In re 21ST Century Oncology Holdings, Inc.

• Decision Date: 11 January 2019
• Docket Number: Case No. 17-22770 (RDD)
• Citation: 597 B.R. 217
• Parties: IN RE: 21ST CENTURY ONCOLOGY HOLDINGS, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

597 B.R. 217

IN RE: 21ST CENTURY ONCOLOGY HOLDINGS, INC., et al., Debtors.

Case No. 17-22770 (RDD)

United States Bankruptcy Court, S.D. New York.

Signed January 11, 2019

Sullivan & Worcester LLP, by Jeffrey R. Gleit, counsel for the Debtors

Klestadt Winters Jureller Southard & Stevens, LLP, by John E. Jeruller, Jr., and Zumpano Patricios, P.A., by Leon N. Patricios, counsel for Andrew L. Woods

MEMORANDUM OF DECISION

THE HONORABLE ROBERT D. DRAIN, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the objection, dated June 30, 2018 (the "Claim Objection") under 11 U.S.C. § 502(b) and Fed. R. Bankr. P. 3007 of 21st Century Oncology Holdings, Inc. and its affiliated reorganized debtors (the "Debtors") to Claim No. 175 (the "Claim") filed on behalf of Andrew L. Woods ("Woods"). The parties have narrowed their issues to two: (1) what portions, if any, of the Claim are subject to the cap set forth in 11 U.S.C. § 502(b)(7), and (2) regardless of any such cap, are two bonuses under Woods' Amended and Restated Executive Employment Contract with Radiation Therapy Services Inc., d/b/a 21^st Century Oncology ("21C"), dated as of May 13, 2013, which serves as the basis for the Claim (the "Employment Contract"),¹ mutually exclusive, or can both bonuses be separately earned?

The Court has considered these issues on uncontested facts. To the extent factual disputes are relevant, there has yet to be an evidentiary hearing.

Based on the parties' pleadings, including their submissions after the August 28, 2018 hearing (the "Hearing") and the record of the Hearing, this Memorandum of Decision explains why (1) the remaining portions of the Claim under dispute are indeed capped by 11 U.S.C. § 502(b)(7), with the exception that Woods is entitled to prepetition prejudgment interest on the unpaid uncapped amount of the Claim and perhaps to certain attorneys fees, and (2) the bonus provisions of the Contract are ambiguous, permitting inquiry into parol evidence.

Jurisdiction

The Court has subject matter jurisdiction over the Claim Objection under 28 U.S.C. § 157(a) - (b) and 1334(b) and the Amended Standing Order of Reference, dated January 31, 2012 (Preska, C.J.), as a core proceeding under 28 U.S.C. § 157(b)(2)(B) that the Court has the power to decide by a final order under Stern v. Marshall, 564 U.S. 462, 496-97, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Such jurisdiction continues after confirmation of the Debtors' chapter 11 plan because the plan and the order confirming the plan reserve the Court's jurisdiction to determine the allowance of claims against the Debtors and the dispute has a close nexus to the plan. Cohen v. CDR Creances, S.A.S. (In re Euro-American Lodging Corp. ), 549 Fed. Appx. 52, 54 (2d Cir. 2014) ; Ace. Am. Ins. Co. v. DPH Hldgs. Corp. (In re DPH Hldgs. Corp. ), 448 Fed. Appx. 134, 137 (2d Cir. 2011).

Facts

The Claim is based on 21C's prepetition termination of the Employment Contract without cause on September 23, 2016 and nonpayment of amounts owing thereunder.² Claim ¶ 8. See also Amended Complaint, dated March 9, 2017, a copy of which is attached as Exhibit C to the Claim, filed by Woods against 21C in the U.S. District Court for the Middle District of Florida, 2:16 Civ. 897 at ¶¶ 60-62, 66, 74-94 (the "Complaint").

There is no dispute that Woods was a highly compensated 21C executive whose job included, among other things, lobbying on the Debtors' behalf, a role critical to the Debtors' heavily regulated business. As stated in the rider to the Claim incorporated in ¶ 8 thereof, Woods asserts an aggregate amount owing of $ 11,097,245.46 as follows, plus accruing postpetition pre-judgment interest and postpetition legal fees:

A. Contractual "severance": $ 1,000,000;³

B. All contractual bonus payments, including those that were not payable on the termination of the Employment Contract except as accelerated thereby: $ 9,000,000;

C. Prejudgment interest under Florida law as of May 25, 2017, 21C's chapter 11 petition date: $ 746,660.96;

D. Prepetition attorneys fees under Fla. Statute § 448.08 and/or 29 U.S.C. § 1132(g) : $ 335,584.50; and

E. Contractual COBRA benefit payment for 12 months: $ 15,000.

Woods' right to the unpaid severance, bonus payments, and benefits is governed by paragraph 3(b) and Art. 5 of the Employment Contract. Paragraph 3(b), appearing in an article captioned "Executive Compensation," provides,

"Performance Incentive and Other Bonuses. The Executive shall be entitled to receive the following incentive bonuses: (i) Five Million Dollars ($ 5,000,000) from the Company for achievement during the Term of a freeze on reductions in Medicare reimbursement to freestanding radiation therapy centers except for those reductions negotiated on behalf of the Company; or (ii) Two Million Five Hundred Thousand Dollars ($ 2,500,000) from the Company for achievement during the Term of the adoption of a new, multi-bundled payments system for freestanding radiation therapy centers, to which the Company elects not to participate, (iii) Two Million Five Hundred Thousand Dollars ($ 2,500,000) upon the Company's initial election to participate in any way in the system referred to in clause (ii) above, and (iv) other cash bonuses as agreed to in writing in the future between the Executive and the Chief Executive Officer with approval from the Compensation Committee. Payments under clauses (i) through (iii) above shall be made annually over a five year period, with the first payment payable within five (5) business days following the freeze, adoption or election, respectively. Any deferred payments of incentive bonuses shall be immediately accelerated and paid in full in the event of (A) the Executive's termination without Cause, termination by the Executive for Good Reason or as a result of the Executive's death or Disability or (B) upon a ‘Change in Control’...."

Article 5 of the Employment Contract, captioned "Payments upon Termination," provides in relevant part,

"(a) Involuntary Termination. If the Executive's employment is terminated by the Company during the Term, the Executive shall be entitled to receive his Base Salary and unreimbursed expenses accrued and unpaid through the date of termination (the "Termination Date"). The Executive shall also receive any nonforfeitable benefits already earned and payable to him under the terms of any deferred compensation, incentive or other benefit plan maintained by the Company, payable in accordance with the terms of the applicable plan. The payments and benefits that the Executive shall be entitled to pursuant to this Section 5(a) are collectively referred to as the Executive's ‘Accrued Compensation.’

"(b) Severance Payments. If the Executive's employment is terminated (i) by the Company without Cause or (ii) by the Executive for Good Reason, then in addition to payment of the Accrued Compensation and any deferred payments of performance incentive bonuses pursuant to Section 3(b), the Company shall also be obligated to make a series of monthly payments to the Executive for a period of twenty-four (24) months immediately following the Termination Date so long as the Executive continues to comply with Sections 8 and 9 hereof⁴ ...."

Paragraphs 5(d) and 5(e) of the Employment Contract provide that if Woods' employment is terminated for Cause or if Woods voluntarily terminates his employment not for Good Reason, he shall be entitled only to the Accrued Compensation. Paragraph 5(f) provides, "In order to receive the severance payments and benefits hereunder (other than the Accrued Compensation), the Executive must execute and not revoke a general release of claims in favor of the Company [in the form attached to the Contract] ... within 60 days following the Termination Date."

Thus, as provided in Employment Contract ¶ 3(b), Woods shall be entitled to three specifically described incentive bonuses, which shall be payable annually over five years after the applicable triggering event but which shall be accelerated and paid fully upon certain events, including Woods' termination without Cause. The right to such acceleration is confirmed in Employment Contract ¶ 5(b) under the heading "Severance Payments," along with the provision of twenty-four months of separate severance payments equal to Base Salary for each year. Employment Contract ¶¶ 5(d) and (e) make it clear, however, that the incentive bonuses and twenty-four months of severance payments shall not be paid if Woods is terminated for Cause or voluntarily terminates his employment without Good Reason, in contrast with "Accrued Compensation," which shall be paid to him in such circumstances, and under ¶ 5(f) they never will be paid unless he timely signs the release described therein (the "Release"). Paragraph 5(a)'s definition of "Accrued Compensation" encompasses "nonforfeitable benefits already earned and payable to [Woods] under the terms of any deferred compensation, incentive or other benefit plan maintained by [21C]..." (emphasis added). It therefore does not include the specific incentive bonuses set out in paragraph 3(b), which are not part of a 21C compensation, incentive or other benefit plan, and, in any event, would not cover them to the extent that they are not yet payable under the five-year payout terms of paragraph 3(b).

The Claim asserts that all three incentive bonuses in Employment Contract ¶ 3(b)(i)-(iii) were triggered prepetition – on December 28, 2015, in February 2015 and on or about July, 2015, respectively. Complaint ¶¶ 43, 46 and 49, and 52. The Claim seeks only $ 9 million of such bonuses because 21C made the initial, $ 1 million payment on the first, $ 5 million bonus in January 2016. Id. ¶ 55.

In addition to the two issues presently before the Court, the Debtors originally objected to $ 500,000 of Woods' "severance" claim and raised or reserved the right to raise other defenses to the Claim, including Woods' delay in executing the Release, and counterclaims. They have since waived all such objections,...