In re Enron Corp.

• Citation: 300 B.R. 201
• Decision Date: 21 October 2003
• Docket Number: No. 01-16034(AJG).,01-16034(AJG).
• Parties: In re ENRON CORP., et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

300 B.R. 201

In re ENRON CORP., et al., Debtors.

No. 01-16034(AJG).

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

October 21, 2003.

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Cynthia Johnson Rerko, A Professional Corporation, Dallas, TX, Cynthia Johnson Rerko, of Counsel, for Matthew B. Arnold.

Milbank, Tweed, Hadley & McCloy LLP, New York City, Luc A. Despins, Susheel Kirpalani, Matthew S. Barr, Of Counsel, Counsel to the Official Committee of Unsecured Creditors.

Weil, Gotshal & Manges LLP, New York City, Martin J. Bienenstock, Lawrence J. Baer, Of Counsel, Attorneys for Debtors and Debtors-In-Possession.

Memorandum Decision and Order Regarding Motion of Matthew B. Arnold for Allowance and Payment of Administrative Expense Claim

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. Introduction

On December 16, 2002, Matthew B. Arnold ("Claimant" or "Arnold") filed a Motion (the "Motion") for Allowance and Payment of Administrative Expense Claim in this Court, pursuant to which Claimant seeks payment of: (i) a $50,000 retention bonus (the "Retention Bonus"); (ii) a $112,499.98 termination payment (the "Termination Payment"); and (iii) costs and attorney's fees, arising from an employment agreement between himself and Enron Global Markets LLC, a subsidiary of Enron Corp. ("Enron Global Markets"). Enron Corp. and its affiliated debtors are, collectively, a large, multifaceted national and international energy corporation with operations, including energy trading operations, and financial interests across the United States and around the world. Enron Corp. and its affiliated debtors, as debtors-in-possession, and the Official Committee of Unsecured Creditors of Enron Corp. and its affiliated debtors, as debtors-in-possession (the "Committee"), each filed an objection to the Motion on February 10, 2003 (together, the "Objections"). A hearing was held with regard to the Motion on March 6, 2003 (the "Hearing").

II. Factual Background

Arnold began working for Enron Capital & Trade Resources, Corp. ("Enron Capital & Trade") in September 1997 as an analyst in the power marketing group. In March 1998, he transferred to Enron Capital & Trade's coal trading group where he worked for three years. Arnold entered into an Employment Agreement (the "Employment Agreement") with Enron Global Markets, effective as of March 1, 2001 (the "Effective Date"), with an expiration date of February 28, 2003 (the "Expiration Date"). In May 2001, Arnold became the head of trading for Enron Freight Markets.

On December 2, 2001 (the "Enron Petition Date"), Enron Corp. and certain of its affiliated debtor entities, including Enron Capital & Trade and Enron Global Markets (collectively, "Enron," the "Company" or the "Debtors"), filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). Since the Enron Petition Date, Debtors have continued to operate their businesses as debtors-in-possession pursuant to § 1107(a) of the Bankruptcy Code.

Arnold was selected by Enron as one of the individuals to facilitate the post-petition liquidation of the Company. Arnold assisted in the winding down of operations of Enron Freight Markets, and then of the coal and emissions trading group. Arnold's post-petition responsibilities included securing accounts receivable, liquidating physical inventory, and identifying and capturing value associated with non-terminated or improperly terminated forward contracts.

Arnold's pre-petition Employment Agreement provides for, among other terms, a $50,000 Retention Bonus payable to him on March 1, 2002 (the "Retention Bonus"). Section 2.2 of the Employment Agreement states that:

"2.2 Termination by Employee. Employee may terminate the employee relationship before the term expires for the following reasons:

a. Breach by Company. A material breach by Company of any material provision of this Agreement which remains uncorrected for 30 days following Employee's written notice to Company of such breach. Upon such a termination, Employee shall be entitled to receive the Monthly Base Salary ... as if Employee's employment had continued for the full Term.

b. Voluntary Termination. For any other reason whatsoever, in Employee's sole discretion. Upon a Voluntary Termination before the Term expires, all of Employee's future compensation and benefits ... shall cease as of the date of termination, and Employee shall be entitled only to pro rata salary through the termination date."

Arnold retained legal counsel in early-March 2002 and has been represented by counsel at all times since. By letter dated March 6, 2002 (the "March 6th Letter"), Claimant, by his attorney, advised Enron Global Markets that due to Enron Global Markets' failure to pay the Retention Bonus to Arnold on March 1, 2002, notice was being given of a material breach pursuant to Section 2.2(a) of the Employment Agreement. By letter dated April 26, 2002 (the "April 26th Letter"), Claimant, by his attorney, advised Enron Global Markets that as a result of Enron Global Markets' failure to pay the Retention Bonus to Arnold during the thirty-day cure period set forth in Section 2.2(a) of the Employment Agreement, Arnold's employment relationship with Enron Global Markets was terminated as of April 26, 2002. In the April 26th Letter, Claimant demanded that Enron Global Markets immediately remit the Retention Bonus and the Termination Payment to Claimant in full. Notwithstanding Arnold's assertion that the employment relationship was terminated, Claimant continued to report to work and, by letter dated May 24, 2002 (the "May 24th Letter" and, together with the March 6th Letter and the April 26th Letter, each a "Demand Letter" and collectively, the "Demand Letters"), advised Enron Global Markets that he would work through June 3, 2002 "in order to complete the sale of Enron's emission allowances and ensure a smooth transition of price risk management issues associated with the coal and emissions trading groups."

Enron Global Markets continued to pay Arnold a base salary of $125,000, consistent with the base salary set forth in the Employment Agreement, through mid-March 2002. At that time, Arnold received a raise of approximately six percent that was not specifically provided for under such agreement. Arnold continued to be paid this above-contract rate salary through his termination date on June 3, 2002. On July 15, 2002, Claimant commenced employment as a vice president of Constellation Power Source. On July 16, 2002, Claimant executed a General Release (the "General Release") in consideration of the final payment to be paid pursuant to the Enron Corp. Key Employee Retention, Liquidation Incentive and Severance Plan (the "KERP"), which had previously been approved by this Court on May 8, 2002. By letter dated July 17, 2002, Enron Global Markets demanded that Arnold repay an amount equal to $18,288.34, in accordance with the terms of the Employment Agreement, which required that Arnold return a pro rata portion of his signing bonus in the event that he voluntarily separated from the Company before February 28, 2003. On August 1, 2002, Enron Global Markets made a $14,267 payment to Claimant pursuant to the KERP. By letter dated August 12, 2002 (also, a "Demand Letter"), Claimant, by his attorney, again demanded that Enron Global Markets pay the Retention Bonus, the Termination Payment and all related attorney's fees accrued as of that date. Claimant filed the Motion on December 16, 2002. Enron and the Committee responded by filing the Objections on February 10, 2003. The Hearing was held on March 6, 2003.

III. Discussion

A. Legal Standard for Administrative Expense Claims

Claimant requests that the Court allows and compels payment of the Retention Bonus and the Termination Payment as administrative expense claims. The Court has previously discussed the legal standard regarding administrative claims in, among other decisions, In re Enron Corp., 279 B.R. 79, 84-88 (Bankr.S.D.N.Y.2002) and In re Enron Corp., 279 B.R. 695, 704-07 (Bankr.S.D.N.Y.2002). Section 503(b)(1)(A) of the Bankruptcy Code provides a priority for "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." Pursuant to § 507(a)(1) of the Bankruptcy Code, these expenses for administering the estate are afforded a first priority. Thus, expenses that the debtor-in-possession incurs during the reorganization effort are afforded a first priority. In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984).

This priority is based on the premise that the operation of the business by a debtor-in possession benefits pre-petition creditors; therefore, any claims that result from that operation are entitled to payment prior to payment to "creditors for whose benefit the continued operation of the business was allowed." Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 954 (1st Cir.1976). While Mammoth Mart was decided under the former Bankruptcy Act, its analysis is applicable under the Bankruptcy Code. In re Drexel Burnham Lambert Group Inc., 134 B.R. 482, 489 (Bankr.S.D.N.Y.1991). Administrative expenses are afforded a priority to facilitate the reorganization effort by encouraging third parties, who might be reluctant to deal with a debtor-in-possession, to transact such business. Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir.1986) (citing Mammoth Mart, 536 F.2d at 953). Otherwise, absent this incentive, the third parties would refrain from dealing with the debtor-in-possession, thereby inhibiting the reorganization effort and harming pre-petition creditors. Id.

Nevertheless, in light of the bankruptcy goal of providing equal distribution of a debtor=s assets to all creditors, priorities are narrowly construed. Amalgamated Ins. Fund, 789 F.2d at 100. Strictly construing the terms "actual" and "...