The Bottom Line
The Delaware Bankruptcy Court, in In re Old BPSUSH Inc., Case No. 16-12373 (Bankr. Del. June 1, 2018) [Docket No. 1787], upheld provisions in a post-petition key employee retention plan (KERP) that provided for a waiver of pre-petition wages and bonuses under a pre-petition retention plan even if the waiver allegedly violated state labor law. Under California state law, employers are not permitted to require a release for wages due unless paid in full. The court found that even if California state law were applicable, the retention bonuses under the pre-petition retention plan had not become payable because the applicable conditions under that retention plan had not been met. Importantly, the court ultimately determined that federal bankruptcy law, enforced by a court order, pre-empted state law. Therefore, the waiver was enforceable.
What Happened?
This case involved a tale of two retention plans — one pre-bankruptcy and one court-approved KERP.
Prior to filing for bankruptcy, the debtors implemented a two-year retention plan to ensure certain employees remained with the debtors until June 2018. Shortly after filing for bankruptcy, Old BPSUSH Inc. and its affiliated debtors (together, the “Debtors”), lost eight employees, three of whom were critical employees party to the Debtors’ pre-petition retention plan. The Debtors subsequently adopted a new, post-petition KERP that offered bonuses to eligible employees who stayed until the closing of a Section 363 sale. The KERP letter agreement signed by every participant included a waiver of wages and bonuses earned under the pre-petition retention program being superseded by the new KERP.
Despite having signed the new KERP, several California-based employees (the “Claimants”) filed proofs of claim for bonuses under the former pre-petition retention plan. The Claimants asserted that the waiver in the KERP was unenforceable because California labor law provided an employer cannot require an employee to provide a release for wages due unless the wages are paid in full.
First, the Claimants argued the claim waivers in the KERP were not enforceable because the KERP letter agreement was a novation that was not supported by new consideration and was therefore invalid. The court disagreed and found the Claimants received new and valuable consideration under the post-petition KERP because, among other reasons, the new KERP substituted pre-petition general unsecured claims of unknown...
