of that agreement). Entering into the Separation Agreement was a requirement for receiving severance and retention benefits under the Special Severance and Retention Plan ("the Plan"). Under the terms of the Separation Agreement, Suarez was to receive a severance payment of $42,225.23, a figure arrived at by multiplying his years of service by one week's base salary. Under Section 3 of the Separation Agreement, Suarez agreed, among other things, to refrain from disparaging the debtors. On September 17, 2002, Suarez filed a proof of claim for "severance and retention benefits" in the amount of $42,225.23, characterizing it as an unsecured priority claim under 11 U.S.C.  507(a)(3).

The debtors moved to reject both the employment contract with Daniel and the Plan (as implemented by the Separation Agreement) as executory contracts pursuant to 11 U.S.C.  365(a). The debtors contend that the decision to reject these contracts is subject only to review under the "business judgment" rule, which requires that a debtor demonstrate that the rejection of the contract in question will benefit the estate. The debtors state that it is well-settled that courts will not disturb a decision to reject an executory contract in the absence of bad faith, and that in the business judgment of these debtors it is in the best interests of the estate to reject the contracts at issue.

The respondents contend that the debtors' initial premise is in error in that employment contracts cannot be executory contracts. In support of this contention they both cite In re Spectrum Info. Techs., Inc., 190 B.R. 741 (Bankr. E.D. N.Y. 1996). That case involved the pre-petition termination of employment contracts, including that of the chief executive officer of the corporation. His employment agreement provided that upon termination "without just cause" he would be paid six months' salary, while he retained an obligation to comply with confidentiality and non-interference clauses in the agreement. Other employees had entered into pre-petition separation agreements with the debtor that provided for the payment of certain sums to the employee upon separation, while the employee was subject to certain restrictive covenants. The debtor maintained these contracts were within the purview of  365(a) and therefore executory, and sought to reject them as burdensome to the estate.

The court engaged in a detailed discussion of the requirements for demonstrating that a contract is executory, noting that "the term 'executory contract' is not defined in the Bankruptcy Code, and the law remains unsettled over the proper interpretation of the word 'executory.'" Id. at 746. The court went on to discuss Professor Countryman's famous and well-used definition of an executory contract as one in which the obligations on both sides remain unperformed to such an extent that either party's failure to complete performance would constitute a material breach excusing performance by the other party. The court went on to say that under this definition contracts in which one party has completed performance "are excluded from the ambit of section 365." Id. at 747.

The court found that under the Countryman definition none of the contracts sought be rejected was executory, holding that the employees' remaining obligations under the various restrictive covenants "[did] not rise to the level of material future performance." Id. at 748. The court held that the employment agreement was not executory and could not be rejected, employing the following reasoning:

Spectrum's obligations to make termination payments ... are insufficient to deem the Employment Agreement executory. As indicated above, where the only performance that remains is the payment of money, the contract will not be found to be executory. See In re Wang Laboratories, Inc., 154 B.R. 389 (Bankr. D. Mass. 1993) (employment agreement not executory where employee was no longer required to perform service and only remaining obligation was the payment of severance pay); In re Chateaugay, 102 B.R. at 345 ...; In re THC Fin. Corp., 686 F.2d 799, 804 (9th Cir. 1982) (indemnity agreement not executory because the only obligation is the payment of money).



Id. The court applied similar reasoning to the separation agreements and came to the same conclusion.

The respondents here ask this court to make a determination, based on the case law set out above, that the contracts which the debtors here seek to reject are not executory and therefore not susceptible of rejection. This court would first point out that it is not bound by the decisions of other bankruptcy courts, although it certainly may be persuaded by them. The Sixth Circuit, while not ruling on the executory nature of an employment contract, characterized employment contracts as executory contracts in Chattanooga Mem'l Park v. Still (In re Jolly), 574 F.2d 349, 351 (6th Cir. 1978):

Thus, executory contracts involve obligations which continue into the future. S. Rep. No. 94-458, 94th congress, 1st Sess. (1975). They include leases, employment contracts and agreements to buy or sell in the future. Generally, they are agreements which include an obligation for the debtor to do something in the future. (Emphasis added).



See also In re Constant Care Cmty. Health Ctr., Inc., 99 B.R. 697, 702 (Bankr. D. Md. 1989); In re Rovine Corp., 5 B.R. 402, 404 (Bankr. W.D. Tenn. 1980) for the proposition that a covenant not to compete is an executory contract because performance remains due to some extent on both sides.

Further, the Spectrum court's insistence that a contract is not executory where payment of money is the only remaining obligation is based on its interpretation of language found in the legislative history of  365 in H.R. Rep. No. 595, 95th Cong., 1st Sess. 347 (1977); U.S. Code Cong. & Admin. News 1978, pp. 6303-04: " A note is not usually an executory contract if the only performance that remains is repayment. Performance on one side of the contract would have been completed and the contract is no longer executory." This court is not convinced that this language (which certainly appears to specifically address a "note") must be extrapolated to include every instance of a contract that involves the payment of money.

In view of all of the foregoing, it is the opinion of this court that the debtors may reject the Daniel and Suarez contracts, subject only to the business judgment rule. There having been no demonstration that the court should substitute its judgment for that of the debtors, the court accepts the debtors' determination that these contracts are burdensome to the estate and should be rejected. The debtors' Motion for Authority to Reject Executory Contracts should therefore be sustained, and objections filed by Teresa Daniel and Francis Suarez should be overruled. An order in conformity with this opinion will be entered separately.

Dated:



By the court -







Judge William S. Howard



Copies to:



Robert G. Sable, Esq.

Gregory R. Schaaf, Esq.

Wendell S. Roberts, Esq.